IMF and this government

It is patently evident that the government's economic strategy remains unchanged. The government, under the economic leadership of Hafeez Sheikh, remains committed to complying with the two specific conditions laid down by the International Monetary Fund (IMF): reliance on revenue generation from a value-added tax (inanely renamed Reformed General Sales Tax by Sheikh) and a reduction in expenditure through eliminating across-the-board subsidies in all sectors.
Macro-targets as set by the IMF, particularly pertaining to meeting the overarching objective of the Stand-By Arrangement (SBA), namely a sustainable budget deficit has been severely compromised. The government inherited a 7.4 percent deficit and has forecast an 8.4 percent for the current fiscal year. The Finance Minister has all but given up hope of convincing the parliament that the proposals committed by the government, under the SBA, must be implemented. His detractors, both in parliament and the general public, argue the obvious. Hafeez Sheikh, since the Finance portfolio was given to him, has been unable to make a perceptible difference in three key areas of concern. First, poor governance that the incumbent Finance Minister continues to ignore, unlike his predecessor (the multibillion rupee financial scams continue to be unearthed with regularity and the onus of taking them to task is falling on the courts while the investigative branches of government are protecting the accused as opposed to investigating them). Second, profligacy is evident from the very large cabinet to the Prime Minister's decision to enhance the bureaucrats salary by 50 percent (one must contrast this populist action with President Obama's state of the union address where he noted that the bureaucrats pay will be frozen for two years to deal with the deficit on the one hand and ensure that wage-push inflation does not fuel prices on the other hand). And last but not least, the method currently in use to plug the rising deficit gap, a bane of all economists because of its inflationary impact, is to borrow from the State Bank. At the last count, the government was borrowing 2 billion rupees per day. This is two years after an explicit commitment to the IMF that the government would not borrow from the State Bank was made. This policy has been in evidence since Hafeez Sheikh took over the reins of control.
The 7.3 percent fiscal deficit in early 2008 was premised on the terribly flawed policy of the Caretakers to continue to heavily subsidise oil prices domestically, at a time when they were rising globally as an election tool prior to the 2008 February elections. This deficit, together with the failure of the newly-elected PPP government to cash in on the democracy dividend led to the decision to go on yet another IMF programme in November 2008. Bilaterals did pledge assistance of over 5 billion dollars as the democracy dividend, though analysts argue that the ongoing war on terror and the US engagement with multilaterals and bilaterals to extend assistance to cash strapped Pakistan may have been the main reason behind the pledges. However disbursement is being linked to a reputable international agency like the IMF endorsing the government's commitment as well as the implementation of macroeconomic reforms; or in other words, the three concerns remain with the pledged assistance still not being disbursed.
The IMF programme, a little over two years down the line, is now stalled because of the failure of the government to comply with two of its critical conditions: the failure to implement VAT and the elimination of subsidies. Economists however argue that the objective of these conditions must be the government's focus, rather than strict compliance with these two conditions. In other words, the government needs to increase the tax to the GDP ratio through reforms that would render the tax system equitable and non-anomalous. Tax on the income of rich landlords, as well as the ending of all exemptions under the existing sales tax regime would be a good start towards achieving the IMF objective of raising revenue. Elimination of subsidies across-the-board to be replaced by those targeting the vulnerable is another positive policy plan which is yet to be implemented.
Dr Sheikh would have us believe that the blame for poor macroeconomic indicators lies with external factors, notably the devastating floods of this summer past and global recession. No one can deny the veracity of this argument, however his critics point to two indicators that have improved recently and that challenge his premise. First and foremost in spite of the global recession and the severe energy shortage, our exports have risen in recent months. And secondly remittance income increased, due no doubt indirectly to the global recession as the central banks of Western countries reduced interest rates to negligible levels as a tool to effectively combat recession.
Dr Sheikh has also expressed frustration at coalition partners and opposition leaders alike for failing to see the wisdom behind the IMF stipulated condition to impose VAT. Sources close to him have revealed that he, on occasion, blames his predecessor Shaukat Tarin for agreeing to implement an across-the-board VAT with minimum exemptions in spite of the fact that VAT on services is constitutionally a provincial subject. And he also blames the coalition partners and the opposition for pressurising the government, unusually weak due to its low strength in the parliament, to withdraw the oil price hike in line with the international price of oil. What he conveniently ignores is the fact that the petroleum levy on oil and products seriously challenges the government's contention that it is subsidising the price of oil domestically.
One would have hoped that Hafeez Sheikh had drawn some valuable lessons from actions taken during the last two years by several Western governments that include massively reducing current as well as development expenditure. Instead Sheikh has remained focused on maximising the impact of his economies on the vulnerable by slashing development expenditure which fuels employment, and compelled the central bank to print money to fund the government's profligacy.
Dr Sheikh defends his inability to deliver, much like his other cabinet colleagues: by blaming his predecessors as well as his own cabinet colleagues on the one hand, rather than accepting his own lightweight political credentials, as well as his inability to develop a home-grown economic plan that envisages a reduction in borrowing, domestic and foreign.
Dr Sheikh was one of two candidates proposed by the IMF to take over the finance portfolio. That he failed to convince anyone of the efficacy of the IMF-supported reform programme is evident given the fact that the Fund staff launched their own campaign to convince the stakeholders, politicians as well as the media that the SBA programme is in the national economic interest. The Fund staff has failed as well and there are genuine concerns amongst economists that urgent remedial actions are necessary. A step in the right direction would be to argue that the government revisits the Finance portfolio and appoints someone like Raza Rabbani, respected by most political parties, evident from his successful chairing of the difficult and challenging committee on constitutional reforms that led to the unanimous passage of the eighteenth amendment.