The Pakistani economic team returned from the trip to Dubai (May 11-17) with its collective tail between its collective legs as almost a week long discussions held with International Monetary Fund (IMF) staff ended unsatisfactorily from the perspective of the two sides.
The IMF remained unconvinced that the shared budget statistics were in compliance with the agreed reform package between the Fund and the government that included qualitative and quantitative macroeconomic targets identified at the start of the Stand-By Arrangement (SBA) in November 2008 and reviewed four times subsequently that formed the basis of the tranche releases. The last tranche release was in May 2010, a month or so before the IMF succeeded in what has been widely reported as the engagement of Dr Hafeez Sheikh as the country's Finance Minister. It is unclear if the Fund staff continues to have confidence in Dr Sheikh's capacity to deliver as the Finance Minister more than a year down the line though IMF's actions or, non-action as reflected by the stalled SBA, may better reflect the Fund staff's views on Dr Sheikh's performance. Or as is widely believed the onus of non-compliance to the agreed conditions is being laid at the doorstep of the political leadership which, if accepted, does indicate, Dr Sheikh's inability to deliver.
Be that as it may, reports from the IMF indicate that there was serious disagreement between the Fund and the government over the proposed 4.5 percent fiscal deficit envisaged by our economic managers and, additionally, little confidence was reposed in the government's ability or indeed intent to implement the budget proposals. Thus Pakistan's economic team including such heavy weights as the Finance Minister, Dr Hafeez Sheikh, the State Bank Governor Shahid H. Kardar and the Deputy Chairman Planning Commission Dr Nadeemul Haq returned to the country with their primary objective unachieved: to convince the Fund team to reactivate the stalled SBA. The question is: what is the likely outcome in terms of the Pakistan economy?
If the SBA remains stalled then this, in effect, may well imply that the budget for the forthcoming fiscal year would be unable to guarantee 3.2 billion dollars, amounting to the two unreleased IMF tranches under the SBA, as revenue from external sources - a significant amount. At the same time, the government would have to earmark 800 million dollars repayment to the Fund under the SBA. In effect the government may well be short by over 3 billion dollars considering the IMF alone and if one takes account of other bilaterals and multilaterals requesting a Letter of Comfort (LoC) from the IMF as a prerequisite to disbursing their own programme assistance in the next fiscal year, a letter that is not forthcoming, one would be compelled to conclude that the budget requires a massive revisit that must envisage greater revenue resources than envisaged till the 17th of May and a dramatic cut in expenditures. And may well explain the one week delay in the presentation of the federal budget!
There is hectic behind the scenes activities with the Federal Board of Revenue engaged in calculating various options targeted to increase revenue. It is the focus on revenue generation rather than on rendering the taxation system fairer and less anomalous that accounts for rather outlandish proposals published in different sections of the media. There is talk of a higher petroleum levy while its impact on industry and inflation continues to be ignored; there is talk of three slabs of sales tax with those sectors who would have to pay the higher tax crying foul and citing lower output and lay offs as the outcome; there is mention of going after the tax defaulters though the system of random audit (an IMF condition) has all yet been abandoned. At the same time, there is absolutely zero focus on eliminating more than 500-billion-rupee corruption in the FBR per annum.
Much has been written on the failure of the government to implement the value-added tax renamed as Reformed General Sales Tax (RGST). The government, according to sources, informed the Fund that this time around it would ensure implementation. However, others point to what they allege was sustained disinformation spread by the Pakistani side and carried in the local media which suggested that the Fund had agreed to the elimination of all exemptions/distortions in the existing sales tax regimen rather than insisting on a politically controversial though economically appropriate RGST.
The Fund team angered at this misrepresentation set the record straight and thought it would be appropriate to add an entire range of challenges that the government must resolve in a note placed on its website dated the last date of the talks namely 17 May. The note is a list of do's that may not be possible within the year: "Discussions centered on measures to reduce the budget deficit in 2011/12 as well as quasi-fiscal operations (for example, the procurement of agricultural commodities) to reduce inflation, assure fiscal sustainability, and protect the external position.
Reducing the budget deficit will require higher revenue through tax reform to broaden the tax base, including steps to implement reforms in the general sales tax. Measures to reduce spending on general subsidies in the energy sector have begun to be implemented... Continued efforts are needed to reduce the budget deficit to take the pressure off monetary policy and create space for more credit to the private sector. In addition, as government debt has increased, debt management needs to be improved. Moreover, careful monitoring of the financial sector is needed to assure continuing financial stability."
Traditionally the Fund focuses on improving the performance of macroeconomic indicators (with a focus on ending subsidies on all utilities in an effort to achieve full cost recovery and reducing dependence on borrowing from the State Bank) and leaves discussions on social indicator improvements to the World Bank. However, such is the nature of our existing appallingly poor performance in the economic arena that the May 17 note placed on its website by IMF states: "The quality of expenditure could be improved by increasing the share of spending on health, education, and infrastructure."
The Fund obviously remains concerned with the government's implementation record as far as raising tax-to-GDP ratio is concerned and with its expenditure priorities. Three years into the SBA programme and Fund concerns are obviously escalating. It is time for change but the political leadership remains blithely indifferent to this spiraling need.
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