Problem of plausibility

There was much posturing this week past by the newly transferred Finance Secretary Rana Abdul Wajid while briefing the Senate Standing Committee on Finance that the government will not seek another International Monetary Fund (IMF) loan. The implication, critics allege, was that the government's domestic economic reform agenda is on track and that the need for external assistance no longer acute.
Wajid added that Pakistan is not going for a shadow IMF programme either, defined one assumes as the continued engagement of the IMF in policy implementation in this country. However perhaps he was unaware of the fact that Post-Program Monitoring will commence, given that the IMF reserves this right in case the debtor country has an outstanding credit from General Resources Account of over 200 percent of its quota - monitoring which is more frequent than formal consultations under a programme loan. Many may well refer to this enhanced monitoring as a shadow programme.
Wajid then rather disturbingly stated that the challenges on the fiscal framework identified by the IMF in its Article IV consultations (routine for member countries even when the country is not under any active IMF programme) were based on assumptions that external inflows budgeted on various accounts would not materialise. His assessment, flawed by any stretch of the imagination, was that the government projections in the budget, based on assumptions with respect to external resource inflows as well as budget surplus by provinces, would materialise and the deficit would therefore not be as high as forecast by the IMF.
Rana Abdul Wajid, it maybe recalled, is the man who replaced Dr Waqar Masood recently. This correspondent asked the Prime Minister during his meeting with Islamabad based editors and senior columnists if the reason for Dr Masood's transfer was his reported tightfistedness in releasing funds for either politically motivated or economically unfeasible projects (including refusal to extend bail out packages for inefficiently run public sector entities without a business plan) to which the Prime Minister first replied that bureaucratic transfers are a routine matter and later stated that it was at the request of Dr Sheikh.
Be that as it may it would have been appropriate for Wajid to defer his appearance in front of the Senate Standing Committee on Finance till he was prepared to respond credibly to their queries. However, he did not do so and came up with some statements that are as niggardly with respect to truth as Interior Minister Rehman Malik's statements according to Zulfikar Mirza. I will mention Wajid's three that simply defy plausibility.
First, there has been no programme lending to this country since May 2010 when the IMF released its third last tranche under the 11.13 billion dollar Stand-By Arrangement (SBA). The last two tranches remained suspended - a reflection of the failure of the government to convince Fund staff that it would implement the remaining critical SBA conditions within an agreed time period. By September of last year the government abandoned all hope of convincing the Fund staff that it would meet the conditions and decided to end the SBA. The outcome of SBA suspension was the announcement by multilaterals that they would require either a Letter of Comfort from the IMF which would indicate that the Fund is comfortable with not only the policies being implemented but also the time during which they would be implemented or else for the government to begin implementing the conditions proposed by multilaterals and almost the same as those that the government failed to implement under the SBA. The government's failure to provide either an LoC or begin implementing reforms resulted in the cessation of all programme lending by multilaterals and bilaterals. In 2010-11 budgetary programme lending was earmarked at 80.3 billion rupees while actual inflow under this head was only 39 billion rupees (the amount reflected the period till the release of the May tranche by the IMF). In 2011-12 budget actual programme lending envisaged is 117 billion rupees - an amount that is not possible given three facts admitted by the Prime Minister, the Federal Finance Minister and Wajid: (i) we are not on an IMF programme loan - well defined or shadow; (ii) there will be no new taxes that would leave the tax to GDP ratio as low as last year; and (iii) the focus on bailout packages and release of development funds given the government is in an election mode would no doubt raise expenditure significantly thereby negatively impacting on the budget deficit.
Second, Wajid also inexplicably stated that the 125 billion provincial surplus identified in the budget would be realised - a claim that simply defies any law of credibility. Had he said that remittance income would rise, a claim that incidentally defies a forecast made by the State Bank of Pakistan in one of its reports, as would our export revenue by about 500 million dollars as a consequence of the European Union humanitarian trade package that would enable our textile exporters to take advantage of the two-year tax concessions he would have been arguably a little more believable.
Third, the IMF forecasts a budget balance (deficit) of negative 6.7 percent for the current year with the government's budget 2011-12 document optimistically placing the deficit at 4 percent this year. The IMF also stipulates a deficit of 6.1 percent of Gross Domestic Product (GDP) last year which our current budget document claims was 5.7 percent. The fact that the budget 2011-12 was announced early June last year accounted for the failure of the Ministry of Finance to correct the serious error of the Federal Board of Revenue where gross instead of net proceeds of 2010-11 were released. Given the expected lower tax receipts (partly due to what is by now routine overstatement of tax collections each year as well as adjustment of last year's overstated tax proceeds), and higher expenditure it is unlikely that the budget deficit would be less than the 6.7 percent forecast by the IMF.
I would go so far as to stipulate that the deficit in 2011-12 would be higher than what the 7.6 percent the PPP led government inherited in 2007-08. I would go one step further and maintain that if the budget for next fiscal year is announced in May this year, as publicly stated by members of the cabinet including the Prime Minister, then it would rely on highly underrated forecasts of expenditure and overrated revenue figures for this year (by relying on unrealistic 2011-12 budgetary estimates) which would allow the government to present even more flawed and less realistic figures for budget 2012-13 than in the past.
So what can we expect with Dr Masood's replacement Rana Wajid? First, release of substantial development funds to senators as part of the deal to approve the twentieth constitutional amendment. More money supply would without doubt fuel inflation further. Second, release of funds to Pakistan Railways (as well as other poorly performing state owned entities) without evaluating the business plan's ability to deliver. Third, no new taxes; and fourth, an increase in the budget deficit with serious negative consequences on inflation as well as on employment opportunities.