EDITORIAL: Finance Minister Ishaq Dar stated the obvious during his briefing to the National Assembly Standing Committee on Finance: that his 9 June budget presented to parliament was trimmed by 300 billion rupees - 215 billion rupees additional taxes and 85 billion rupee cut in current expenditure - by the International Monetary Fund (IMF) as a prior condition for the Stand-By Arrangement (SBA) reached on 29 June 2023.
He then proceeded with the same biased litany: blaming the previous administration for violating the Fund conditions agreed under the Extended Fund Facility (EFF) programme specifically the relief package announced by the former Prime Minister effective 1st March for which he can only be held responsible till the passage of the vote of no-confidence on 9 April 2022; however, he conveniently does not aver that the incumbent government did not reverse this package till 3 June.
Dar’s predecessor, Miftah Ismail, reached a staff-level agreement (SLA) on the seventh/eighth review with the IMF under the EFF mid-August 2022, which led to an agreed disbursement by early September.
Sadly, as always, Dar refused to take responsibility for his own violations of the last SLA signed off by the Shehbaz Sharif-led government that included the inane policy to control the rupee-dollar parity at a time when reserves were too low to intervene in the foreign exchange market (which accounts for a 4 billion dollar decline in remittance inflows through official channels in 2022-23) and raising current expenditure from the budgeted 8.7 trillion rupees to 10.5 trillion rupees (21 percent rise) funded through borrowing domestically as without the IMF support, even friendly countries refused to extend pledged assistance leading to a 40 percent rise in markup on domestic debt from what was budgeted for the year – a highly inflationary policy.
What is also noteworthy is that the 9 June budget did not envisage any structural reforms that were identified in the EFF and whose implementation was allowed to lapse after 27 September, the day Dar took oath as the finance minister – reforms in the poorly performing power/tax sectors or in expenditure priorities or indeed in improving governance in the state-owned entities.
The period with Dar at the helm in block months (October 2022 till 29 June 2023) are severely criticised throughout the SBA documents as a period of uneven policy implementation, misaligned economic policies including large fiscal deficits, loose monetary policy and defense of an overvalued exchange rate, which steadily eroded macroeconomic buffers and increased external and internal debt and depleted international reserves.
However, what is not being highlighted by the Finance Ministry with respect to the SBA is that the structural reform conditions in the suspended EFF have been fine-tuned and incorporated in the SBA – conditions that were violated from October 2022.
These include a market-determined exchange rate, a monetary policy that remains tight – higher rates and prudent use of liquidity injections as needed given incoming data to achieve real positive rates (with many arguing that the decision to keep the policy rate at 22 percent in the last Monetary Policy Committee meeting may have to be revised before the next tranche release) and fiscal adjustment that envisages increasing the rate of petroleum levy to 55 rupees per litre (with the government already having violated this agreement by raising it to 55 rupees per litre on petrol though not on high speed diesel effective for the first 15 days of August).
Other measures agreed in the SBA have been implemented and include raising personal income tax by 2.5 percentage points on wage earners and businesses on their taxable annual income in excess of 2.4 million rupees; however, the government shied away from making an effort to shift away the existing inordinate reliance on indirect taxes whose incidence on the poor is greater than on the rich with direct taxes, based on the ability to pay principle, accounting for only 41 percent of all revenue collected, though withholding tax in the sales tax mode accounts for 70 percent of all direct taxes collected.
For the energy sector, the government as in the EFF, agreed to allow tariff determination by the regulators – Nepra (National Electric Power Regulatory Authority) and Ogra (Oil and Gas Regulatory Authority)– though here too, the entire pass-through as recommended by the regulators is not being adhered to with the SBA document stating that measures must include notification in full and, if needed, retrospectively with effect from 1 July and steadfast acceleration of crucial medium-term cost reducing reforms.
The circular debt management plan that was to be shared by end July with the donors has, so far, reportedly not yet been shared, raising questions about whether a plan has been left to the caretakers to finalize.
It is pertinent to state that the SBA documents do note that long-standing structural benchmarks are holding back Pakistan’s socio-economic development, growth enhancing investment and job creation with bottlenecks, inclusive of uneven playing field for SOEs and private companies, corruption, red tape and a weak business climate.
There is nothing in the budget or in recent policies that reflect that any far-reaching structural reforms have begun to be implemented and this is in spite of the fact that it has been made patently evident post-September last year, that without structural reforms there will be no inflows from multilaterals or indeed friendly countries.
Copyright Business Recorder, 2023
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