EDITORIAL: Federal Finance Minister Muhammad Aurangzeb speaking during the Senate session on Monday stated that if structural reforms are implemented the 7 billion dollar Extended Fund Facility (EFF) programme on which a staff-level agreement (SLA) was reached on 12 July would be Pakistan’s last International Monetary Fund (IMF) programme.
The Fund Board approval on the EFF is still pending, a prerequisite for disbursement, and the agenda of the Board calendar till 18 September, uploaded on the Fund website, does not include Pakistan. This has raised legitimate concerns that the government has yet to meet the “prior” conditions that have been agreed during the SLA.
One prior condition acknowledged by the economic managers is procurement/firm pledges of the budgeted foreign loans from multilaterals and bilaterals with both the signatories to the Letter of Intent that has to be submitted to the Fund Board committing to the implementation of all agreements reached in the SLA - Minister of Finance and Governor State Bank of Pakistan - publicly claiming that progress on meeting these targets is at an advanced stage.
The Finance Minister referred to bilateral loans while the Governor referred to reliance on commercial loans from the banking sector, higher by 2 billion dollars than was budgeted, fuelling speculation that the budgeted loans from friendly countries are facing lacunae.
There are also concerns that the 16th August decision by the Punjab government to subsidise electricity by 14 rupees per unit for those using up to 500 units per month for two months at a cost of 45 billion rupees - an amount that was not budgeted and is certainly not targeted to the poor - maybe considered a violation of the SLA wherein the government agreed not to extend unfunded and untargeted subsidies. This move indicates that the political leadership maybe unwilling to abide by the terms and conditions agreed with the Fund.
Three further major observations are in order. First, implementation of the reforms agreed with the Fund will lead to EFF loan approval by the Fund Board and as post-2019 Fund loans have brought home to Pakistani authorities bilaterals will only then release pledged assistance. In other words, without an active ongoing Fund programme whose implementation is strictly monitored by Fund staff every three months no multilateral or bilateral is willing to extend any further loans to Pakistan.
This would keep the country’s rating at the high risk of default level that, in turn, would make procurement of any commercial bank loans from abroad or issuance of sukuk/Eurobonds extremely expensive – a situation that Pakistan was facing during last fiscal year even though the country was on a 9-month 3 billion dollar Stand-By Arrangement (SBA) with the Fund that it successfully completed by March this year.
The second observation should be deeply concerning as any implementation of the harsh upfront prior conditions agreed with the IMF under the EFF will only guarantee Board approval with no prospect of this being the last programme loan from the Fund for two major reasons: (i) the Fund continues to focus on total revenue collections and not on the source of taxes, an objective that the Federal Board of Revenue and the country’s economic managers seem to mirror. This explains why the tax structure to date continues to be skewed in favour of the elite and segments of high nuisance value that successive governments have failed to bring into the tax net.
The result is that the salaried class is overburdened, withholding taxes are imposed in the sales tax mode, an indirect tax whose incidence on the poor is greater than on the rich, and total reliance on indirect taxes is to the tune of 80 to 85 percent of all revenue collections – a trend that accounts for rising poverty levels to 41 percent last year as per the World Bank report.
The emphasis on taxing the traders can be supported but the envisaged revenue from them in the current year is budgeted at only 50 billion rupees and therefore there is an urgent need to cut expenditures.
Any additional taxes on existing taxpayers may lead to more violent street protests than were witnessed during Jamaat-e-Islami’s protests designed to pressurise the government to backtrack on such so-called reforms.
And (ii) the government is announcing austerity measures including privatising commercial and non-commercial state-owned entities (the latter all but abandoned as per economist Kaisar Bengali who recently resigned from the austerity committee for this reason) as well as slashing benefits earmarked for 7 percent of the total labour force of the country paid for by the taxpayers (excluding their pensions as and when due as employee contributions remain zero). We have been urging the government and all those who draw a salary from the treasury to voluntarily slash their expenditures because that is the need of the hour.
Unless there is at least a 2 trillion rupee reduction in current expenditure this year the need for more loans - both externally and internally – will not end by the end of the 37-month programme.
We realise that the Fund programme is not well designed and is severely contractionary to boot (in terms of both fiscal and monetary policy) which would mean not only that the tax collection targets premised on growth and imports will not be achieved necessitating mini-budgets but current expenditure may well rise as the government seeks more loans and not less to meet its expenditure budgeted at 18.877 trillion rupees – 25 percent higher than the revised estimates of last year with current expenditure budgeted at 21 percent higher than the revised estimates of last year.
Something has to give, as general public’s income is at capacity it is the government’s current expenditure that needs to be slashed to an extent, which is clearly noticeable.
Copyright Business Recorder, 2024
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