Structural reforms in IMF programme

The Staff Report on the new 37-month Extended Fund Facility by the IMF of $7 billion contains a number of structural benchmarks, along with their rationale and the date by which implementation should take place.

The structural benchmarks identify the reforms and policy actions in a number of areas, including fiscal policy, governance, social, monetary and financial, energy sector, state-owned enterprises and investment policy. Altogether, there are 22 structural benchmarks. These have been endorsed by the government.

The objective of this article is to focus on a number of key structural reforms within the list. An assessment will be made of each reform, the case for its implementation and the likely impact. The political, institutional and other constraints will be identified.

The first group of eight benchmarks relates to the fiscal area. We focus first on the finalization of a National Fiscal Pact among the federal and the four provincial governments. The objective is to address the mismatch between revenues and expenditures. The expectation was that the Pact would be finalized by end-September 2024 and made available to the IMF.

The issue is that the transfer of some functions like higher education, population planning, etc., will have little impact on the consolidated fiscal deficit. It will reduce the federal deficit but will also bring down the provincial cash surplus. A positive impact is only likely if the transfer is accompanied by greater efficiency and economy in expenditure.

The second major reform proposed is with regard to the full development of the Agriculture Income Tax (AIT). The tax has been levied, for example, in Punjab since 1997. However, the total revenue collection is only Rs 2.5 billion due to very low tax rates and poor collection.

The distribution of farm land in Pakistan is very skewed: 1% of the farms account for 22% of the farm area, at the top of the distribution. As agreed, the reform requires the full alignment of the AIT with the rates in the existing system at the federal level of taxation of other incomes. A conservative estimate is that, if after the tax reform the tax is properly collected, the annual revenue could exceed Rs 350 billion.

However, there is a big risk that the large landowners, who are very influential especially at the provincial level, may frustrate the proper collection from the tax. This has already happened with the proposed enhancement in income tax revenues from the Tajir Dost scheme due to the political influence of the trading community.

An ingenious new reform that has been proposed is that of improving the process of selection of development projects in the federal PSDP. An agreement has been reached with the IMF that the federal ministry of planning will develop and publish on its website the criteria for project selection and the annual limit on the total size of new projects entering the PSDP portfolio.

Historically, the project approval process was based on the preparation of project PC-1s and the approval by the CDWP and ECNEC. The project documents were expected to include a proper cost-benefit analysis of the proposed project, with the use of appropriate shadow prices.

A sample of recently approved project’s PC-1s may be put on the Ministry of Planning Website. This will enable an independent appraisal of the quality of these project documents.

Further, given the massive throw-forward of on-going projects in the Federal PSDP of over Rs 10 trillion, it is essential not only to minimize the allocation to new projects but also to maximize the allocations to mature on-going projects to get an earlier development impact and provide a boost to growth.

The eighth and last structural benchmark in the fiscal area relates to the levy of a 5% federal excise duty on fertilizer and pesticides. This is combined with the pressure by the IMF on the end to the practice of announcement of procurement or support prices on major crops like wheat, cotton and sugarcane. There is the likelihood that in the face of greater risk and lower returns, due to taxation of inputs, farmers may change their cropping patterns and/or reduce the overall cropping intensity. This could lead to a big increase in the import bill, for example, of wheat and cotton and significantly raise the current account deficit, thereby putting pressure on the foreign exchange reserves.

An appropriate understanding has also been reached on annual inflation adjustment of the unconditional cash transfer (Kifalat) in the Benazir Income Support Programme (BISP) by end-January 2025. The cash transfer currently covers 9.4 million families. With the rise in the incidence of poverty to above 40%, there are over 14.5 million poor households in Pakistan today. Therefore, there should have been agreement on an appropriate increase in the number of households with access to the cash transfer.

An expected, there are major policy actions asked for in the energy sector. The first is the commitment to complete all policy actions needed to prepare two DISCOs for privatization and concession transactions. The second relates to elimination of captive power usage in the power sector.

There are serious concerns about privatization of DISCOs. It would have been useful if much earlier NEPRA has prepared a report assessing the outcome of privatization of KESC. Apparently, the private entity, K-Electric, has adopted a policy of discrimination among consumers by reducing the supply of electricity to the poor neighborhoods in Karachi.

A fundamental policy relates to the pricing of electricity in different parts of the country. Privatization of DISCOs will lead to a large regional variation in electricity tariffs, depending upon the cost of electricity supply. There is need for greater public debate on privatization of DISCOs and the creation thereby of regional monopolies.

Overall, the above paragraphs have attempted to highlight the potentially negative implications of some of the structural reforms and policy actions. Also, some of the benchmarks will need to be looked at more carefully in terms of the time-frame for implementation.

For example, it is not clear if the end-September 2024 deadline has been met for sharing with the IMF the report on reducing the federal government’s footprint. Similarly, the end-October 2024 deadline for amendment of the AIT legislation has not been adhered to by any provincial government.

A subsequent article will look at the structural benchmarks in areas like financial and monetary, governance and investment policy.

Copyright Business Recorder, 2024