The "do more" mantra was the main theme of the International Monetary Fund (IMF) staff third review report under the 6.64 billion dollar Extended Fund Facility for consideration of its Executive Board - a prerequisite prior to the release of the third tranche.
The staff report highlights what it terms "significant (revenue) shortfall from the Programme's objectives" with tax revenues expected to be one-fourth of a percent of Gross Domestic Product (GDP) lower than envisaged and, contrary to government claims, non-tax revenue from auction of 3G licences estimated at 0.15 percent of GDP lower than envisaged. And perhaps the single most backhanded slap on the wrist of the Federal Board of Revenue in the report was the statement that the authorities have taken steps to 'improve its underperformance'. The report indicates that the government has agreed to meet this significant revenue shortfall through lower subsidies in the non-energy sectors and reducing untargeted grants. The budget for 2014-15 envisages a reduction in subsidies to 203 billion rupees in comparison to the 323 billion rupees in the revised estimates of 2013-14 - 80 billion rupees more than budgeted for the year. However, budget 2014-15 as expected envisages the bulk of this reduction in subsidies on the energy sector, which accounts for 91 percent of all subsidies. It is relevant to note that in the budget for 2013-14 the government budgeted around 91 percent of all subsidies for the energy sector (Wapda and K-Electric) but in the revised estimates subsidies to the energy sector accounted for nearly 96 percent of all subsidies. Grants are projected to rise this year and are allocated 370 billion rupees as against 337 billion rupees in last year's budget with the revised estimates at 336 billion rupees.
The Fund staff emphasised the need to support social safety network for the vulnerable on the one hand and convinced the government to impose an electricity surcharge to recover 240 billion rupees Syndicated Term Credit Finance in the event that Nepra does not include it in tariff determination on the other. While this is an economically valid proposal yet given that the rising bills with increasing energy shortages are already the cause of spontaneous violent protests there is a concern that any further tariff raise may increase these protests. Rising electricity bills are also a major impediment to the failure of the productive sectors to compete with either items' smuggled into the country from our eastern and western porous borders or in foreign markets and account for Pakistan performing worse on the World Bank index of doing business in comparison to last year.
The government's performance in terms of procuring foreign loans, including the 2 billion dollar inflows from Eurobonds, allowed the country to meet its end-March Net International Reserves target by a wide margin of 735 million dollars, which also led the SBP to narrow its short-term, swap/forward position by 550 million dollars thereby over performing the end-March target by 120 million dollars. The report maintains that foreign reserves have recovered but are still low (not more than for 3 months of imports) and urged the SBP (in this case one would not be remiss to lay the onus on the Finance Minister) not to bet on one offs thereby referring to the Saudi $1.5 billion gift and privatisation proceeds. The ceiling on borrowing from the SBP was also met, however, "sterilization of foreign exchange inflows and liquidity management through open market operations were not sufficient to contain Net Domestic Asset growth" and the target was missed by 41 billion rupees. However, as in previous staff reports, the Fund urged the government to do more to grant autonomy to the SBP and 'to consider a transition to the inflation targeting framework over the medium-term and move beyond merely meeting the programme monetary targets.'
There was also serious concern expressed by IMF at the "recent appreciation of the nominal exchange rate and stressed that a more flexible exchange-rate regime will help SBP to better reach its reserve objectives and boost competitiveness." However, one would again assume that given that the Finance Minister as well as the Prime Minister are on record as having stated that the rupee value would be maintained between 98 and 100 rupee per dollar the onus rests not with the SBP but the government. This explains why the IMF once again urged the government to grant autonomy to the SBP through a number of steps.
Perhaps most disturbing of all was the statement in the report that the government faces challenges in its administrative capacity to carry out complex reforms simultaneously and security conditions remain difficult and constitutes a significant downside risk to the economy. Ignored is the fact that the government has yet to make senior appointments in several key public sector entities due to challenges in courts because of a preference for direct appointments in violation of a Supreme Court verdict; and Finance Ministry allocated a mere 92 million rupees for implementation of a 32 billion dollar National Internal Security Policy under which Nacta would operate.
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