The fourth review

The mandated fourth quarterly review under the International Monetary Fund's (IMF) Extended Fund Facility (EFF) will be cobbled with the fifth review as per the IMF website. The reason: delay in complying with time bound actions including sale of 10 percent of OGDC shares, issuance of Sukuk bonds, reversing the court decision disallowing the government to collect Gas Infrastructure Development Cess (GIDC) as well as raise power tariffs buy 7 percent.
All these decisions are revenue generating and were delayed, so argue government stalwarts, because the ongoing dharnas created political uncertainty that would have naturally sounded alarm bells for prospective buyers of OGDC shares and Sukuk bonds; while raising electricity rates at the present moment in time, they argued, would have swelled the ranks of the disgruntled within the country. Finance Ministry sources, however, recently indicated that OGDCL shares and Sukuk bond sale would proceed soon, with only a slight delay from what was originally envisaged, while the Finance Minister Ishaq Dar publicly stated that the government would not raise electricity rates at present due to sociopolitical implications of such a decision.
OGDCL sale is expected to generate around 813 million dollars (around 829 billion rupees if the exchange rate of around 102 rupees to the dollar is used) as per newspaper reports. In March 2014 the government, with 85 percent shares of OGDC with around 10 percent expected to be put on the market, had indicated it expects to generate 998 billion rupees at the then share price. The Supreme Court overturned the Peshawar High Court decision staying the sale of shares on the petition filed by the Khyber Pakhtunkhwa (KPK) government arguing that the provincial government's approval, as required under privatization law was not sought. The apex court has allowed the Privatization Commission to accept bids for the sale but not to transfer the shares till a final decision in the matter - an interim judgment that would allow the road shows to continue though it is unclear if investors would succeed in downgrading the price of the shares as a condition of showing an interest at the present time. In addition, the government would not be able to beef up its dwindling foreign reserves till after the final judgment.
Gas Infrastructure Development Cess (GIDC) budgeted to generate 145 billion rupees (inexplicably cited as a tax rather than as non-tax revenue in budget documents) was passed through an ordinance, which has also been stayed by the Lahore and Karachi courts. The impact of the two courts' decisions namely sale of OGDCL and collection of GIDC on the budget is estimated at around 1 trillion rupees.
Sukuk bonds were budgeted to yield 49.5 billion rupees. However, like his predecessors the Finance Minister's budget data became irrelevant almost the next day it was presented to parliament - an example being the sale of 2 billion dollar instead of the budgeted 500 million dollar Eurobonds last fiscal year (made possible by giving an interest rate more than double what was prevailing in the West). It is therefore unclear how much the government would borrow through sale of Sukuk. Sources in the Ministry of Finance have revealed that the agreement with the Fund is that 1.9 billion dollars would be realized through sale of OGDCL and Sukuk, which may imply that Sukuk bonds would take up any slack. However, with the IMF downgrading world growth especially in Eurozone countries the interest in sale of OGDCL and Sukuk bonds may not be as high as projected - which, based on the Finance Minister's past decisions, may lead to shorter term loans at a much higher rate of return.
The government has, as per documents available with Business Recorder, put pressure on National Electric Power Regulatory Authority (Nepra) to increase power tariff by 30 paisas per unit immediately (effective October) and another 12 paisa later. Such tactics are adopted to perhaps absolve the government's role in a tariff rise, and stop any anti-government protests as a consequence. However, it is unlikely that the public would place the blame for a tariff raise on Nepra instead of the government.
A current account deficit due mainly to a rising export-import gap would require 2.6 billion dollar gross financing needs, or so stipulated the IMF in its third review. Thus a shortfall of 700 million dollars was projected with 555 million dollars expected to have been met with the release of the fourth IMF tranche and the rest through borrowing from other sources. Failing to generate revenue from the above sources would require a mini budget that would include: (i) reducing power subsidies, which the government may be unable to implement due to its current political compulsions; and (ii) raising revenue through indirect taxes rather than implementing tax reforms with its negative impact on the poor greater than on the rich (though yet another tax reform commission has been set up). What is, however, more likely is enhanced reliance on short term much more expensive borrowing from where ever Dar can find it - internationally or domestically!
Ishaq Dar has been at great pains to underline the fact that his economic policies account for better borrowing terms and conditions than during 2008-13. This raises the questions about the difference, if any, between 2008 Stand-By Arrangement (SBA) and 2013 Extended Fund Facility (EFF). The lending rate for both SBA and EFF is at non-concessional rates and are tied to the IMF's market-related interest rate which is itself linked to the Special Drawing Rights (SDR) interest rate. Currently the basic rate of charge amounts to the SDR interest rate plus 100 basis points. Large loans carry a surcharge of 200 basis points, paid on the amount of credit outstanding above 300 percent of quota. If credit remains above 300 percent of quota after three years, this surcharge rises to 300 basis points, and is designed to discourage large and prolonged use of IMF resources. A service charge of 50 basis points is applied on each amount drawn.
According to the IMF website the SBA is the workhorse lending instrument for emerging market economies, and is designed to assist the borrower overcome balance of payment problems, with a short-term duration of between 12 to at maximum 36 months. Post-2009 a new SBA framework was developed by the Fund that envisaged the elimination of structural performance criteria and progress in implementing structural measures that are critical to achieving the objectives of the programme; and instead assessing the performance of the borrowing country in a holistic way, including via benchmarks in key policy areas, in the context of programme reviews. Thus SBA in 2013 would have enabled the government to negotiate on conditions in a more holistic way.
An EFF is a longer engagement with repayment between 4-1/2 to 10 years in ten equal semi-annual instalments...and the Fund requires the presence of adequate assurances about the member's ability and willingness to implement deep and sustained structural reforms. The cobbling of the fourth and fifth review indicates the IMF's concern with respect to the government's commitment to implement deep and sustained structural reforms.
Sources within the PPP as well as in the IMF have revealed, on condition of anonymity reflective of PPP support for the government, that ongoing discussions on structural reforms between the Fund and the PPP-led coalition government a few months before its term ended on 16th March, 2013 focused on much less stringent conditions than agreed by the Federal Finance Minister Dar under the EFF.
It is moot to consider whether the PPP government was negotiating another SBA, short-term but more flexible in terms of reforms, as opposed to Dar's focus on long-term as opposed to short-term loans that was highlighted in his budget speech on 6th June, 2014: "medium-term debt management strategy (2014-18) has been developed to lengthen the maturity profile and reduce the refinancing risk along with sufficient provision of external inflows to relieve the pressure on domestic resources and to enable the private sector to access more credit from the banking system." Unfortunately the refinancing risk does not take account of the exchange risk. Dar on the instructions of the Prime Minister is committed to keeping the rupee between 98 to 100 per dollar (a decision that accounts for the IMF third quarterly review to maintain that "the authorities do not share staff's view that the exchange rate is somewhat overvalued and place greater priority on the nominal exchange rate stability"); however, recent rupee depreciation reflects the obvious: the exchange risk remains irrespective of monetary policy measures to control it.
The government has obviously allowed political constraints to outweigh economic constraints - reminiscent of the PPP-led coalition government - and like its predecessor, has been unable to improve the performance of the energy sector even after the passage of sixteen months. The receivables today are higher than during the tenure of the PPP-led coalition government in spite of tough talk by Abid Sher Ali, the power hike is estimated at 33 percent with average bills rising by 42 percent, receivables have risen from 80 to 90 percent while distribution losses have declined by only 0.5 percent according to independent government data collected by Musaddiq Malik, the Special Advisor to the Prime Minister on Energy. Unfortunately the Prime Minister and his Finance Minister have rejected this data and have instead focused on over-billing during July and August alone that has created unrest in several cities.
While one would assume that Dar's control over the power sector is proportional to what the Prime Minister allows him yet the Federal Board of Revenue operates directly under his Ministry. He has been unable to improve the tax structure and reliance on indirect taxes continues with many of his budgetary withholding taxes either challenged in courts of law or simply not being collected by newly-designated withholding agents. Examples are advance tax on business and first class airline tickets and tax on interest income and dividends versus taxation of accounting income.
Thus the IMF decision to defer the fourth tranche release, likely to delay budgetary support from other multilateral and bilateral sources as Pakistan witnessed during 2010, is based on systemic issues that plague the economy due to government policies rather than sourced to the ongoing dharnas. The dharnas/jalsas have simply provided the government with an excuse for poor economic macroeconomic data.