The Pakistan economic team is currently in Dubai for the mandatory fourth/fifth review by the International Monetary Fund (IMF) under the 6.64 billion dollar Extended Fund Facility (EFF). The clubbing together of the two reviews that may lead to the disbursement of two tranches simultaneously reflects the fact that the IMF is unwilling to waive compliance on time bound structural conditions; and the government's failure to comply with these conditions belies the repeated claims by Federal Finance Minister Ishaq Dar that Pakistan is being seen as a country embarked towards meaningful reforms and development by multilaterals and bilaterals.
Some comparisons with actions taken by the PPP-led coalition government are in order. In November 2008 the Finance Ministry led by Shaukat Tarin went on an IMF programme and by the first quarter of 2010 or around fourteen to fifteen months after loan approval the IMF suspended and later scrapped the 7.2 billion dollar Stand-By Arrangement (SBA) with two tranches remaining un-disbursed. Citing personal reasons for his resignation, Tarin was replaced by Dr Hafeez Sheikh in the first quarter of 2010 and, in spite of what was widely reported as Sheikh's close ties with multilaterals, he failed to secure the release of the two un-disbursed tranches during his three-year tenure as the Finance Minister. This has led many analysts to maintain that Tarin left the Ministry because of his inability to convince the Gilani-led coalition government to implement the required politically challenging reform agenda while Dr Hafeez Sheikh was willing to subordinate his economic reform agenda to his political ambitions. Pakistan thus failed to implement reforms agreed with the IMF under the SBA notably with respect to improving governance in the power sector and making the tax system more equitable.
The incumbent Finance Minister, Ishaq Dar, known for very close ties with the Prime Minister signed on the dotted line in September of 2013 and by July of this year, less than one year after loan approval, the EFF is effectively suspended. There is no doubt that Dar's clout within the party is significant in marked contrast to the finance ministers appointed during the PPP-led coalition government. This implies that Dar's ability to deliver on commitments made to the IMF is considerably more attainable relative to technocrats Tarin and Hafeez Sheikh. And yet Dar has failed to deliver on three counts (sell-off of OGDCL shares, issuance of sukuk bonds and raising electricity rates by 7 percent) which led to the suspension of the fourth review. The reason: the power base of the PML-N remains the business sector which is at a collision course with the Federal Board of Revenue's (FBR) objective to evaluate their real as opposed to declared income through data available from Nadra as well as commercial banks. However, the FBR did undertake a random audit in September 2014 wherein 77500 returns were selected in six categories. Those selected have been issued notices but the process of audit has yet to be initiated and critics maintain that if past precedence is anything to go by this effort would fizzle out due to political pressure. The tax structure also relies heavily on the salaried class for income tax collections and there has been no change in taxing the other large income earners though the budget 2014-15 made the distinction between filers and non-filers (with the latter paying double the withholding tax).
And this unfortunately has accounted for the continued reliance on indirect taxes whose incidence on the poor is greater than on the rich, manipulating data from one head to another for example the 145 billion rupees to be collected under Gas Infrastructure Development Cess was placed under tax revenue rather than non-tax revenue to show a higher tax-to-GDP ratio and of course massive data manipulation and not allowing the Federal Bureau of Statistics to interact with economists/journalists who have openly challenged the methodology used to determine macroeconomic data.
The irony of course is that even during civilian rule when the source of power resides with the general public the influentials and pressure groups exert pressure on the government on policies - be they tax policies, gas management plan or indeed ensuring that the power sector receivables from government entities as well as the private sector are not passed on as higher bills to the general public. To date therefore Dar has been unable to deliver on tax reforms that are urgently required and has relied on withholding agents to generate and raise collections that are then unfairly credited to FBR efforts. His decision to stay the tax agreement between the 40-odd key stock market players and Dr Hafeez Sheikh must be condemned in the strongest possible terms - an agreement that was a long time coming and which would have enabled the government to begin to collect revenue from a market that is a source of considerable revenue for governments around the world including India which collects around 100 billion rupees a year from the stock markets. Pakistan's collections under this head are less than 2 to 3 billion rupees. The reason: Dar's reliance on the stock market players to show a bullish market when the efficacy of his policies are openly challenged.
The third IMF review projected 2.6 billion dollars gross financing requirements for the first quarter of the current fiscal year (July-September) - a requirement that assumed disbursement of 550 million dollars - the fourth tranche - from the IMF in September. That money has not been disbursed. The government had projected 1.8 billion dollars from its own sources (including the Coalition Support Fund from the US, Foreign Direct Investment of 522 million dollars and another 211 million from grants and loans from other lenders) which have yet to materialise. Thus convincing the IMF to release the two tranches is imperative for the government if it is to be able to meet its financing requirements.
So can Dar deliver on the time bound conditions? He can issue the sukuk bonds though he may be forced to reduce their maturity time and raise the rate of return (thereby increasing the country's short term indebtedness further). OGDCL shares' sale has hit a snag with protests by its employees claiming that the share price is too low and openly accusing the government of favouring an investor. Besides the matter is in the court now though the federal government has been given interim relief namely to get the bids and make the sale but not to credit it to the federal consolidated account till the final verdict. This would delay the process though Dar is likely to point out to the IMF that the money would be available with the State Bank of Pakistan and would be credited to the consolidated fund shortly. Be that as it may, to begin sale of profitable ventures (and OGDCL is a profit-making entity) while ignoring the loss making state-owned entities (SOEs) implies that the primary objective of the PML-N manifesto namely to cut off over 500 billion rupee annual bailout packages to badly performing SOEs is being severely compromised.
In the third mandatory IMF review dated July 2014 the government committed to privatisation programme aimed at offering and/or marketing at least one transaction in each quarter during the upcoming year" and the time line was as follows: United Bank Limited and Pakistan Petroleum Limited end June 2014, OGDCL end September 2014, National Power Construction Company end December 2014 and Allied Bank Limited and Habib Bank Limited end March 2015. These deadlines appear to be optimistic and sadly the government did not consider it appropriate to take parliament on board, a forum that sadly it only employs when it faces a political challenge, or the employees who are in a better position to evaluate a market driven share sale price.
Electricity rates were raised by 30 paisa under the levy titled surcharge though this is less than the 7 percent increase in electricity that Dar had committed to the IMF.
It is unfortunate that Dar's recent visit to the US to attend the World Bank/IMF annual meeting did not lead to any visible US State Department support for the release of the fourth and fifth tranche - unlike what happened during the PPP led coalition government. True that the US State Department's support in 2008 and 2009 was premised on the role played by Pakistan in the war on terror and not on our economic performance yet one can conclude that lack of interest and lack of economic performance has finally come home to roost for Dar. Thus there is every indication that the IMF would not release the tranches without prior compliance of conditions which for the common man would imply higher tariffs leading to high inflation and fewer employment opportunities.
Comments
Comments are closed.