The ninth International Monetary Fund (IMF) mandated quarterly review is scheduled for the end of the current month and indications are that there are significant shortfalls in the implementation of the structural as well as quantitative benchmarks that were agreed with the Pakistan authorities in the eight staff review. The question what can the government do to ensure the release of the much needed tenth tranche is fairly obvious: seek some waivers, raise revenue from some other sources to make up the shortfall and last but not least manipulate some data to show a better picture than is in fact the case.
There is a general perception that the IMF team is fully cognisant of the state of our economy and additionally that its continued tranche disbursements are not due to Finance Minister Ishaq Dar's ability to present "convincing arguments" but on insurmountable pressure from members of its board of directors from the more powerful donor countries particularly the United States and Europe. In this context it is relevant to note two facts. First, in an exclusive chat with Business Recorder the IMF mission leader Harald Finger expressed surprise earlier this year when asked if the privatisation plan of four discos as agreed with the Pakistan authorities can be supported given that the privatised K-Electric has received and continues to receive massive subsidies from the federal government - data that is openly available in budget documents. In addition, in a recent teleconference with Islamabad based journalists Finger, when asked, stated that he would seek an explanation from Pakistan authorities on the damning recent Nepra report that highlighted serious flaws in the power sector during the forthcoming ninth review. The Fund without its own means of collecting national data has to mainly rely on the government and therefore there is scope for some subtle and not so subtle manipulation that has been ongoing in the past as well as since Dar took over the Finance portfolio. However, the State Bank of Pakistan (SBP) figures can not be manipulated and hence it should surprise no one that waivers are mainly sought on data compiled and maintained by the SBP for example net domestic assets, international reserves, government borrowing from SBP and commercial banks, net swaps/forward position.
Secondly, it is relevant to note that during the tenure of the PPP-led coalition government when Pakistan was on the Standby Arrangement with the Fund the then Information Minister Sherry Rehman stated on the electronic media that the US had to call the Fund prior to any tranche release to Pakistan. However, the US support appears to have considerably waned during Nawaz Sharif's current tenure and it is relevant to recall the visit of Ishaq Dar to the US in October last year to attend the IMF/World Bank annual meetings, declared a success though hindsight being 20/20 that visit did not achieve any tangible positive results. The government at the time measured the success of Dar's visit with the reported 44 meetings that his delegation held. One would assume that more than half of the 44 meetings were part and parcel of the annual World Bank/IMF meetings given the range of seminars and private chats that are routine for delegations of all countries. Dar, in a press briefing claimed that he held discussions with financial institutions including the World Bank, OPIC, IMF and EXIM Bank as well as with finance leaders from other countries including Britain, China and Iran to discuss co-operation in areas of trade and economy. There has been no positive outcome of these meetings other than the coupling of the fourth and fifth tranche review by the Fund last year and the release of the delayed fourth tranche with the fifth tranche under the 6.64 billion dollar Extended Fund Facility. Here too, however, the fourth and fifth staff review notes that "corrective measures have been taken through prior actions on government borrowing and net domestic assets and other policy steps to put the authorities on track to meet end-December targets."
Thus prior conditions have become the norm and it needs reminding that the government was compelled to release a mini budget in February 2015 before the sixth review could be successfully completed. The revenue shortfall in the first quarter of the current fiscal year is around 40 to 45 billion rupees and thus a mini budget is likely prior to the success of the ninth review. Who will face a tax rise? One would assume that given that the Federal Board of Revenue (FBR) is abrogating its responsibility to withholding agents reflected by around 65 to 70 percent of all direct taxes now collected by withholding agents, and using the sums so generated as an outcome of its own achievements, there is a likelihood that these taxes would be widened and/or raised. In addition, if the international oil prices continue to decline higher taxes on these products would also create fiscal space.
Dar in October 2014 also got to meet the US Trade Representative Michael Froman, USAID Chief, US Special Representative for Pakistan and Afghanistan Dan Feldman, and US deputy national security advisor. He also discussed co-operation with Deputy Secretary William J Burns and Under Secretary of State for Economic Growth, Energy, and the Environment Catherine Novelli and Sarah Bloom Raskin, Deputy Secretary of Treasury Department. A year on there has been no significant increase in trade or grant assistance for energy projects to Pakistan from the US though subsequent to his claims of an economic revival all those he met in October 2014 diplomatically expressed an appreciation for his policies, or so claimed the press releases from the Pakistan Embassy in DC.
And finally some data manipulation, subtle but by and large not so, has been evident. Dar for example downgraded the growth rate of 2011-12, two years after he took over the portfolio, just so he could claim that the rate of growth during the PML-N first year in government was the highest in six years. There is also incompatibility between figures for example cement output is shown as rising considerably less than construction growth. Adding on foreign reserves held by Pakistani individuals to the country's international reserves (contrary to international practice) is however identified by the Fund staff because that information is available with SBP.
There are some external factors that are helping the economy including the decline in oil prices, which has allowed the government to keep inflation down despite not passing on the entire price decline, but lower international commodity prices (our major exports) are partly responsible for a massive decline in our exports. Energy issues, Dar's insistence to keep the rupee strong to lower the country's annual foreign debt repayments and anomalous taxes are internal factors responsible for rising unemployment and lower quality of life. Remittances, however, are rising but there are indications that they would level out this year which would further fuel Dar's need to borrow. The focus on deficit reduction is compromising growth as is appalling performance of the power sector and the failure to reform the FBR.
To conclude, Nawaz Sharif's repeated vote of confidence on Ishaq Dar and his economic policies is simply inexplicable.
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