The Institute of Policy Reforms on Friday released a fact-sheet on false statements made by the International Monetary Funds. The fact-sheet follows an IMF staff report on the "ninth review of the extended fund facility to Pakistan" was released a few days ago. This has been followed by a conference call to economic journalist by Herald Finger, the Mission Chief.
The transcript of this press conference was released on the January 13.
The economic journalists must be commended for asking some very relevant questions on the on-going IMF program. In turn, Mission Chief Finger has patiently responded to each question. Unfortunately, there are a number of factual errors in the answers. This may be due either to wrong information being provided by the authorities or a lack of awareness of latest trends or due to pressure to demonstrate that the Program is performing well and that the Staff Mission has been successful in inducing improvement in the economic indicators through promotion of appropriate actions.
The fact-sheet said the first problematic statement is that there is a process of 'continuation of gradual recovery' of the economy in 2015-16. The GDP growth rate has risen from 3.7 percent to 4.2 percent in the first two years of the Program. In 2015-16, the growth rate is expected to rise further to 4.5 percent. However, there have been a number of developments which could impact negatively on the growth rate in 2015-16. The cotton crop has failed and output is likely to be down by over 18 percent. This alone can reduce the GDP growth rate by one percentage point, given the role of cotton in the national economy. Exports have plummeted by over 14 percent in the first six months. Imports have grown in overall quantity terms, thereby adversely impacting on production in import-substituting industries. Further, the largest industrial plant of Pakistan, the Pakistan Steel Mills, is shutdown. Therefore, it is unlikely that the GDP growth rate will substantially exceed 3 percent in 2015-16.
It also said Mission Chief Finger had said "the majority of revenues is through Customs and lower oil prices are hurting the [tax] collection efforts". There was a time when customs duty was the largest source of revenue but now it contributes only 12 percent to FBR collections. Even if other taxes at the import stage are included the share remains below 40%.
Contrary to perceptions, lower oil prices have actually created space for higher tax rates and revenues. Currently, the general sales tax rate on the highest consumption-volume petroleum product, high speed diesel oil, has been fixed at 51 percent, three times the standard rate of 17 percent. In addition, both statutory and regulatory duties have either been introduced or increased on oil imports. These two measures have contributed to additional revenues of over Rs 100 billion.
IPR Fact Sheet describes that there is also a statement that 'the number of taxpayers has increased by more than 200,000.' Analysis of the tax directory for 2013 and 2014 respectively reveals that the number has increased by 65,283 or 8 percent only. Further, it is asserted that the 'number of audits and also the collection through audits has increased.' Actually, the peak collection from demand following audit was attained in 2011-12 at Rs 130 billion, equivalent to 17.6 percent of total income tax revenues. It was lower in 2014-15 at Rs 116 billion or 11.1 percent of collection.
The IMF Mission Chief also states that 'Pakistan collects 11 percent of GDP in tax revenue. This is significant improvement from where it started at the beginning of the Program.' Actually, the level of 11 percent has been reached by including Gas Development Surcharge and Gas Infrastructure Development Cess as tax revenue. There is a Supreme Court judgement that the latter is a non-tax source of revenue, while the former has been shown historically in non-taxes. Also the rise in the tax-to-GDP ratio is a modest 0.6 percentage points since 2011-12.
The IPR fact-sheet said one of the most surprising statements by Mission Chief Finger was that "power outages were quite significant at around 8 to 10 hours a day, which had come down to below two hours in many segments of industry". In fact, there was an increase in electricity consumption by industrial sector in 2014-15 of only 2 percent. This implies that the consumption per industrial unit may have actually fallen. For units in Punjab, there is the additional problem of gas loadshedding during winter. It is highly unlikely that the loadshedding situation has improved to the extent claimed. The Government keeps reassuring that this problem will only be solved by end-2017. Finally, the assessment by Finger is that 'the chances of completion of the program are good.' This will, of course, depend on the liberal continuation in program waivers as has been the case in the reviews up to now. The decision point is likely to be reached at the time of the framing of the Budget for 2016-17. The Government will require additional 'fiscal space' to accommodate CPEC projects in the PSDP and to push for faster growth prior to the elections.
Currently, the macroeconomic framework in the Program projects that development spending will fall from 3.8 percent of the GDP in 2015-16 to 3.7 percent in 2016-17. Simultaneously, there is to be a big reduction in the fiscal deficit from 4.3 percent of the GDP to 3.5 percent. These projections clearly do not provide the necessary fiscal space. As such, the Fund will have to accept the need to shift gear from stabilisation to growth if the Program is not to end prematurely. IPR added that overall, there is a sense of disappointment about the quality of review by the IMF. Many of the positive findings are based on erroneous data. The Government has very skilfully handled the IMF.
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