Fund's evaluation

The International Monetary Fund (IMF) staff report on Article IV consultations and ninth review as well as Selected Issues Paper both uploaded on 11 January were disappointing documents not only because their evaluation of the doctored macroeconomic data for the first quarter of the current year was more than 'generous', though the report did downgrade some of the more unrealistic government figures, but also because it continued to make some flawed assumptions.
The IMF amended government data on a number of major macroeconomic indicators. The real Gross Domestic Product (GDP) growth rate for the current year was downgraded to 4.5 percent (from the budgeted 5.5 percent which the Fund report claims the government insisted would be achieved), inflation downgraded to 4.7 percent (from the budgeted 6 percent), tax revenue as a percentage of GDP re-evaluated at 12.1 percent (upgraded from the budgeted 12 percent), current expenditure as a percentage of GDP was estimated at 15.1 percent (against the budgeted 14.9 percent), and development expenditure as a percentage of GDP was assessed at 3.8 percent (as opposed to the budgeted 4.5 percent).
Some observations are in order with respect to the amending of data by the IMF. Independent economists basing their forecast on first quarter 2015-16 government data are projecting a GDP growth rate of between 3.9 to 4.1 percent or, in other words, the Fund's projections are being challenged based on the same domestic and external data. While the inflation downgrade is no doubt based on the decline in the international price of oil as well as commodities' price by more than what was projected by the Dar-led Finance Ministry during the budget preparation yet it is a projection that would be acceptable to Dar as it shows better than budgeted performance though, if past precedence is anything to go by, he is likely to claim that his policies are the reason for the lower inflation.
The IMF's projection of tax revenue being met as a percentage of GDP is a source of concern for three reasons: (i) accepting the government's accounting jugglery whereby 300 billion rupees were transferred from non-tax revenue to other taxes; (ii) an increased reliance on withholding taxes which now account for between 65 to 70 percent of total direct tax collections - a tax that is not collected by the Federal Board of Revenue (FBR) and is, in some cases, passed onto consumers and therefore can not be strictly defined as a direct tax. Selected Issues Paper mentioned Pakistan's reliance on indirect taxes to the tune of 68 percent and urges a more progressive system - a claim that grossly understates reliance on indirect taxes whose incidence on the poor is greater than on the rich; (iii) based on the government's commitment that while it would proceed with fiscal consolidation efforts and reforms in the tax structure (including risk based audits), amending the anti-money laundering bill to include income tax (which incidentally gives little comfort level to the general public as the case of Ayyan Ali caught red handed continues to flounder in our Customs courts yet its revenue targets would be met as it would announce mini-budgets as and when the unrealistic budgetary revenue targets are missed - a commitment that over burdens the common man and may perhaps not be politically sustainable after the December 2015 mini-budget. Praise for the Benazir Income Support Programme by the Fund has clouded its inappropriate focus on tax measures that seek to ensure that the lower to lower middle income earners do not fall into the category of the vulnerable.
Dar has been at pains to maintain that current expenditure is on the decline while the budgeted development expenditure would be disbursed in the current year. However the Fund report does note that "the authorities agreed with the need for fiscal consolidation while noting a preference for a somewhat gradual path to address the country's development needs." In addition, this preference for a gradual path towards development, takes account of the significant projected investment input under the China-Pakistan Economic Corridor (CPEC) which, the report maintains, maybe held hostage to a sharp slowdown in the Chinese economy in 2015-16 which would impair (i) exports though the report states that 'the current account deficit has come down from the peak of 8 percent of GDP in fiscal year 2008 to 1 percent of GDP in 2014-15. While the deficit is relatively small its structure - a large trade deficit (7.5 percent of GDP) financed by remittances (7 percent of GDP in 2015) and other transfers - highlights the importance of strengthening Pakistan's export competitiveness. Market shares for Pakistan's exports have been either stagnant or declining;" (ii) reduce remittances, (iii) weaken Foreign Direct Investment prospects; and (iv) dampen growth.
The Staff proposes three policies to mitigate these risks and inexplicably did not mention a more gradual phasing of the budget deficit target than agreed under the ongoing programme. First, through build-up of fiscal and external buffers and preferably from higher exports (including one would assume) through first coming up with a time-bound business development plan - a suggestion that is widely regarded as being in conflict with the Fund's insistence that the budget deficit targets be met. Harald Finger, the Mission leader for the 6.64 billion dollar Extended Fund Facility, maintains that there is no linkage between growth and budget deficit in Pakistan. In an interview given exclusively to Business Recorder last year Finger stated that "there is no trade-off between growth and deficit reduction given significant imbalances in Pakistan. Debt is over 60 per cent of the GDP and about 40 percent of federal government expenditures are on interest payments; the banking system is funding a large share of the government's financing needs, which implies that less credit is available for financing private sector projects; the rupee has appreciated by 10 percent, while the Euro has depreciated, (factors not conducive to exports), load shedding remains a challenge, the business environment needs improvement, infrastructure requires development and the tax to GDP ratio needs improvement." The report reveals that all these imbalances remain and one wonders as to the efficacy of the Fund ongoing programme in this regard.
Second, allow for exchange rate flexibility. The report notes that the authorities do not consider that there is any need to allow for exchange rate flexibility; unfortunately, the Issues Paper gives too wide a range to assist the government undertake appropriate policy measures - between 5 to 20 percent. And third, improve business climate. The report cites a decline in Pakistan's rating in Doing Business Report (138 out of 189 countries) and Global Competitiveness Report (126 out of 140 countries). And suggests a time-bound action plan to improve business climate. With the government borrowing heavily from the domestic banking sector (thereby crowding out private sector activity which it refuses to acknowledge as per the report) and strengthening reserves through borrowing and remittances (which have shown a declining trend world-wide) there appears to be little room for improvement.
The report notes that "fiscal consolidation under the programme is the key driver of improvements in debt dynamics. Fiscal adjustments not only improve the debt ratio under the baseline scenario but the declining trend is quite resilient to standard size shocks...gross financing needs are high and are sensitive to shocks ....these gross financing needs indicators reflect the relatively large share of national savings schemes which, given their diversified base, might have a similar roll over effect." The diversified base implies tacit support for poaching on national savings to meet the rising demand of current expenditure.
IMF's standard normal procedure is to keep engaged with the borrowing government to ensure that the agreed reform agenda continues unless the government consistently fails to convince the Fund that it is embarked on the path of agreed reforms and is simply facing delays, requiring waivers, due to factors external to its decision making. However, the Fund has clearly failed to either compel the government to share more realistic data through delinking the Federal Bureau of Statistic from the Ministry of Finance or to take appropriate action for defying its own stipulated commitments (by maintaining in its December 2015 Letter of Intent that there would be no amnesty schemes and announcing the Voluntary Tax Filing Scheme less than one month later promoting Finger to criticise it) or to undertake critical reforms with respect to the exchange rate, or improve the business climate by allowing a more gradual reduction in the budget deficit than agreed thereby enabling the government to invest in development spending.
So what has Dar achieved after the successful completion of the ninth review? Release of SDR 350 million while the rest of the country pays a heavy price in terms of lower development expenditure, higher indirect taxes and yet another tax amnesty scheme which penalises the existing taxpayer and filer as opposed to the non filer.