IMF staff performance under EFF

The International Monetary Fund (IMF) Executive Board approved the disbursement of the second-last tranche to Pakistan under the 6.6 billion dollar extended Fund Facility. While the approval was expected as the 11th Staff review had been completed successfully, a fact constantly cited by Federal Finance Minister Ishaq Dar as an indicator of the support for policy reforms ushered in by the Sharif administration. A press release uploaded on the IMF website attributes a statement to M Furusawa, Deputy Managing Director and Acting Chair, which is a major source of concern to local economists. First and foremost, while the government has cited a revised GDP growth for 2015-16 at 4.7 percent, down from the 5.5 percent budgeted; the IMF has not deemed it appropriate to adjust its own growth projection for the outgoing year and keeps it at 4.5 percent. In addition, the Fund staff has not bothered to evaluate government data - an exercise which several local economists have undertaken that reveals a growth rate of no more than 3.1 percent. And needless to add several key macroeconomic data are calculated on the basis of the growth rate; for example, tax revenue as a percentage of GDP, current expenditure as a percentage of GDP and total public debt as a percentage of GDP.

Secondly and equally disturbingly, the Fund staff during the course of the EFF focused on total revenue and not on where the revenue was to be generated from, thereby ensuring that the tax system remained unfair, inequitable and anomalous. Furusawa stated in the press note that "the authorities are on track to achieve their programme's end-year fiscal targets, and their commitment to continue with gradual fiscal consolidation in FY2016-17 is welcome". This is unfortunate and accounts for the Finance Ministry's (i) heavy reliance on withholding tax on goods and services, in the sales tax mode as it is passed in its entirety to consumers/clients, while mislabelling it as direct tax; (ii) shifting non-tax revenue items, for example, gas infrastructure development cess, accounting for 145 billion rupees in the budget for last year as well as in 2016-17 to other taxes in an attempt to raise the tax-to-GDP ratio; and iii) placing revenue items under non-tax revenue which the relevant ministry has already indicated is unlikely, an example being the auction for 3G/4G.

Thirdly, the press note states that "expansion of the coverage of tax crimes under the Anti-Money Laundering (AML) framework is welcome and will contribute to improve tax compliance and governance". Again an unfortunate statement that smacks at worst of not being aware of the contents of the AML bill or at best of deliberately ignoring the fact that the AML is limited to indirect taxes, and ignores direct taxes.

The press note focuses on the stalled privatisation process and maintains that "restructuring and privatising loss-making public sector enterprises (PSEs) remain a priority to ensure their financial viability, reduce fiscal costs and strengthen the efficiency of the economy. In light of the delays in the privatisation agenda earlier in the year, the authorities' commitment to attract private sector participation, while putting in place measures to reduce PSEs' financial losses, is welcome". This though a typical condition of all multilaterals does not take account of any new research in the field and the Fund staff would do well to consider research-based arguments that privatisation is not always a success. Joseph Stiglitz, Nobel laureate, lamented that "the World Bank and the IMF pushed countries to privatise as much as they could and as fast as they could. Privatisation became not only one of the pillars of the "Washington Consensus" but also a condition imposed on countries seeking assistance. The experiences of the last 15 years have cast a pallor over this unbridled enthusiasm for privatisation...a new more pragmatic consensus is developing... more consistent with economists' normal two handed stance 'it depends'. Privatisation has some successes but it has also been marked by dramatic failures and disappointments... In many countries a few individuals managed to grab hold of previously state-owned resources for a pittance and became millionaires or billionaires... there is even more serious principal agent problem in the privatisation process itself. What is at stake is not just the current flow of profits (rents) but the present discounted value of these rents which is much larger."

The Fund statement adds that "foreign exchange reserves have been progressively rebuilt under the programme, and the continued accumulation of international reserves will further bolster external buffers and reduce vulnerabilities". Interestingly, the mission leader for the EFF did admit, when asked, that the build-up of our foreign exchange reserves is 'debt enhancing' which is ignored in the review.

There have been some reforms notably in the power sector though with only 2 percent improvement in power generation and a fall in private investment claims that large-scale manufacturing growth is 4.7 percent (July-March) is over-rated. However, the positives can be quickly reversed in the event that there is political uncertainty or indeed an election looms near. It is unfortunate that both these negative elements are present today. The situation, therefore, gives birth to question as to what policies would the Finance Ministry support or be compelled to support in the face of an impending political uncertainty or a general election.