A crafty dealing?

The eleventh International Monetary Fund (IMF) review was uploaded on the website on 5 July, eve of Eid-ul-Fitr. This could be construed as either a deliberate attempt to defuse a critical analysis of the review given the Eid holidays or else indifference to our religious sensibilities.
Not surprisingly the review acknowledges that the budget document was submitted to the Fund as a prior condition for the release of the eleventh tranche and many, if not all of the budget's expenditure and revenue priorities, are a reflection of finance minister Ishaq Dar's overarching objective to ensure disbursement of the second last tranche under the Extended Fund Facility. The government requested and the Fund approved extension of the ongoing programme from 3 September to 30 September 2016 to take account of the time required to undertake the final review.
The allegation that the IMF team led by Harald Finger may have deliberately chosen 5 July as the day for uploading the review has some merit for two reasons. First and foremost, the shoddy work done by the Finger team in not undertaking any kind of readily available primary data analysis, (inclusive of data released by sectors namely petroleum sector, the Pakistan Bureau of Statistics, Labour Force Survey, Pakistan Household Income and Expenditure Survey, Pakistan Social Standards Measurement Survey) to evaluate whether the government had allegedly manipulated data to show better performance than was in fact the case is very disturbing. The review echoing the blatantly flawed claims of Dar states that "Despite a weak cotton harvest and declining exports, real growth will likely reach 4.7 percent in FY 2015/16, supported by large-scale manufacturing and buoyant construction activity, and higher private sector credit growth". The rate cited in this statement is an upgrading of the IMF's own previous widely believed to be overoptimistic growth assessment of 4.5 percent. No consideration was given to the fact that our farm output directly contributed 21 to Gross Domestic Product and its overall impact is much higher given 60 percent contribution to industry and 40 percent to trading and transport. Thankfully though the Fund staff did note an "increase in the statistical discrepancy in the fiscal accounts (0.5 percent) of GDP as of end March 2016 which, if unwound could entail pressure on the deficit in the last quarter".
Secondly and equally disturbingly, the focus of the Fund team remained on total revenue irrespective of its source and it maintains in the review that "building on the strong fiscal performance in the first three quarters of FY 2015/16 the authorities are on track to reduce the budget deficit (excluding foreign grants) to 4.4 percent of GDP (including an adjustor of 0.3 percent of GDP for exception spending on security and resettlement of intern ally displaced persons)." Such support from the Fund is alarming because: (i) it reflects the failure of the Fund staff to identify that the rise in revenue is from indirect taxes given that withholding taxes (accounting for over 75 percent of direct taxes) are not on income but on consumer items and services or in the sales tax mode which is an indirect tax whose incidence on the poor is greater than on the rich; though the report did acknowledge that State Bank of Pakistan made substantial liquidity injections into the interbank market amid persistent demand for currency in circulation, a reflection of the imposition of withholding tax on financial transactions for non-filers of income tax returns; (ii) the fact that Ministry of Finance surreptitiously issued a notification dated 15 May 2015 in compliance with the Fund's structural benchmark to include income tax evasion in the list of tax crimes considered as predicate offence under the Anti-Money Laundering Act; it is unclear how much hue and cry would be raised in parliament as the standing committee on finance had rejected inclusion of income tax under the AML; (iii) the failure to note that the government has shifted around 196 billion rupees from non-tax revenue to other taxes to dishonestly show a higher tax to GDP ratio of over 10 percent; (iv) the Fiscal Research and Statistics Wing of the Federal Board of revenue (FBR) is publishing biannual reviews and quarterly reviews containing monthly data on stock of outstanding tax refund claims including sales tax, income tax and customs duty as indicated in the IMF staff review report however the discrepancy between FBR data and that of refund claimants is more than 200 billion rupees - a fact that compromises claims of meeting the revenue targets; (iv) the focus on deficit reduction at the cost of growth continues and the review notes that the government remains committed to a deficit reduction. Finger had earlier, when asked, had inexplicably maintained that in Pakistan there is no linkage between growth and deficit reduction; and (v) the acknowledgement that there is reliance on provincial surplus to meet the budget deficit.
The Fund staff's treatment of the China Pakistan Economic Corridor (CPEC) is blatantly inconsistent. The review notes that the new framework for public private partnerships (PPPs) can foster much needed investments while allowing for adequate management of associated financial risks - a framework that was inserted as a new structural Fund imposed benchmark earlier this year at almost the tail end of the programme with a technical assistance released in haste to take account of projects under CPEC which, as per China's requirements, entailed significant departure from public procurement rules and regulations. The review then goes on to acknowledged that "CPEC related imports would widen the current account deficit to 1.8 percent of GDP" from 1 percent of GDP and added that "long term risks could arise from repayment obligations and profit repatriation related to large scale investments such as those under CPEC underscoring the need for careful co-ordination and monitoring". This no doubt compromises the government's stated stance on CPEC being entirely a PPP with no implications on debt.
The government, in its Letter of Intent, informed the Fund that a fiscal co-ordination committee comprising of provincial and federal finance secretaries has started operating, a more appropriate membership would have consisted of the FBR and their provincial counterparts, and claimed that it meets on a quarterly basis to co-ordinate fiscal policy - a claim that is astounding given the budget's proposal to designate provincial tax authorities as withholding agents and directing them to deduct taxes on those who file sales tax returns but are not income tax filers - a measure that was withdrawn after much hue and cry in the standing committee on finance. In addition, National Finance Commission negotiations are at a stalemate and the authorities claim that they are seeking an agreement with provinces to balance the devolution of revenue and expenditure responsibilities in support of macroeconomic stability is clearly not reflective of the real picture.
One commendation to the Fund staff is that they finally came up with a more realistic figure for the rupee appreciation and instead of the previous wide range - 5 to 20 percent - stated in the eleventh review that competitive losses related to real exchange rate appreciation 1.3 percent year on year in March 2016 and cumulatively 19 percent over the past two years. Exports, the report noted, declined by 9.2 percent and added that "favourable oil prices and so far robust remittances from the Gulf Cooperation Council countries continue to counterbalance the decline in exports. And further argues that "completed CPEC projects would contribute to promoting exports offsetting the CPEC related imports of industrial goods for investment". And the way forward to enhance exports is to implement the government's new countrywide business climate reform strategy, adopted in February 2016, with many claims that are subject to being challenged including strengthening the regulatory framework by focusing on ten areas like starting a business, construction permits, paying taxes, enforcing contracts, property registration, getting credit, trading across borders and resolving insolvencies.
Finger also did not note his earlier comments in the review notably that foreign exchange reserves were mainly debt enhancing. A major thrust of the IMF and other multilaterals much to the chagrin of economists including Nobel laureate Joseph Stiglitz who argued that "The World Bank and the IMF pushed countries to privatise as much as they could and as fast as they could. Privatization 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 privatization...a new more pragmatic consensus is developing....more consistent with economists' normal two handed stance 'it depends'. Privatization has some successes but it has also been marked by dramatic failures and disappointments." This sage advice, of particular relevance in third world countries like Pakistan where accountability remains a challenge is completely lacking in the review report which contends that "restructuring and privatising ailing Public Sector Entities (PSEs) remain key to ensuring their financial viability, reduce fiscal costs and strengthen the efficiency of Pakistan's economy....staff welcomed the authorities commitment to attract private investors' participation in PIA, privatise KAPCO and conduct IPOs for DISCOS."
The Letter of Intent submitted by the government as a prerequisite for the Fund Board's consideration states that "The Cabinet Committee on Privatization initially approved a list of 31 PSEs for action and subsequently added another 8 PSEs to the list. We are in the process of adding more companies to our list and we aim at updating the list by July 2016....We have identified ten companies in the oil and gas, banking, and insurance sectors for block sales and primary or secondary public offerings.....we will conduct the Initial Public Offering (IPO) of State Life Insurance Corporation by end-March 2017. ...We have identified 25 companies (listed in the TMU) for strategic partnerships, which will act as a catalyst in unlocking their potential through their managerial and investment participation, and can also increase the value of Government's residual shareholding. ....in light of recent labor and strategic concerns, we have engaged with key stakeholders and reassessed our strategy for DISCOs' strategic private sector participation. We now plan to conduct an IPO in the capital markets for FESCO by November 2016 to be followed by IESCO and LESCO. As we had planned in our strategy, we intend to utilise the related proceeds to reduce the stock of outstanding circular debt in the power sector. In addition, we have hired a financial advisor for SME Bank Limited in January 2016, the due diligence process is ongoing with the objective of issuing the expressions of interests by August 2016 and finalising the transaction by end-December 2016."
Despite maintaining in the tenth review report that the energy sector over-performed the Fund report slapped two new structural benchmarks on the energy sector including (i) Update the plan to further limit the accumulation of new payables and gradually eliminate the outstanding stock of payables arrears in the power sector till July 15, 2016; and (ii) strengthen the financial performance of the power sector and solicit expressions of interest for the divestment of Kot Addu Power Company (KAPCO). Be that as it may, total flow of energy debt was 48 billion rupees in 2014-15 and in 2015-16 the total is projected to decline to 36 billion rupees given that the report has access to data up to march 2016 while the stock of arrears is 349.4 billion rupees - up from the 2014/15 stock of 313 billion rupees or a rise of 36 billion rupees.