IMF Eleventh Review

The International Monetary Fund's (IMF) penultimate staff review under the $6.64 billion Extended Fund Facility has raised several questions by notable local economists particularly with respect to supporting macroeconomic data cited by the Finance Ministry for the past three years, widely believed to have been 'doctored'. The allegation of 'doctored data' has been substantiated by correlating/analysing data released by Pakistan Bureau of Statistics (PBS) that is under the administrative control of the Finance Ministry, as well as other credible primary data sources, including data released by the petroleum/textile sectors, Labour Force Survey, Pakistan Household Income and Expenditure Survey and Pakistan Social Standards Measurement Survey.

The IMF review team led by Harald Finger, deemed it appropriate to reconfirm data released by the PBS even in those instances that entailed upgrading its own earlier assessment without providing an explanation. One instance that stands out is the Fund's affirmation of the government-claimed Gross Domestic Product (GDP) growth rate of 4.7 percent instead of the 4.5 percent that is still cited on its website for 2016. According to noted economist and former Finance Minister Dr Hafiz Pasha, the IMF's eighth review projected a GDP growth of 4.5 percent based on a growth in investment of 8 percent and export growth of 2 percent. How come with an investment growth of 5 percent and a decline in exports of 9 percent, the Fund has upgraded the growth rate to 4.7 percent, he legitimately questions. Two elements may have accounted for this revision in the Fund's assessment, Dr Pasha contends, but then notes that the aggregate investments under the China Pakistan Economic Corridor, the game-changer, for the year past has been only 0.2 percent while construction activity has only increased by 4 percent. Be that as it may, economists maintain that with the replacement of the federal excise duty on cement at the rate of 5 percent at a fixed rate of one rupee per kg in the budget for the current fiscal year, the construction sector's growth rate is likely to decline.

The Fund notes in its review that the submission of the budget for fiscal year 2016-17 prior to the release of the eleventh tranche, was a condition, but fails to note that the costs of agriculture relief and salary hike were not part of the budget projections. In addition, the Fund staff fails to note the budget overstating non-tax revenue by Rs 73 billion - Rs 170 billion is cited in the non-tax revenues as defence receipts under the Coalition Support Fund (CSF) while CSF receipts are estimated at Rs 97 billion in the balance of payments statistics.

Equally, if not more disturbing, was the IMF team's contention in the Eleventh Review that "although the outstanding stock of power sector arrears remains to be addressed, new arrears are accumulating at a significantly reduced pace." But again, what the Fund team failed to highlight but is evident from the table contained in paragraph 22 of Attachment II (Technical Memorandum of Understanding) that although flows of arrears have declined by Rs 12 billion from Rs 48 billion in 2014-15 to Rs 36 billion in 2015-16, the stock of arrears rose by Rs 34 billion from Rs 313 billion to Rs 349.4 billion. Questions that beg answers are: why the stock of arrears soared and whether the relevant ministry simply shifted the flow of arrears into stocks to manipulated data to show a better performance with respect to flows, a reflection of ongoing performance, than was in fact the case.

And the Fund team's overarching focus on total revenue irrespective of its source, accounts for the erosion of income earned by middle income earners all the way to the vulnerable as: (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; the Fund review however did acknowledge that the State Bank of Pakistan made substantial liquidity injections into the interbank market amid a 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 failure to note that the government shifted around Rs 196 billion from non-tax revenue to other taxes to dishonestly show a higher tax-to-GDP ratio of 10.2 percent; and (iii) the discrepancy between FBR data and that of refund claimants is more than Rs 200 billion - a fact that compromises claims of meeting the revenue targets.

The Harald Finger-led team's 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, inexplicably maintained that in Pakistan there is no linkage between growth and deficit reduction. More recent data suggests that Pakistan has gone into a recession.

The IMF holds a unique position within multilateral financing institutions in presenting not only a more cogent set of macroeconomic indicators on which it bases its prior to a tranche release conditions but being on a Fund programme also triggers off support from other multilaterals as well as bilaterals. Thus confirming government data that is being openly challenged did merit an explanation in the review and sadly none was forthcoming. One can only hope that the Fund's management and its Board of Directors take urgent cognisance of this point. More importantly, the mission leader may look into the possibility of providing an explanation/clarification for serious deficiencies in terms of supporting clarifications/explanations in the Eleventh Review report.