MoF clarification

An article titled "The IMF Review: It's all in Footnotes" has been published in Business Recorder on 17-10-2016 by Anjum Ibrahim in which the writer, under footnotes, has raised issues such as in Footnote 2, which refers to IMF's 2016 Guidance on the Assessment of Reserve Adequacy (ARA) and Related Considerations, IMF has mentioned the risk about the reserve adequacy by stating that "international reserves, while having tripled over the program period to cover 4.2 months of imports, have not yet reached comfortable levels (76 percent of ARA metric).
It is for writer's information that Pakistan is not very much below this standard and the outlook is favourable. The guidelines relate to ARA published by the IMF in Jun 2016, show that Pakistan's reserves are over 72 percent of ARA metric in 2016 and likely to increase to 78.1 percent in 2017. These guidelines can be accessed at: http://www.imf.org/external/np/spr/ara/. Being at these levels does not necessarily mean that Pakistan's external sector is vulnerable. For example, many other countries are at much lower rank than Pakistan in reserves adequacy (data can be accessed from the above link).
It should also be noted that Pakistan's foreign exchange reserves have reached historic high level of above $23.0 billion in 2016. With this level of reserves, the country has the capacity to comfortably meet its short to medium term external obligations without any serious risk to the he external sustainability. In Footnote 3, the writer stated that "energy circular debt actually rose by 1.1 percentage points. Additionally, the fund pointed out that base tariff was increased by 32.5 percent-from 8.8 rupees in 2012-13 to 11.9 rupees by 2015-16".
With reference to the issue of circular debt (CD), it is pertinent to point out that the build-up of circular debt has also slowed down due to measures taken under power policy. The outstanding stock of circular debt stands at around Rs 321 billion (around 1 percent of GDP) as of end June 2016, excluding the liabilities of Power Holdings Private Limited (PHPL).
Implementation of National Power Policy 2013 has pushed forward the structural reforms agenda in the power sector. The current government has rationalised the tariffs. The timely payment of tariff differential subsidy (TDS) is being ensured on a monthly basis. The gap between GoP notified tariff and NEPRA determined tariff has narrowed to Rs 0.88 per unit in FY 2014-15 in comparison to Rs 2.29 per unit in FY 2013-14, which has resulted in rationalisation of untargeted subsidies. The vulnerable consumers in the residential and agriculture categories have been protected.
Footnote 4 refers to the "public debt remains high (430 percent of the total government revenue, 65 percent of Gross Domestic Product (in violation of our Fiscal Responsibility and Debt Limitation Act) and, more disturbingly, that over the three year program period (2013-2016) debt rose by 2.5 percent of GDP".
The writer needs to note that with the recent amendments in Fiscal Responsibility and Debt Limitation Act, the government is required to reduce the debt to GDP ratio to 60 percent till 2017-18. Hence, the government is not presently in violation of 60 percent debt to GDP threshold with respect to Fiscal Responsibility and Debt Limitation Act.
Moreover, the analysis of public debt to GDP ratio during the last 15 years reveals that in the period of high inflation, public debt to GDP ratio performed relatively better as the denominator becomes larger and this ratio mostly hovered close to 60 percent even when real GDP growth was merely half of what it is at present eg 2008-09.
While higher inflation could help reducing the public debt-to-GDP ratio yet repercussions for the economy. Therefore, economic managers would always prefer high real GDP growth coupled with low inflation rather than low real GDP growth coupled with high inflation.
In Footnote 7, writer criticises the tax refunds claims as "the total stock of tax refund claims increased to Rs 205 billion in June 2016, from Rs 200 billion in June 2015. As part of this total stock outstanding GST refund claims increased to Rs 133 billion at end June 2016 from Rs 89 billion at the end of 2014-15".
The writer's contention is not based on the facts. FBR's tax collection has recorded a massive growth of 21% in 2015-16 and more than 60% in last three years which speaks volumes for dedication of FBR. The FBR is trying to promote tax culture and taxpayer friendly environment in the country. It facilitates the taxpayers /refund claimants through speedy clearance of refunds. Overall tax refund claims have declined.
The net revenue collection during 2012-13 was Rs 1946 billion and the pending refund claims were 9.5% of net collection. This percentage has declined during the last three years and the net collection as on 30th June 2016 was Rs 3112 billion whereas, the pending refund claims were 6.7% of the net collection.
In Footnote 8, the writer criticise the NFC negotiations and states that "this is unlikely to be successful for two reasons - provinces are up in arms, including Punjab, lamenting the Center's dictation on the amount of annual provincial surplus to balance the federal budget and have indicated that such dictation would not be acceptable in future".
The writer's view seems incorrect as in pursuance of Article 160(1) of the Constitution of Pakistan 1973, a National Finance Commission has to be set up at intervals not exceeding five years. On expiry of every five years term old NFC expires and a new NFC is constituted. However, the NFC award does not expire after 5 years, rather it remains in operation till announcement of new award.
Fiscal consolidation is a joint responsibility of the federation and provinces. To contain the fiscal deficit within the prescribed limits, the federal and provincial governments have to work in harmony. To maintain cash surpluses was a mutual and agreed decision making between federation and provinces. The cash surplus maintained by the provinces with the State Bank of Pakistan belongs to them and they are free to utilise these funds. In addition, provinces are also entitled to get incentives grant on maintaining cash surpluses on quarterly basis.
Under the 18th Amendments the subjects of Education, Health and Housing stand fully devolved to Provinces. It is, therefore, responsibility of the provincial governments to make sufficient allocations for these sectors. Federal government has taken some special initiatives related to development projects, for which allocation and disbursement is made on the recommendations/demands of the provincial government.
In footnote 10, the writer states that "the extreme test scenario which would severely compromise Pakistan's capacity to repay the Fund, defined as a situation where downside risks materialise that include external financing peaking at 8 percent of GDP, may apply if the following is assumed lower remittances, higher profit repatriation, a sharp decline in Foreign Direct Investment, equity portfolio inflows, higher external financing costs and lower medium term growth".
The risk which writer has mentioned is not appropriate to conclude on the basis of just three months data. FDI is expected to increase going forward as the progress on projects under CPEC gain further traction. Recent joining MSCI emerging market index reflects the signs of strength and stability of capital market. The portfolio investment is witnessing a phenomenal increase.
To enhance exports the government has announced a number of initiatives in the Budget 2016-17 which included operationalization of trade policy, a technology upgradation Fund (TUF) is being established to invest in non-traditional exports and Zero-rating of Export Oriented Sectors for the encouragement of five main sectors. The government, through the State Bank of Pakistan has reduced its mark-up rate on Export Refinancing Facility (EFR) to 3.0 percent from July 2016 till date. Similarly, Long Term Financing Facility (LTFF) for 3-10 years duration to 6.0 percent in July 2015 till date, to allow export sector industries to make investments on a competitive basis.
Going forward that Prime Minister of Pakistan has approved strategic trade policy framework (STPF) 2015-18 keeping in view the current trends in global trading environment and the declining trend witnessed in Pakistan's exports during 2016. The STPF is amid at achieving $35 billion improvement in export.
In Footnote 11, the writer also stated that "Pakistan is projected to fall below the Post Project Monitoring (PPM) thresholds by 2023. And what exactly is this threshold? And disturbingly adds that the Share of the Fund's credit exposure covered by PPM would be largely unchanged by the new thresholds compared with the 2010-15 period.
The choice of the year 2023 is because in the event that Pakistan does not go on yet another Fund programme the EFF repayments would begin in 2018 (150 million SDRs in the first year), and end in 2023 with 732.2 million SDRs".
PPM stands for Post Program Monitoring as opposed to Post Project Monitoring. EFF repayments will begin in March 2018 and are scheduled to end in November 2026, as opposed to the author's claim of their culmination in 2023. The author's premise that the year 2023 has been chosen by design as a benchmark year with regard to the claim that "Pakistan is projected to fall below the Post Project Monitoring (PPM) thresholds by 2023" stands falsified on the basis of the incorrect conjecture that the EFF loan Repayment horizon ends in 2023.