IMF's assessment

International Monetary Fund (IMF) has uploaded the 2017 Article IV consultations on its website and self-servingly maintained that macroeconomic risks have begun to re-emerge since the completion of the three-year Extended Fund Facility (EFF) programme in September 2016 and long standing challenges remain subsequent to the strengthening of economic resilience and a number of structural reforms set in motion during the EFF. This newspaper was in the forefront challenging the veracity of the quarterly reviews by the IMF mandated under the EFF that accounted for an unprecedented number of waivers and allowed for the release of subsequent tranches by the Fund's Board.
Most particularly Business Recorder maintained during the duration of the EFF programme that the government had failed to implement governance reforms in the two most poorly performing state institutions namely the Water and Power Ministry and the Federal Board of Revenue (FBR). Disturbingly, the focus of the government during the EFF remained on increasing electricity generation without first ensuring that existing capacity was fully utilized which would have been in line with the conclusions of the third party audit on rental power projects undertaken by the Asian Development Bank. This could have been achieved through eliminating the circular debt to ensure that Independent Power Producers are not constrained by liquidity issues and are able to generate at capacity, improving governance of badly managed state-run generation companies and strengthening the transmission system to enable it to transmit more than 16,500MW. With respect to FBR, the Fund remained focused on raising total revenue generation as opposed to making the tax system more equitable and fair which explains why the current tax system relies heavily on withholding taxes in the sales tax mode that are passed onto the consumers simply because they are easy to collect but their incidence is greater on the poor relative to the rich. It would have been more appropriate for the Fund to have focused on widening the tax net and raising reliance on taxes on income.
Extremely disturbingly, however, the latest Fund report argues that the budget for 2017-18 is subject to significant risks as it envisages "marked increases in tax and non-tax revenue, a large expansion in development spending, and contained growth in current spending." And suggests that, "measures could include further reducing tax expenditures (estimated at 1.3 percent of GDP in FY 2016/17), gradually raising petroleum taxes, further strengthening the system of withholding taxes for non-filers, and improving provincial tax collection in agriculture, property and services" - reducing tax expenditures is politically unfeasible especially post-Joint Investigation Team report, raising taxes on petroleum products would make our exports even more uncompetitive than at present and raising withholding taxes which are largely in the sales tax mode do not reflect widening the net.
However, the government consistently rejected the IMF's assessment and subsequent warnings on an overvalued rupee during the quarterly reviews; unfortunately though the Fund was never forceful enough to insist, through the imposition of a time bound condition, that the government ensures a more realistic real effective exchange rate (REER) - realism considered relevant to the extent that the heavy external borrowing by the Dar-led Finance Ministry, with external borrowing consisting of around 31 percent of outstanding debt in foreign currency, including the high interest rate on Eurobonds and sukuk, accounted for it no longer being economically feasible to ensure a REER. It is the failure of the Fund to use its leverage to compel the government to allow market conditions to prevail with respect to the rupee value that accounts for a steadily worsening current account deficit with exports declining and imports rendered more attractive. In this scenario, for the Fund to blithely state in its recent report that "the authorities have not allowed for more downward exchange rate flexibility in light of sustained real exchange rate appreciation" reflects poorly on the Dar-led Finance Ministry but also on the Fund.
What must be appreciated is the fact that the Pakistan Bureau of Statistics (PBS) has acknowledged its shortcomings with respect to data compilation, given the frequent challenges to its data by independent economists, and requested technical assistance from the IMF to improve compilation of fiscal accounts. This newspaper had frequently pointed out the statistical discrepancy being very significant in national income accounting and in this context, the Article IV Consultation notes that the "concepts and definitions used in compiling government finance statistics are broadly based on the GFSM (Government Finance Statistics Manual) 1986...the authorities have indicated their intent to adopt the methodology of GFSM 2001 over the medium-term...the principal issue involving GFS is to reduce the size of the statistical discrepancy between the financial and non-financial accounts."
To conclude, the warning by the IMF Board while reviewing the Article IV Consultation report with reference to the China Pakistan Economic Corridor, the only silver lining in our growth forecast, requires consideration by the Pakistan authorities "key external risks include lower trading partner growth (reference to lower growth projected in China), tighter international financial conditions, a faster rise in international oil prices, and over the medium-term, failure to generate sufficient exports to meet rising external obligations from large-scale foreign-financed investments."