Structural reforms remain ignored

The Asian Development Outlook (ADO), an annual publication of the Asian Development Bank, that analyzes and forecasts the state of the economy of member states, uploaded on its website on 11 April 2018 reiterated the emergent need for structural reforms in Pakistan, a position that was taken by the International Monetary Fund (IMF) in its March 2018 first post-programme monitoring report and the World Bank in its November 2017 Pakistan Development Update.
The focus of all three multilateral lending agencies that Pakistan continues to borrow from - for programme (budget support) and project specific loans - has been to emphasize the need for structural reforms subsequent to post-IMF Extended Fund Facility (EFF) from September 2013 to September 2016. What is unfortunate is that the need for structural changes particularly in the energy sector and our tax system have been identified by multilaterals and bilaterals for decades now but have never been undertaken; not even under the IMF's EFF as it remained focused on total revenue generation as a means to reduce the budget deficit.
The Ishaq Dar-led Finance Ministry fulfilled the IMF condition to raise revenue by increasing taxes on existing taxpayers. This implied raising sales tax by one percent across the board and levying a withholding tax in the sales tax mode though defining it as income tax. Thus while the non-filers were made to pay double the withholding tax rate that was applied to filers (with a steadily rising differential over four years) yet this implied taxing the filers twice, on their income at source and again on products/services they purchased on which a withholding tax was levied; while the non-filers paid the tax on their purchases but did not file their returns - the ostensible reason for the differential in the rates. Each year there was a shortfall in the overambitious budgeted revenue targets which were met by mini-budgets that envisaged raising existing rates rather than in widening the tax net.
The energy sector too has been riddled with poor governance for the past five years and claims that generation capacity has been significantly added that would end load shedding forever are being challenged on three counts: (i) the inter-circular debt has risen to 1.1 trillion rupees, higher than what the PML-N administration inherited from the PPP-led coalition government; (ii) the transmission network remains inadequate with a capacity to transmit no more than 16500MW, a generation capacity that was available in 2013 but was not utilised because of liquidity issues emanating from the circular debt; and (iii) heavy reliance on borrowing by the energy sector has led to surcharges on tariffs that make our electricity more costly than available to our competitors in other countries with a negative impact on our exports.
Commitment to privatise distribution companies was never met by Nawaz Sharif when he was prime minister because of opposition by the employees. And the World Bank Update notes that "significant reforms undertaken in the electricity sector have stalled since the government stopped privatisation a year ago. There have been efforts to reduce the electricity regulator's independence."
The Update further notes that "investment levels remain very low, at around 15 percent of GDP (both public and private). Maintaining macroeconomic stability and further progress in structural reforms will be necessary to accelerate growth and ensure it is inclusive and sustainable... . Pakistan remains one of the lowest performers in the South Asia Region on human development indicators, especially in education and stunting."
And the issue of a widening current account deficit and depleting foreign exchange reserves that were propped by Dar with external borrowing require more immediate remedial measures. The IMF report refers to "continued structural reform challenges" and forecasts doom as "fiscal risks stem from continued loss-making in public sector enterprises...the combined accumulated losses by these PSEs now exceed 1.2 trillion rupees (4 percent of GDP)... external sector imbalances are expected to rise further and fiscal deficit will likely remain elevated." The report projects underlying fiscal deficit at 5.9 percent (and that too if one-off operations are excluded which consist of heavy borrowing by the energy sector) and adds that "on current policies and based on the authorities' ambitious external financing plans, gross international reserves are expected to weaken further to 12.1 billion dollars (2.2 months of imports) this year...reserves are expected to continue declining in the medium term."
To conclude, the optimism displayed by Dar's successor seems highly misplaced and indicates that the budget may be even more unrealistic than the past five budgets. Business Recorder sincerely hopes that the Special Advisor to the Prime Minister on Finance, Revenue and Economic Affairs, Miftah Ismail, would accept ground realities and present a budget that would go down in history as one of the best and most appropriate ever. Unfortunately, his statements belie the possibility of this ever happening.