Medium-term economic framework

Finance Minister Asad Umar took the occasion of his address at an event titled "A Roadmap for Stability Growth and Productive Employment" to state that the Medium-Term Economic Framework (MTEF) - a three-year economic treatise of the government - has been prepared and would be shared once staff level agreement with the International Monetary Fund (IMF) has been signed. The Finance Minister further stated that the MTEF has been shared with the IMF though considering that it was only recently finalised by the government, the Fund may not have had the opportunity to examine it in detail.
The MTEF reportedly consists of 40 equations that provide precise details of expenditure as well as revenue measures to be realised through specific decisions that would be taken by the administration - details required by the IMF to assess the capacity of any measure to contain the budget deficit as projected. In other words, projections in the MTEF are not on the basis of optimism, an example being the PTI government's projection of generating 93 billion rupees from technological measures in the first supplementary finance bill 2019, but on the basis of a clearly crafted economic model.
Be that as it may, the question whether the IMF will accept all the detailed MTEF proposals for disbursement of a bailout package being sought by Pakistan would remain till the agreement is actually signed. The Fund has a set of specific conditions before signing on a bailout package, inclusive of (i) prior actions (elimination of price controls, budget consistent with fiscal framework); (ii) quantitative performance criteria (minimum level of federal primary balance, ceiling on government borrowing, minimum level of international reserves); (iii) indicative targets (minimum domestic revenue collection, minimum level of social assistance spending; and (iv) structural benchmarks (strengthen public financial management, build up social safety nets).
However, IMF's conditionality framework continues to evolve, so states its website. In this context, it is relevant to note that during the last Extended Fund Facility programme (September 2013-16) for Pakistan, the Fund expressed reservations at the tax amnesty scheme launched by the PML-N administration in 2014 but did not insist on its withdrawal. The Staff level report at the time stated that: "the package opens another loophole in the system in addition to the ones that already exist for remittances and equity stock investment and raises potential money laundering risks. The immunity from routine audit hinders the self-assessment process and the amnesty - entailed by waiving penalties and interest - is likely to be detrimental to improving compliance and collections as taxpayers will develop the expectation of future immunities." Additionally, the report added that "the authorities consider this scheme as a one-off and will refrain from issuing another amnesty during the programme period" - a pledge that was not met by the previous administration and the programme was completed on schedule.
On 4 February 2019, the IMF released its policy paper titled "review of the Fund's Anti Money Laundering/Combating Financing Terrorism strategy" that stated that over time AML/CFT and financial integrity have become an integral part of the Fund's core mandate. The strategy paper further added that "the Fund's efforts to strengthen financial integrity have evolved in light of new policy developments... Staff regularly coordinates its AML/CFT policy and activities with other international and regional organisations to maximise the impact of its engagement and prevent duplication of efforts..." including with Financial Action Task Force (FATF).
Pakistan is at present on FATF's grey list and in this context, it is a foregone conclusion that the Fund would carefully evaluate the Khan administration's amnesty scheme designed to generate additional revenue for the current fiscal year (with the objective of containing the budget deficit). The inclusion of 'leadership' in the amnesty scheme is premised on the general perception in Pakistan, backed by recent multi-billion rupee cases under investigation by the National Accountability Bureau, that a sizeable portion of tax-evaded funds and consequent money laundering activities are vested in/carried out by politically exposed persons (PEPs) and public servants/recipient of salaries and perks from the exchequer. Thus, until and unless a chance is given to such persons to avail of an amnesty scheme, if its members decide to pay a political cost of legalizing their illegally gained wealth, the latest scheme would have as limited a success as the old. Needless to say, that the PTI too would incur a heavy political cost by extending such opportunity. Its leadership would rightly be seen to have broken its promise to the people and abandoned its major plank of bringing the corrupt to book and recover the ill gotten wealth.
The Fund's strategy paper indicates 33 percent of all financial irregularities stem from corruption (where PEPs and public functionaries play a prominent role). FATF defines PEPs as "individuals who are or have been entrusted domestically with prominent public functions, for example, heads of state or of government, senior politicians, senior government, judicial or military officials, senior executives of state-owned corporations, important political party officials;" and when assessing ML/TF risk of a relationship urges state entities to take account of such factors as whether the PEP has (i) a conflict of interest; (ii) involved in public procurement processes; (iii) is from a country identified as having strategic AML/CFT regime deficiencies; (iv) has a prominent public function in sectors known to be exposed to corruption levels such as oil, gas, construction, mining; and (v) has a prominent public function that allows him to exert a negative impact on effective implementation of FATF recommendations in his home country.
We acknowledge the government's objective in this 'last amnesty scheme' given the scale and extent of the resource constraints at present. That the government, in extending this scheme would suffer extreme embarrassment for abandoning its promise of bringing the corrupt to book and recovering the ill gotten funds, yet it has not made it a matter of ego and is willing to carry this burden to address the ailing national economy is something that must be appreciated. However, it remains to be seen if the Fund or the FATF would find this measure of the MTEF palatable.