Government-IMF impasse must unlock itself

The impasse between the International Monetary Fund (IMF) and Pakistan authorities persists over readjustment of the tax revenue target as well as resistance to raise tariffs on utilities, particularly power sector, to meet the Fund conditionalities of achieving full cost recovery. The Fund's second quarterly review mission left the country without any pledge that it would submit a recommendation to its Board of Directors to release the third tranche of the Extended Fund Facility (EFF) programme without "steadfast progress on programme implementation."

Business Recorder, while evaluating the staff-level agreement signed with the IMF on 12 May 2019 had stated that the: (i) harsh upfront conditions should have been staggered over a longer period and a more careful assessment of the poverty levels in the country should have been made to determine the implementability of the programme instead of relying totally on the Prime Minister's personal popularity ratings to see the programme through; (ii) some targets were completely unrealistic, particularly those relating to tax revenue especially given the low projected 2.4 percent growth rate; and (iii) governance reforms in the power sector were not only about reducing theft, though the government's claims in this regard are not independently verifiable, but improving across the board governance that would reduce costs and allay pressure to pass on the buck to the already overburdened consumers.

According to a Business Recorder exclusive, Pakistani authorities acknowledged that generating 4.7 trillion rupee tax revenue would be a challenge, comprising a 15 percent reduction from the 5.5 trillion rupee budgeted target that was agreed, while the Fund reportedly insisted on not more than an 11 percent downward revision (4.9 trillion rupees) requiring additional taxes of 200 billion rupees to be generated within the next four and a half months till the end of the current fiscal year on 30 June 2020. The raise in power/gas tariffs in the remaining period of the current fiscal year would further erode the income of the public in general. No political government however popular to start off with, can politically withstand any further erosion of the purchasing value of the rupee this year.

There is little doubt that responsibility for the impasse is being passed on from one division to the next and one ministry to the next; however, one cannot dismiss the fact that the targets were agreed by the then newly-appointed Pakistani economic team leaders, with limited if any experience in the Pakistani public's capacity to withstand upfront extremely harsh fiscal and monetary policy conditions, that would make implementation a challenge, if not an impossibility. That it has happened so soon is worrisome and instead of dismissing it as IMF's intransigence the government needs to sit down and come up with a workable plan to salvage the programme. Without any clout in the Fund and with our erstwhile allies unlikely to extend support to nudge the Fund management to delay implementation of some conditionalities, the only option left is to revisit the current stalemate with the Fund mission.

Needless to add, in the event that the Fund is not satisfied with 'steadfast progress' and suspends the programme as happened in 2010 all positive reports by multilaterals and rating agencies cited by Adviser to Prime Minister on Finance Dr Hafeez Sheikh during his recent speech in the National Assembly would become negative and the inflow of 'hot' money would turn into an outflow with claims of an increase in foreign direct investment going up in smoke. The political government must accept that the need of the hour is to take some more extremely unpopular short-term decisions due to the staff-level agreement made by its economic team leaders. Insofar as a long-term strategy is concerned, the government must try to improve governance in the tax and power sub-sectors but make a more realistic assessment of the time required to make the change.