Deferment of IMF third tranche

Resident Representative of the International Monetary Fund (IMF) Teresa Daban Sanchez has stated that the Fund has postponed approval of the second review of the 6 billion dollar bailout package scheduled for 10 April 2020 due to "delay in implementing agreed actions by Pakistan." The Ministry of Finance has inexplicably indicated that it has not been informed of this decision given that the press release dated 27 February uploaded on the Fund's website clearly and unambiguously states that "following discussions between IMF staff and the Pakistani authorities in Islamabad from February 3-13, which continued from the IMF headquarters in recent days, IMF staff and the Pakistani authorities have reached a staff-level agreement on policies and reforms needed to complete the second review of the authorities reform programme supported under the EFF." The wording of the release clearly indicates that prior-tranche release conditions have been put in place and, without implementation, there would be no disbursement.
On 29 March 2020, the Managing Director of the IMF announced that the government of Pakistan has requested 1.4 billion dollars under the RFI and stated that a Fund's team was working expeditiously to respond to this request so that a proposal can be considered by the IMF's Executive Board as soon as possible. The actual third tranche release was 450 million dollars or in other words, only 32 percent of the RFI requested, though it would be fair to argue that bilaterals/multilaterals are unlikely to take Pakistan to task in the immediate term for failing to implement conditions though it is also relevant to note that the stage has been set to revert to their implementation as critical to remaining on the programme.
The Fund's decision flies in the face of the public back slapping by government functionaries on success in convincing the IMF to release funds to mitigate the massive negative impact of the Coronavirus on the poor and the vulnerable under the Rapid Financing Instrument (RFI); but at the same time the realization must have come home to roost that the IMF, in spite of the very heavy costs of the virus itself on the global economy in general, and Pakistan as a developing country in particular, is not going to seek approval from its Board to disburse a tranche release without the country meeting agreed structural benchmarks and quantitative targets under the second review. Waivers on key agreed measures therefore maybe a thing of the past. And in the spirit of identifying those responsible for the inability to meet the agreed conditions, there is a need for the government to identify the major lacunae in the way of implementation of the second review conditions.
While the actual second review report would be uploaded on the Fund website only after disbursement has been approved by the Board which would provide details of what the authorities agreed to implement as a prior-condition for the tranche release yet one can speculate on two of the major and persistent shortfalls in meeting the agreed IMF conditions. The first major shortfall in meeting targets agreed with the IMF is one of revenue shortfall. While it is easy to blame the recently-replaced Shabbar Zaidi, a man who was inducted as Chairman Federal Board of Revenue from the private sector amidst much fanfare as being able to detect tax avoidance/evasion, yet his failure is attributed to two other relevant factors: (i) the agreement by Pakistani economic team leaders to an entirely unrealistic target of 5.5 trillion rupees given a projected growth rate of 2.5 percent, which has been dramatically undermined more recently by the Coronavirus pandemic; and (ii) his inability to change/fire an entrenched FBR bureaucracy that is able and willing to raise revenue through raising the rates of existing taxes but not widening the tax net. The number of filers has increased but that increase has not brought in more revenue as the new filers, many not eligible to file, took advantage of the difference between the rates of withholding taxes payable by filers and non-filers. The government's focus on privatisation and higher than budgeted State Bank of Pakistan's profits as a source of revenue have not succeeded partly due to the prevailing investment climate in the country, exacerbated by contractionary fiscal and monetary policies as well as failure to release refunds, which has of course taken a further battering due to the virus pandemic.
The second major area of failure to implement agreed conditions was with respect to the power sector. Circular debt continues to swell and the government continues to pass on inefficiencies to consumers that further undermined private sector output. And tellingly claims by the Ministry of Power were challenged by Nepra during a meeting chaired by the Prime Minister. It appears that claims by the government notwithstanding, the IMF is not satisfied with the pace of implementation of the agreed reform agenda. While critics of the economic team may accuse them of not being aware of the ground realities when they took over at best or poor negotiating skills at worst, the country still has to move forward and; to achieve that it is required to take politically difficult decisions. Sadly, by delaying the inevitable the economic team has pushed the administration to beyond its honeymoon period where it would be all the more difficult to take bold and essential decisions.