The International Monetary Fund (IMF) supported reforms as an integral component of the Stand-by Arrangement (SBA) were considered to be a blueprint by donors to Pakistan (bilateral as well as multilateral) to turning the economy around.
The government was informed that disbursement of pledged assistance at the Friends of Democratic Pakistan (FoDP) meeting held in Tokyo in the first quarter of 2008 would be contingent on satisfying the IMF staff that it is on track, to the extent possible, as far as adhering to the blueprint is concerned.
There were two major ingredients of the blueprint. First, governance reforms, designed to transform a corruption-ridden, Public Procurement Regulatory Authority (PPRA) violating executive, senior bureaucrats, including the Federal Board of Revenue (FBR), as well as management of state owned enterprises (SOEs) into clean and efficient run entities where accountability would become the norm and all leakages from the system plugged. And, second, heightened fiscal responsibility that envisaged ending profligacy in current expenditure, as well as increased tax collections through withdrawal of all exemptions, currently enjoyed by the rich and the influential. Two years after the SBA was signed, neither of these salutary objectives are in evidence. And it is precisely this failure to witness changes that accounts for growing international frustration at the constant demand by the government to inject further resources into development without first cleaning its own house.
Hillary Clinton once again warned the Pakistan government on 28 September: "Countries that will not tax their elite who expect us to come in and help them serve their people are just not going to get the kind of help from us that historically they may have". In a high-level United Nations-sponsored meeting to generate assistance for the Pakistani flood victims, World Bank President Robert Zoellick disturbingly stated: "to make most effective use of help and even to secure full donor support, the government will need a reconstruction founded on transparency, accountability, flexibility, backed by law." He added "senior Pakistani officials have told us that this is what they wish to do, yet experience from many countries warns that the machinery tends to slide back to business as usual."
Zoellick urged the Pakistani government to "continue to take concrete steps by the October meeting (subsequent to the completion of the Damage Needs Assessment currently under way), backed by law, so we have an opportunity to build Pakistani ownership, governance and capacity."
Pakistan's Foreign Minister Shah Mehmood Qureshi responded by saying that every dollar it receives "will be utilised in the most efficient manner ... and in the most transparent manner." He did not dwell on how the government would be able to accomplish this challenging yet critical task.
Two facts need to be emphasised in this context. Clinton's focus on not taxing the elite is a serious charge, albeit, a true one. The exemptions, enjoyed by the elite continue, be they in terms of not taxing the income of the rich landlords (leave alone taxing them at the same rate as the income earned by industrial/commercial sectors and the salaried class), or be it through issuance of Statutory Regulatory Orders (SRO) that grant exemptions to specific sectors/sub-sectors with close ties to the decision-makers.
The IMF, under the SBA, proposed the imposition of value-added tax (VAT) that would have reduced exemptions, with exceptions granted to essential food items only, and, at the same time, brought the large undocumented sector as well as some holy cows (inefficiently state/army-run operations) exempt from taxes into the tax net at some point in future. The resulting controversy was partly due to the sustained resistance by the undocumented economy to come under the government radar in terms of taxes; however, part of the blame rests with the government for its failure to launch a media campaign to ensure public awareness of the pros and cons of VAT (as undertaken by all governments that finally succeeded in implementing VAT) as well as its failure to take account of the fact that VAT on services is a provincial tax under the Constitution.
Implementation of the reformed GST, considered by many as simply a renaming of VAT though the actual difference between the two taxes would be evident once the list of exemptions is announced, has been delayed by yet another month - November 2010.
Given that the Minister of Finance has instructed all relevant ministries as well as the FBR to desist from making any public statements it stands to reason that the public awareness campaign has been put on the back burner again - a fact that may well lead top yet another delay in its implementation.
Thus fiscal responsibility with respect to a tax system that seeks to tax the elite is still not in place. What has probably sent further shock waves within the donor community is proof of government's naivete in sustaining a few expenditures even in the post-flood period: the refusal of Prime Minister Gilani to defer the 50 percent raise in salaries of government servants (estimated to cost more than 70 billion rupees nation-wide) and the passage of the reinstatement of 9000 PPP supporters fired during Nawaz Sharif's tenure, which is expected to cost the exchequer around 20 billion rupees. The large cabinet also continues to be a source of unnecessary expenditure and is proof positive of the government's lack of focus in terms of reducing its frivolous expenditure.
The other area that was the concern of IMF was in the area of governance and accountability. In this context too, performance has been negligible. Part of the fault must be laid at the doorstep of the government's focus on Presidential immunity which, analysts believe, led to the passage of an Accountability Ordinance, empowering the Law Minister to rule the roost in the National Accountability Bureau (NAB). However, surely an overkill if the ordinance is taken into account was the government's decision to appoint a long time PPP supporter former Justice Deedar Hussain Shah as NAB Chairman without consultation with either the leader of the opposition or indeed the Chief Justice, thereby violating yet another Supreme Court directive. The impact of these two decisions on donor perception would be considerable and would further spread unease over the government's focus when over 20 million people remain affected by the floods. In addition, a case is being heard in the Supreme Court on the highly controversial rental power projects and there are almost daily revelations of scams for example in PSM, PIA, NICL, Hajj Directorate etc. Governance thus has not improved appreciably, if at all.
So would the government succeed in accessing the next tranche of the IMF? If the IMF focuses on government compliance with specific conditions for example ending cross subsidies on electricity, eliminating the inter-circular debt and implementing a reformed GST, then the next tranche would be released but not without some US support premised not on the way Hafeez Sheikh is handling the economy but how the army is fighting the war against the Taliban. If, however, the focus is on the macro picture in terms of governance reforms that have made a difference and overall fiscal responsibility, then it is unlikely that any donor would inject cash into this economy. Luckily for the government, the IMF would, no doubt, focus on specific conditions and not on the overall picture. Unluckily for the people of this country little will change.