Prime Minister Imran Khan and Finance Minister Shaukat Tarin took to twitter to claim victory soon after the International Monetary Fund (IMF) Board of Directors approved the release of the sixth tranche (stalled since June 2021) on 2 February that was, amongst other “prior” conditions, contingent on the passage from parliament of two bills - withdrawal of exemptions amounting to 343 billion rupees Finance Supplementary bill and State Bank of Pakistan (amendment) Act – neither bill reflecting even close to a consensus within the ruling party leave alone the coalition partners which renders the Fund’s insistence on their passage inexplicable.
The passage of the two bills reflects yet another U-turn by Prime Minister Imran Khan as per his critics who have been gleefully repeating his rather naïve denigration of IMF support prior to taking oath as the prime minister in August 2018 – condemnation invariably accompanied by his pledge never ever to get a loan from the Fund, if elected.
While a rap on Finance Minister’s knuckles is implicit in the staff-level report on the sixth review which in its very first paragraph notes that “despite significant efforts to bring the program back on track earlier in the year (which led to the completion of the combined second to fifth EFF reviews in March 2021) the authorities’ efforts shifted towards expansionary macroeconomic policies and reversed some of the earlier reforms in an attempt to spur growth.”
The finance minister has been forced to accept all the harsh upfront conditions agreed by his predecessor, Dr Hafeez Sheikh, that he publicly and repeatedly disparaged - conditions that he naively thought he could renegotiate.
In his own defence he stated that the geopolitics of the region had changed dramatically since 2008 when he negotiated the Stand By Arrangement with the Fund – perhaps a reference to the strained relations with the US only partly explained by the changing geopolitics in our region as the Prime Minister’s message of ‘absolutely not’ to the reported US request for bases probably did not help either.
It is high time that the Prime Minister and the Finance Minister accept that proactively seeking high government office after undergoing an arduous process of elections requires working within the prevalent/inherited parameters rather than constantly blaming one’s predecessors especially three years into one’s administration – a medium term period considered long enough for economic policies to begin to make a difference.
The Fund further stated that the “approved FY 2022 budget marked a departure from the EFF objectives and contributed to rapidly increasing macroeconomic vulnerabilities” - a damning indictment of the budget; however, the Fund acknowledges that it was on track to “deliver an adjusted primary deficit of 2 percent of GDP, representing a fiscal loosening of 1.4 percent of GDP compared to the FY 2021 outturn.”
Tarin budgeted his predecessor Dr Sheikh’s tax targets, of nearly 6 trillion rupees (5.82 trillion to be exact) projected at 10.8 percent of GDP (one percent more than last year) and an additional trillion rupee collection with projected direct taxes based on the ability to pay principle shrinking to 37.4 percent of total taxes (a decline from a peak of 39.7 percent in 2018), petroleum levy target of 610 billion rupees against 450 billion rupees the year before (a highly inflationary policy) and a budget deficit of negative 6.3 percent against negative 7.1 percent the year before.
The Fund quipped in its report that “on the revenue side, it (the budget) expected unrealistically strong tax revenue growth (from marked improvements in tax administration and strong domestic demand, notably imports) and high non-tax revenue receipts thus introducing significant fiscal slippages. In addition, the budget delayed key reforms and reversed some key policies damaging revenue prospects.”
The government also budgeted: (i) a rise in public sector development programme to 900 billion rupees (1.8 percent of GDP) against 630 billion rupees the year before (1.6 percent in 2020-21) – a standard normal practice by most incoming finance ministers desirous of showing their commitment to development, though PSDP is usually scaled down by the end of the year with reports indicating that it has already been scaled down to the same amount as last year; (ii) raised current expenditure to 7.5 trillion rupees (14 percent of GDP against 13.8 percent the year before – one trillion rupee rise from the year before); and (iii) reduced primary deficit from negative 1.2 percent last year to negative 0.7 percent this year. The Fund’s reaction on budgeted expenditure was not supportive as “it allowed for large increases in public wages and allowances, a doubling of subsides and an increase in investment of over 50 percent.”
The finance minister at the time of the budget presentation was confident that he could convince the Fund to phase out the harsh upfront conditions for the sixth tranche release – a confidence that was clearly misplaced not only in hindsight which is 20/20 but bewildering as the Fund documents did not delay the original programme completion date of September this year — a date selected to ensure that it would be several months before the scheduled elections which, time and again, have derailed IMF programme implementation.
Tarin is on record, in both domestic and foreign media, projecting a growth for the current year at between 5.5 to 6 percent which, he argues, would ensure that the country would never go on another Fund programme. The question arises as to which growth estimate he is taking for last fiscal year.
The Fund projection is 4 percent growth for the current year however its data cites GDP growth at 3.9 percent for 2020-21 which indicates that it has not yet taken account of either the upward revision of the growth to 5.37 percent based on 2005-06 prices (released by the National Accounts Committee on 20 January 2022) nor the growth of 5.57 percent subsequent to rebasing at 2015-16 prices; one may assume that this data will be verified by the Fund which may take some time. The key question is if the government’s 5.5 to 6 percent projection is based on the recalculated 5.37 percent for 2020-21 then 5.57 percent implies an insignificant rise this year or is it taking the earlier growth of 3.9 percent?
There is also a need for clarity as revenue and grants as a percentage of GDP are estimated at 15.9 percent of GDP in the Fund report while 10.8 percent is budgeted. Does this mean that, barring the different growth rates in circulation, the additional revenue is expected to be generated through the finance supplementary bill (which lends credence to Governor SBP referring to the bill as fiscal consolidation and not as claimed by the Finance Minister that 280 billion rupees would be refunded and so would be inflation neutral).
For the general public inflation remains a critical concern. And in this context there is a sustained design flaw in the IMF programmes that have carried the seed of failure not only in Pakistan but other debtor countries as well.
The Fund insists on full cost recovery, an economically commendable objective, however instead of launching harsh upfront structural reforms that penalize sectoral inefficiencies responsible for the widening gap between costs and recoveries the Fund insists on passing on the entire cost of these inefficiencies onto the hapless consumers with the potential to generate socio-economic unrest with serious political implications for the administration till such a time as the structural reforms begin to bear fruit. This accounts for the Fund’s reference to “Pakistan’s long history of stop and go economic policies (which resulted in elevated vulnerabilities and low investment and growth that weigh on the population.”
In Pakistan, inefficiencies are costing the taxpayers hundreds of billions of rupees each year – inefficiencies associated with the power sector, the state-owned entities, and the FBR due to its sustained failure to raise its reliance on direct taxes (which accounts for the Fund’s insistence on personal income tax legislation currently being drafted and expected to be effective from 1 July 2022) rather than continuing to rely on indirect taxes through withdrawal of exemptions or raising the sales tax on items to what is euphemistically referred to as the standard 17 percent.
The Fund projects inflation at 10.2 percent for the current year against the budgeted 8.2 percent, and given the Fund was remarkably accurate in its projection for the first programme year 2019-20 at 13 percent till the pandemic hit the country in March 2020 one may give greater credence to its projection as opposed to the budget documents.
The Fund projection no doubt took account of the rise in utility prices to achieve full cost recovery however it’s projection maybe understated if the international oil price continues to rise given the ongoing geopolitical tensions and if the government adheres to its pledge to the Fund to raise petroleum levy by 4 rupees per litre per month to reach the maximum limit of 30 rupees per litre to generate at least half of what was budgeted under this head.
While the Fund does note the rise in expenditure in its report yet it does not focus on time bound conditions to reform the pension system, and curtail procurement though not operational expenses of all government entities – civilian or otherwise instead of passing on the buck to the general public be it through higher taxes/utility rates or be it through borrowing from abroad or domestically.
To conclude, one would hope that the Fund considers these design flaws and takes mitigating adjustments.
Copyright Business Recorder, 2022