The International Monetary Fund (IMF) made no mention of the devastating floods in Pakistan in its press release dated 29 August titled ‘IMF Executive Board completes the combined Seventh and Eighth Reviews of the Extended Fund Facility (EFF)’.
And more disturbingly, the combined review documents uploaded in the early hours of Friday past were also not updated with respect to the floods that have continued to receive extensive international and domestic media coverage due to the sheer scale of the destruction with one-third of the country inundated and more than 33 million displaced.
An initial assessment places the damage at a minimum of 10 billion dollars prompting several Western governments including the US and European countries to extend assistance. China and other friendly countries have extended money as well as relief goods.
The joint appeal for assistance by the United Nations and Pakistan led by Foreign Minister Bilawal Bhutto Zardari to enable Pakistan to deal with the crisis has prompted pledges though there has been an ominous silence from the Fund so far. Be that as it may, the amount pledged so far is about one third of what is required for rescue and relief efforts.
There is no doubt that administration after administration has deferred/suspended or reversed structural reforms agreed with the Fund (at least 23 times given that Pakistan is on its 23rd programme) as soon as the current account deficit became sustainable – a fact that accounts for the country’s present extremely fragile economy.
And deferral or reversal of structural reforms are indicative of elite capture of our resources, that all governments pledge to end, but no government, including the Khan administration and the incumbent government, have made any significant strides to achieve this objective.
Hillary Clinton as Secretary of State during the 2010 floods exhorted the Pakistan government to enlarge its tax base by asking the wealthy to pay more. That sadly remains a pipe dream, a claim that is strengthened by the incumbent government withdrawing the budgeted tax on retailers/wholesalers who accounted for nearly 18 percent of Gross Domestic Product last year because Maryam Nawaz tweeted Finance Minister Miftah Ismail to take care of it.
Be that as it may, the Fund documents indicate that Ismail pledged to expand Personal Income Tax by another 300,000 people through use of data on withholding tax on businesses, third party data and physical surveys to book individuals and seek to bring service sector, notably retailers, into the tax net by making better use of data (from tax collected through electricity bills on commercial connections).
There is no question that the IMF Mission remains entirely focused on the pre-floods macroeconomic indicators and the agreed conditions with Finance Minister Miftah Ismail-led economic team — agreed after much resistance indicated by deferment of the withdrawal of the 28 February relief package till 27 May and 3 June, the 1 March industrial package providing electricity to the five zero-rated export sectors at less than cost recently limited to three months (August to October) while the amnesty extended by the Khan administration to builders has since lapsed.
And perhaps the Fund mission intends to deal with the aftermath of the floods after a detailed assessment of the flood damage is available in negotiations on the ninth review which would no doubt entail a revisit of all the macroeconomic projections for the current year that, in turn, one hopes would necessitate a revisit of all the conditions agreed by Pakistan in the seventh/eighth review.
While time will certainly provide clarity to these issues yet the decision taken with respect to the petroleum prices effective 1 September does shed some light on the Fund’s intent. The petroleum levy has been raised by 17.50 rupees per litre effective 1 September raising the levy from 20 rupees per litre effective during the second fortnight of August to 37.50 rupees per litre effective from 1 September. This Shahid Khaqan Abbasi recently stated was a pledge made to the Fund by the previous administration. Perhaps, but he needs reminding that the amendment to the finance bill that allowed the government to raise petroleum levy from 30 to 50 rupees per litre was passed on 29 June 2022 by parliament at a time when Pakistan Tehreek-e-Insaf legislators had already resigned en masse from the National Assembly.
True that there is still no general sales tax on petroleum products, due to what Miftah Ismail proudly and repeatedly claimed is his categorical refusal to impose this tax during negotiations with the Fund.
However, what is ominous is his pledge to a contingency plan if the four risks identified in the Fund documents come into play — risks that are very likely to raise their ugly head and include: (i) the government’s ability to raise projected revenue from a number of novel taxes given that the raise in revenue linked to GDP growth is unlikely to be realized as an outcome of the floods; (ii) staggered petroleum levy implementation (with 90 percent to be generated from October onwards) which may well generate civil unrest as inflation in August had already reached a high of 27.3 percent; (iii) provincial commitment to deliver the historically high surpluses agreed (which notwithstanding the directions by PTI high command to Punjab and Khyber Pakhtunkhwa governments are, like Sindh and Balochistan, not expected to generate any surplus due to the floods); and (iv) significant containment of current spending relative to GDP in a pre-election year. The pledge made is to reduce civil government costs through a ban on furniture and vehicle purchase, cutting avoidable travel and reducing consumption of utilities by 10 percent — savings hardly likely to make too much of a difference.
The incumbent government has committed to limiting spending to 16.9 percent of GDP with an additional 0.2 percent to clear IPP arrears and a contingency reserve of 0.25 percent of GDP. In the event that compression of spending does not meet the target the contingency revenue measures noted above would come into effect with severe implications on the quality of life of the general public.
The contingency plan will come into play as soon as monthly (as opposed to quarterly) data show signs of underperformance against programme revenue targets, an underperformance that is all but a given after the floods, and Ismail pledged to immediately increase GST on fuel as a prelude to reaching the standard 17 percent, streamline GST on sugary drinks (60 billion rupees) and other unwarranted exemptions such as those benefitting exporters (which as noted above have already been limited to three months instead of the entire year).
The Prime Minister, however, announced on Thursday that fuel adjustment charges will not be paid on consumption of electricity bills upto 300 units. This decision in all probability was cleared by the Fund team, a contention that is backed by the Prime Minister stating that all economic decisions have to be cleared by the Fund.
Needless to add the tone of the IMF’s seventh/eighth review documents is uncompromising and criticizes the previous administration for “accommodative policies in FY 22 that resulted in uneven and unbalanced growth” – an unambiguous reference to 28 February relief package and 1 March industrial package.
The only outlay that the Fund insists must not be undercut and maybe raised if fiscal space is found (unlikely due to the floods) from what is budgeted is for social protection – raising the kifalat programme to 316 billion rupees marking a 40 percent increase in the execution last year, expanding it to 9 million more families by end 2023, and finding fiscal space to increase the kifalat programme to meaningful generosity (which is at 9 percent of average consumption level of the bottom quintile compared to global best practice of 25 percent).
The Fund emphasised the need for tight monetary policy to reduce inflation and help address external imbalances and preserving a market based exchange rate that remains crucial to absorbing external shocks, and structural reforms to strengthen governance including of state owned enterprises and improve the business environment to support sustainable growth.
However, notwithstanding the 112 plus pages of the uploaded documents one is forced to conclude there is likely to be a major revisit of targets, and time bound conditions going forward as a consequence of the floods.
Copyright Business Recorder, 2022