EDITORIAL: Multilaterals, including the International Monetary Fund (IMF), have developed independent audit committees – independent from departments tasked to design a programme, undertake quarterly reviews and assess the overall success of the programme itself.
In the words of the IMF it “conducts audit of all its operations. The audit mechanisms are set up to improve governance, transparency and the Office of Internal Audit (OIA).
The external Audit Committee is independent of the IMF department heads and its Executive Board.
The Committee reports to the Board of Governors and is responsible for overseeing the IMF’s external audit, internal audit, financial accounting and reporting, risk management and internal control functions.
OIA is an independent assurance and advisory function designed to protect and strengthen the IMF.
The OIA’s mandate is twofold: (1) bringing a systematic and disciplined approach to assess and improve the effectiveness of the IMF governance, risk-management processes, and internal controls; and (2) acting as a consultant and catalyst for improvement of the IMF’s business processes by advising on best practices and the development of cost-effective control solutions.”
In Pakistan’s case there is clear evidence that administration after administration has relied on a Fund programme to ease the periodic severe balance of payment issues associated with flawed policy decisions, including sustaining a productive base reliant on import of inputs with only surplus to domestic demand being exported which incidentally also accounts for sustained reliance on imported refined fuel as well as cooking oil and luxury items (cars, upscale perfumes, etc.) while at the same time budget after budget has ensured that the influencers/elite capture continues.
However, as successive Pakistani governments have typically abandoned IMF programmes midway due to political considerations yet it is relevant to note that all programmes (all 23 so far) were designed to: (i) raise total revenue and while lip service was paid to the need to widen the tax net in the Fund documents, yet the pre-condition for programmes (approval and staff-level reviews) focused on the realisation of target revenue (generated from existing sources heavily reliant on indirect taxes whose incidence on the poor is greater than on the rich) rather than bringing the influencers/elite into the tax net; (ii) allow latitude to the government in terms of raising current expenditure, an approach for which the Pakistani public has paid and is paying a heavy price as it not only led to an ever rising budget deficit, a highly inflationary policy, but also heavier than ever reliance on borrowing – domestically and/or from abroad – thereby increasing the government’s indebtedness on the one hand and crowding out (in the case of heavy borrowing domestically) private sector borrowing on the other.
What is extremely disturbing is the IMF’s observation in the second and final review of the Stand-By Arrangement documents that “the caretaker government should be commended for its decisive efforts to meet the FY24 primary surplus target, overcoming political considerations and these efforts should continue to put debt on a firm downward trajectory.”
The caretaker government increased domestic debt to a whopping 42.88 trillion rupees, a highly inflationary policy that led to unit closures as well as unemployment.
In addition, 60 percent of this debt was in Pakistan Investment Bonds, which, given the policy rate of 22 percent, another Fund condition, accounted for an unsustainable interest payment on domestic debt; (iii) insisting on setting the policy rate against Consumer Price Index (CPI) since 2019 rather than core inflation (non-food and non-energy), which was State Bank of Pakistan’s practice in previous years led to a further erosion of each rupee earned of the poor, leading to thousands of families compelled to make the stark choice of pulling their children out of school so as to be able to feed their families: CPI in April was 17.3 percent and core inflation was at 13.1 percent; and to add insult to injury (iv) interfering in the country’s constitution that would require two-third majority in parliament no doubt due to prompting by the economic team leaders on two measures notably; revisiting the National Finance Commission award with a view to giving the federal government a greater share in the divisible pool (a better option would be to focus on devolution of subjects as per the 18th Amendment), taxing the rich landlords at par with the salaried class (a provincial subject whereby the provinces must be tasked to generate the necessary revenue from this source).
There is ample evidence that successive Pakistani administrations’ economic policies have led us to the current impasse; however, at the same time, there is an urgent need for the Fund’s independent audit department to conduct an audit of its programme design not only in countries where failure has clearly been the outcome but also in instances where its lending has succeeded to be able to draw some valuable lessons.
Copyright Business Recorder, 2024