EDITORIAL: Federal Finance Minister Muhammad Aurangzeb in a televised speech on Tuesday claimed yet again that the 7 billion dollar thirty-seven month long International Monetary Fund (IMF) programme on which a staff-level agreement (SLA) was reached on 12 July 2024 is at an advanced stage as the government is near to securing assurances of external financing from three friendly countries – China, Saudi Arabia, the United Arab Emirates.
However, this time around he wisely refrained from giving a deadline as he had previously – first end August and then September – as the IMF Board calendar till 13 September has been released and Pakistan’s loan is not on the agenda. Without the Board approval disbursements will not begin and as has been made clear to Pakistani authorities since 2019, two programmes ago, unless the country is on an active Fund programme friendly countries will not extend assistance - be it already pledged or not.
The critical question at this present juncture therefore is the delay in placing Pakistan’s loan as an agenda item on the Fund’s Board calendar due to the failure to implement agreed prior conditions, read the ongoing engagement to secure 2 billion dollars assistance from friendly bilaterals as claimed by Aurangzeb a few weeks ago, or have some other concerns been raised by the IMF staff that were not an issue on 12 July when the SLA was reached?
While one can certainly accept the government’s claim that it is at an advanced stage of securing the 2 billion dollars from friendly countries yet one cannot understate the legitimate concerns of these countries vis-a-vis Pakistan: China is deeply concerned about the inability of the government to allow repatriation of profits on its energy projects in Pakistan (signed in 2015) due to paucity of foreign reserves, a fact that has led to Sinosure, the Chinese insurance provider, delay the approval of proposed projects under China Pakistan Economic Corridor (CPEC).
Saudi Arabia and the UAE have pledged investment inflows (as opposed to upping the amount of lending); however, delays in these inflows continue as not only does the investment climate in Pakistan remains challenging but also because these countries are seeking fiscal and monetary incentives that the IMF mission may look at as they would be regarded as a deterrent to local investors.
However, there are two post-12 July factors that may have raised IMF concerns and be the reasons behind the deferral of Pakistan’s loan from the Board agenda.
First and foremost was the decision announced by the PML-N party supremo with the Chief Minister Punjab by his side, amidst much fanfare and immediately supported by the Prime Minister and PML-N cabinet members, announcing a 45 billion rupee unfunded and untargeted subsidy to Punjab (and the federal capital) electricity consumers using 200 and 500 units per month for August and September.
The Fund has been consistently stating that subsidies must be budgeted and targeted preferably through the Benazir Income Support Programme (BISP), which has used donor approved scientific methodology to identify the poor and vulnerable. This was confirmed by Finance Minister while speaking to journalists inside parliament house, notably that the IMF had no objections to subsidies that are targeted through BISP.
To argue that a provincial government has the right to extend a subsidy as it may deem appropriate is not a valid argument for the simple reason that the federal government together with all provincial governments agreed to IMF conditions.
The Punjab in particular agreed to generate a surplus of 620 billion rupees in the current year (for use by the federal government) – a surplus that is possible with its share from the federal divisible pool estimated at 3,695,076 million rupees (revenue collected from all over Pakistan and distributed province-wise as per the Finance Commission Award 2010).
The second area of concern is the shortfall in the FBR revenue target for July-August - by 98 billion rupees during the first two months of the current fiscal year with net collections at 1456 billion rupees while the target was 1554 billion rupees. While it is true that part of the reason for the shortfall is the lower growth projection (3.5 percent budgeted), and partly the decline in imports with a consequent negative impact on import tax collections (though the trade deficit declined reducing the need for foreign exchange reserves) yet this does raise red flags.
In addition, the traders are refusing to agree to register and while negotiations are ongoing yet at present there is little prospect of an agreement. Aurangzeb categorically stated that the government will not back down this time around, unlike previous administrations, though it is unclear what strategy he will employ to compel the traders to register and begin to pay advance tax as agreed and file tax returns.
Business Recorder has been consistent in advising the government authorities to begin the reform process by slashing its own expenditure in the current year (bafflingly budgeted to rise by 21 percent) and thereby set the stage for negotiations with all the sectors that are resistant to paying direct taxes commensurate with their incomes.
By asking other sectors to contribute to the economy while continuing to raise their own current expenditures does not sit well with the public, and more importantly does not give any leverage to the authorities in their negotiations with the Fund.
Copyright Business Recorder, 2024