The International Monetary Fund (IMF) uploaded the seventh review under the Extended Fund Facility on 2nd July - nearly a month after the budget was announced and one day after the commencement of Pakistan's new fiscal year 2015-16. To dispel any impression that the government did not share the budget documents with the Fund staff the press release dated 26th June, the day the executive board of the Fund approved the eighth tranche release, states that "the planned fiscal adjustment in the context of the fiscal year 2015/16 budget is appropriate." Be that as it may, based on lessons learned by the Fund in its engagement with Pakistan over decades - Pakistan has been labeled as a perennial Fund borrower - the seventh review highlights the statement that "the authorities have identified contingent measures in case the expected fiscal adjustment falls short of objectives." Or, in other words, failure to meet the revenue targets for any reason, including in the event that the international oil price decline continues, the government would impose higher taxes or impose new taxes as it did in February prior to the sixth review.
The positive news in the review is that the country overshot the target of net international reserves with over 13 billion dollars (the IMF does not include reserves held in scheduled banks by the private sector) "helped by decisive foreign exchange purchases in the context of tailwinds from lower oil prices", progress in addressing fiscal and balance of payments imbalances, GDP growth rate of 4 percent in 2014-15 and 2015-16, and a reduction of government borrowing from the State Bank. The staff review further noted that "the authorities should be commended for attaining all performance criteria and structural benchmarks under the programme for the seventh review, despite significant political and security challenges."
So much for the good news! The review proceeds to disturbingly note that "Pakistan still lags behind other emerging market countries in key macroeconomic and business climate indicators." According to it, the country needs a higher economic growth rate "to absorb new entrants into the labour market and achieve improvements in living standards for wide segments of society. Public debt is still high and tax-to-GDP ratio remains among the lowest in the world." There is no clearly room for complacency; however, what is of particular relevance to the Pakistani public is that failure to meet the revenue targets would not only require additional revenue measures but also a reduction in expenditure allocations. The review adds that "the government plans to reduce expenditure allocations in the first nine months of the year compared to the budget to create a buffer against revenue shortfall" - measures expected to generate savings of 0.5 percent of GDP. One would assume that the Public Sector Development Programme would again be curtailed as it was in the year just past.
The sectors that continued to generate concerns with the Fund staff were the tax and power sectors. With respect to the power sector the Letter of Intent submitted by the government as a pre-requisite to IMF Board approval of the tranche release, acknowledged payables in the power sector (i) to the tune of 280 billion rupees at end-March (comprising mainly current payables, disputed by IPPs, Discos non-recovery of penalties on past non-payment, transmission and distribution losses) and (ii) 335 billion rupees stock of past arrears. The way forward would be tariff adjustments, appropriate amendments to the Nepra law in the event of an anti-surcharge court verdict and moving the PHCL stock of debt into Discos balance sheets targeted for privatisation.
The seventh review identified three new structural benchmarks including (i) new audit policy for FBR by end-September that would move towards risk-based auditing while mitigating risk of legal challenges, (ii) debt management quarterly risk reports covering all government liabilities and (iii) determine and notify multiyear tariffs for Fesco, Iesco and Lesco by November to facilitate their privatisation.
To conclude, the Fund review notes that its exposure to Pakistan increased with the recent disbursement reaching 3.8 billion dollars or 6 percent of the total external debt - and this exposure is expected to increase further over the next 12 months with new EFF disbursements and disturbingly notes that "the materialization of risks to the economic outlook could erode Pakistan's capacity to repay the Fund, particularly in a context where Fund exposure is expected to increase further." This necessitates a greater focus on growth relative to containment of the deficit than is indicated in the budget 2015-16.