The International Monetary Fund (IMF) has released its tenth review report under the 6.64 billion dollar extended arrangement and has identified six new time-bound structural benchmarks (SB). This is unprecedented as structural benchmarks are identified at the start of the programme to ensure implementation rather than at the end with less than five months remaining.
Two out of the six new structural benchmarks (SBs) give pause for thought. Foremost is the SB requiring the authorities to prepare and draft a legislation for a Public Private Partnership (PPP) framework and presenting it in the National Assembly by the end of April (in line with an IMF technical assistance that has yet to be finalised hence the details are not known at the present time). The timing is important because the eleventh staff review discussions with authorities would take place sometime in May and hence this may be considered as a prior condition with the next scheduled review on 2 June. The Staff review notes that "the authorities are planning to make greater use of PPPs for infrastructure projects, which will require appropriate fiscal reporting and management of contingent liabilities. In line with international good practices and the recommendations of the recent Fund TA, the authorities plan to put in place a robust legal and institutional framework for PPPs and submit draft legislation to the National Assembly by end-April 2016 (new SB) to ensure that PPPs are used only when they offer value for money and that they are systematically included in the overall budget process and medium-term planning exercise, with a gatekeeper role for the Ministry of Finance". So why is this included as an SB so late in the programme? There is talk of the government of Pakistan extending sovereign guarantees to the Chinese private sector under the China Pakistan Economic Corridor (CPEC) - a consideration that is unprecedented as other countries refrain from extending such guarantees for commercial transactions with private companies as it exposes the domestic economy to a higher level of risk which, in turn, would effectively evaporate external sources of finance for the government - be they in the form of loans or issuance of Eurobonds.
Additionally, this particular SB may be a source of concern for Ahsan Iqbal, the Minister for Planning, Development and Reforms, who is negotiating the 46 billion dollar CPEC projects on behalf of the government premised on PPPs. The Ministry of Finance is to-date playing little if any role in CPEC, widely regarded as a 'game changer'. It is unclear whether Iqbal's Ministry was involved in the Fund's TA, or whether allowing the Ministry of Finance to play the role of gatekeeper would be acceptable to those involved in CPEC and whether the Chinese who take investment decisions based on their own stipulated conditions would accept the Fund TA recommendations.
The second SB is for the authorities to submit amendments to the Fiscal Responsibility and Debt Limitation Act by end May which (a) would limit federal budget deficit to 4 percent of GDP (excluding foreign grants for 2017-18 and 2019-20 and 3.5 percent thereafter); (b) a limit of 60 percent of GDP on public debt (same as in the existing Act) until 2017-18 and subsequently a 15-year transition towards 50 percent of GDP; (c) define escape clauses for national security and natural disasters; and (d) explicit enforcement procedures and corrective mechanisms. This was perhaps the easiest condition for Ishaq Dar to agree to as the period of implementation is beyond the tenure of the extended arrangement scheduled to end in August this year after which the Fund would be unable to enforce conditions though it would monitor whether agreed conditions during the programme are being met. Be that as it may, one must appreciate the inclusion of defining escape clauses in this context.
With respect to the State Bank of Pakistan (SBP) the Fund's new SB includes (i) issuing an executive order to provide financial guarantee to the SBP in case of any losses that are not covered by SBP's general reserves and recapitalize the bank if it becomes necessary; in layman's terms this implies that the reserves are not to be used to cover government borrowing and in the event that it becomes necessary the government must buy (contractionary policy) shares of the SBP; and (ii) delegate to the SBP board the power to establish profit distribution rules, allowing the board discretion in building reserves and prohibit distribution of unrealised gains. At present, the government uses SBP profits as its revenue and this practice would have to stop if the government is to implement this SB. The deadline for this is end-March however one may safely assume that like all other SBP-related Fund conditions envisaging greater autonomy to the central bank this too would be met in letter though not in spirit.
An additional two new SBs relate to the Federal Board of revenue (FBR): (i) identify 50 potential cases of high net worth individuals and other large taxpayers, based on established risk-based audits criteria and initiate comprehensive income tax audit at least half of such cases to be completed by end March and one can safely assume that the 25 cases would not be those who are close to the echelons of power; and (ii) establish communication platforms (phone hotline and website) to facilitate public reporting of corrupt practices in tax administration by the end of the current month - a hotline that maybe set up but fails to act on it.
The sixth and final SB is to obtain parliamentary approval for amendments to the PIA Act by May 15 this year. The Letter of Intent states that the "legal constraints, labour reactions and ongoing strikes delayed the process and disabled the government from meeting the ninth review SB but adds that "we remain committed to move ahead with seeking strategic private sector participation in PIA by building consensus with stakeholders and obtaining parliamentary approval for amendments to the PIA Act...meanwhile we will continue to work closely with PIA management to ensure that ongoing financial losses are contained." The government and the opposition have reportedly agreed on this and a joint session of parliament that is scheduled to be held today would pass this today. The agreement by the opposition is baffling on two counts: (i) why the opposition insisted on retaining government management is baffling given the appallingly poor performance of PIA during the last three years; and (ii) the Dar proposed stipulation that "the management control of the airline and its subsidiaries will remain with the Board of Directors which shall have representation in proportion to the shareholders". This can allow a strategic investor to buy the bulk of the 49 percent shares to be offloaded at a very low price, given low public interest in shares where the management is poor, get members on the board as well as get the government nominated members to vote for a change in the chief executive.