A few hours after the International Monetary Fund (IMF) uploaded the twelfth and final review under the 6.64 billion dollar Extended Fund Facility (EFF) on its website, mission leader Harald Finger held a video conference with the local media from the Fund's headquarters in Washington DC but this time with a difference: though his prepared statement was a balance between achievements and do-more yet he faced queries which prompted honest though on occasion brutal answers that no doubt did not go down well with the Ishaq Dar led Finance Ministry.
The crux of the review, to my mind, lies in seven footnotes.
Footnote 2 refers to IMF's 2016 Guidance on the Assessment of Reserve Adequacy (ARA) and Related Considerations," IMF Policy paper, June to conclude in the body of the review that "international reserves, while having tripled over the program period to cover 4.2 months of imports, have not yet reached comfortable levels (76 percent of ARA metric)". International reserves are debt enhancing, so acknowledged the mission leader earlier this year. And once the IMF's programme is completed in September 2016 then no doubt access to foreign financing would be more of a challenge given that multilaterals/bilaterals routinely withdraw from extending programme support (budget support), in contrast to project support, as without the Fund's strict monitoring mechanism the debtor nation's compliance with the reform agenda becomes suspect. This trend has been witnessed in Pakistan as well as other debtor countries of the world.
Footnote 3 notes that the "underlying fiscal adjustment after accounting for clearance of circular debt in the energy sector (1.4 percent of GDP in fiscal year 2012-13) was 2.5 percentage points of GDP over the program period." In other words the circular debt was not counted as part of the fiscal deficit, implying thereby that the deficit was much higher than acknowledged, and energy circular debt actually rose by 1.1 percentage points under the Sharif administration - so much for claims of improved governance in the energy sector by the incumbent government. Additionally, the Fund pointed out that base tariff was increased during the Sharif administration by 32.5 percent - from 8.8 rupees in 2012-13 to 11.9 rupees by 2015-16.
Footnote 4 maintains that "the increase in gross public debt in fiscal year 2015-16 was more than projected mainly due to build up of government deposits along with exchange rate effects and a higher than programmed budget deficit" - exchange rates the review adds witnessed a 'pronounced real appreciation of the rupee'. The footnote refers to the statement in the body of the report that public debt remains high (430 percent of total government revenue, 65 percent of Gross Domestic Product (in violation of our Fiscal Responsibility and Debt Limitation Act) and, more disturbingly, that over the three year program period (2013-2016) debt rose by 2.5 percent of GDP - data that provides fodder to those who have been cautioning Dar not to base his deficit reduction on procuring ever greater amounts of public debt, a charge that he has consistently denied but would now find impossible to defend.
Footnote 7 maintains that "the total stock of tax refund claims increased to 205 billion rupees in June 2016, from 200 billion rupees in June 2015. As part of this total stock outstanding GST refund claims increased to 133 billion rupees at end June 2016 from 89 billion rupees at the end of 2014-15. The authorities explained that this increase reflects, in part, a more systematic effort to register outstanding claims." And in the body of the review IMF Staff pointed out that going forward containing the wage bill growth (which has been rising at almost 10 percent every year since this government took over), untargeted subsidies, and non-priority transfers were also necessary to facilitate the targeted shift in the composition of expenditure towards social and capital spending across all tiers of government." Granted that social sector development is in the domain of the provincial governments but the Fund, aware of Dar's insistence on ever rising provincial surpluses to balance his flawed expenditure priorities (in the current budget he has raised this to 339 billion rupees), referred to all tiers of government.
Footnote 8 refers to the National Finance Commission award (which expired in 2015) and reveals that "in the current round of NFC negotiations the federal government will seek an agreement to better balance devolution of revenue and expenditure responsibilities in a way that is consistent with the objective of macroeconomic stability." This is unlikely to be successful for two reasons - provinces are up in arms, including Punjab, lamenting the Center's dictation on the amount of annual provincial surpluses to balance the federal budget and have indicated that such dictation would not be acceptable in future; in addition they argue that the allocation in the federal budget 2016-17 on devolved subjects is much less than the dictated provincial surplus for the year for example education and professional division has been budgeted 2.2 billion rupees only, national health services, regulations and co-ordination division has been allocated 24 billion rupees, housing and works 6.5 billion rupees.
Footnote 10 states that the extreme test scenario which would severely compromise Pakistan's capacity to repay the Fund, defined as a situation where downside risks materialise that include external financing peaking at 8 percent of GDP, may apply if the following is assumed: (i) lower remittances and sadly remittances fell by 5 percent in the first quarter of the current fiscal year - a trend that is in keeping with the global scenario; (ii) higher profit repatriation with the SBP website giving total repatriation on profits/dividends at 34.1 million dollars in August 2012 which rose to 58.5 million dollars in August 2016 (repatriation would certainly rise further with the completion of projects under China Pakistan Economic Corridor); (iii) a sharp decline in Foreign Direct Investment and as per the SBP website FDI declined from positive 106 million dollars in June 2016 (not a significant amount by any stretch of the imagination) to negative 49.4 in July 2016 and negative 53.2 in August though these are cited as provisional estimates; (iv) equity portfolio inflows which continue to rise due to what many maintain is the low rate of taxation on this sector - in India stock markets reportedly generate up to 200 billion rupee revenue whereas in Pakistan the amount is around an appallingly low 2 billion rupees; however portfolio investment is fickle at best and its overnight departure was held to be the reason behind the Asian financial crisis of 1997; (v) higher external financing costs and these are expected to rise given that Pakistan would no longer be on an IMF programme; and finally (vi) lower medium term growth and in this context it is relevant to note that the rate of GDP growth as estimated by the Pakistan Bureau of Statistics, under the administrative control of the Ministry of Finance, has been repeatedly challenged due to a lack of rationalisation with other credible government and industry sources of existing data. There has also disturbingly been no effort on the part of the PBS to clarify its data to a panel of well informed economists or economic journalists in spite of repeated requests for a meeting.
Footnote 11 maintains that "Pakistan is projected to fall below the Post Project Monitoring (PPM) thresholds by 2023". And what exactly is this threshold?" And disturbingly adds that the "share of the Fund's credit exposure covered by PPM would be largely unchanged by the new thresholds compared with the 2010-15 period." The choice of the year 2023 is because in the event that Pakistan does not go on yet another Fund programme the EFF repayments would begin in 2018 (150 million SDRs in the first year), and end in 2023 with 732.2 million SDRs. Projected debt service to the IMF as a share of total external debt service on existing and prospective drawings would be 1 percent next year, rise to 3.3 percent in 2018 and reach a whopping 9.2 percent in 2023.
The Fund in a policy paper dated July 2016 titled Strengthening the PPM Framework states that "PPM reports should provide comprehensive and detailed analysis of risks to capacity to repay. To better align the PPM threshold with risks to the Fund's balance sheet and that of the PRGT (poverty reduction and growth) trust, staff proposes adopting a composite PPM threshold based on two indicators, one capturing the absolute size of credit outstanding and the second, a quota-based indicator, proxying the scale of individual country risk. The rebalancing would help ensure effective monitoring of large exposures and those of PRGT-eligible countries, while maintaining coverage of a significant share of the Fund's balance sheet." The government would therefore have an independent monitor focused on its outstanding borrowings and proxy the scale of country risk - a fact that one hopes may compel Dar to moderate his penchant for flawed data.