International Monetary Fund (IMF) programme is not in a strait jacket, so stated Resident Representative of the IMF in Islamabad Teresa Daban Sanchez, but evolves as the situation on the ground changes, recalibrated in Fund speak, with particular reference to the previously agreed timing of the implementation.
A change of personnel or ministers “does not affect our role and commitment to the people of Pakistan,” she added. This lays to rest the hype created after Dr Hafeez Sheikh’s departure and his successor Shaukat Tarin’s public statement that he is not in favour of abandoning the Fund programme but would like to renegotiate on three components of the agreement. First, raising utility rates, switching off the monthly flow of the circular debt and bringing its 2.3 trillion rupee stock down over an agreed period of time; Tarin had argued that raising rates would dampen growth and further compromise the capacity of the people to withstand the third Covid-19 onslaught. Reports indicate that a request for recalibration on this account was received by the Fund and the World Bank (lead player in the sector) who have requested the Pakistan authorities to submit an alternate action plan, including a revision of the Circular Debt Management Plan with the reform objectives remaining unchanged.
Second, the income tax amendment ordinance has also been passed envisaging withdrawal of exemptions to the corporate sector projected to generate 140 billion rupees though officials of the Federal Board of Revenue stated on condition of anonymity that actual amount would be no more than 30 to 40 billion rupees. In this context, it is relevant to note the United Nations Development Programme report titled “National Human Development Report for Pakistan” released last week has noted that the corporate sector accrued an estimated 4.7 billion dollars in privileges.
Third, Tarin supports a raise in development outlay. Sanchez stated that there are no constraints from the IMF on this account. True, but Pakistani administrations slash development expenditure to contain the budget deficit, a highly inflationary policy. However, the Fund has focused on primary surplus (excluding borrowing costs and repayment) in its ongoing programme which has implied the heaviest-ever reliance on domestic borrowing (a 44 percent rise in domestic debt in the past two years) to meet past debt repayments in the first year of the Khan administration (which rose by more than budgeted due to changing the tenure of the short-term debt to long-term) while in the second year payments for the rise in domestic debt led to higher allocation in spite of a debt relief initiative by the G20.
However, notwithstanding the implementation of these prior conditions, there are pending conditions that were agreed to be met by the Fund’s next quarterly review scheduled for 4 June 2021, around the time the budget may be presented in parliament – timing that indicates the Fund intends to look at the budget proposals with a fine toothed comb to ensure that policy reforms are on track. And recalibrate its reform agenda if it is convinced that the ground situation has changed sufficiently to merit it – the ground situation defined as key macroeconomic indicators. It is unlikely that the Fund would be convinced that the situation has deteriorated requiring recalibration given the projection by the State Bank of Pakistan (SBP) and the government that the growth rate is going to be around 3 percent this year, a decent enough growth rate during a pandemic though it may be the lowest in the region (the Fund’s projection for the year is a more modest 1.5 percent), fiscal deficit of 7.9 percent this year which is unsustainable though the projection for next year appears unrealistic at 6 percent (however, the Fund has not focused on budget deficit but on primary deficit which disturbingly has encouraged the government to raise its reliance on domestic debt to economically unviable levels) and inflation at 8 percent which is untenable for the people of this country given the erosion of each rupee earned since the Fund programme began.
And, finally, granting SBP greater autonomy through an Act, whose draft was approved by the Cabinet on 9 March 2021, which envisages its primary role as a controller of prices. In this context, however, this newspaper has consistently maintained that the SBP’s capacity to control inflation through the discount rate is limited because of: (i) market imperfections even in commodities which operate under perfect conditions in other countries due to cartels/smuggling; (ii) the parallel large informal sector erodes SBP’s ability to check inflation through its policies; and (iii) credit is mainly procured by large-scale manufacturing (LSM) sector in Pakistan, however the country’s fiscal policy, with a high reliance on sales tax, a largely regressive tax, raises costs of the LSM unit which are then passed on to the consumers thereby contributing to inflation and finally inflation is not demand led.
Sanchez pointed out that successive Pakistani governments acknowledged the need for reforms, particularly in the poorly performing power and tax sectors, and pledged to undertake these reforms but they remain pending to this day. Business Recorder supports most of the reforms envisaged in the programme though it maintains that they need tweaking specially in the light of SBP’s role in checking inflation, greater emphasis on the need to improve sectoral governance rather than passing on the onus of cost recovery onto the hapless public whose capacity to absorb these inefficiencies is severely compromised, and a reform of the tax structure to make it fair and equitable. And last but not least, the need for the government to slash its expenditure through sacrifices by all sectors and to begin to implement reforms in pays and pensions and subsidies given that the recommendations were submitted sometime ago.
