The International Monetary Fund (IMF) team led by Harald Finger, Advisor Middle East and South Asia Department, in an exclusive interview with Business Recorder has stated that in Pakistan imbalances are compromising growth and not the commitment of the government to reduce the budget deficit. The list of imbalances that he itemized is exhaustive and ranged from public debt constituting over 60 percent of the budget, 40 percent of all government expenditures on interest payments, banking system meeting a large share of the government’s financing needs thereby crowding out private sector credit, an overvalued rupee compromising exports, load shedding compromising productivity, infrastructure deficiencies and a very low tax to Gross Domestic Product (GDP) ratio. Political opposition and critics of the government’s economic policies would no doubt argue that this is a vindication of their claim that the present government is actually raising indebtedness and failing to increase the country’s tax revenue through implementing reforms that would entail the rich and the influential paying income taxes, including the large number of those operating in the informal sector, in violation of its own manifesto promise.
While the global economy (particularly Eurozone countries and the United States economies) is in a recession yet South Asian countries are registering one of the highest growth rates in the world. India’s growth rate for the current year is estimated at 7.4 percent, Sri Lanka’s at over 6 percent, Maldives’ at 8.5 percent, Nepal’s at over 5 percent (though the devastation wrought by the earthquake would compromise this estimate), and Bangladesh’s over 6 percent. Pakistan’s growth rate as noted by Finger during a joint press conference with Federal Finance Minister Ishaq Dar is 4.1 percent. This highlights the relevance of the imbalances in compromising Pakistan’s growth rate and one would hope that the government takes appropriate measures to resolve these issues that can largely be sourced to government policy notably heavier reliance on borrowing domestically and from multilaterals/bilaterals than ever before. Fund staff feels that the authors are propping up the rupee value to understate the budgeted allocation on interest payments on foreign loans which compromises exports while SBP feels that parity is market-driven and PKR parity with US dollar would fall to below 100 if SBP stops purchasing dollars (50 million to 100 million every week). The challenges facing the economy are immense. The principal challenge could be: having a tax structure that is equitable, fair and non-anomalous and is investment-driven.
Finger also noted that the Fund and the government have agreed on prior conditions, prior to the approval sought from the Fund board to release the next tranche, and added that these prior conditions relate to fiscal measures and collections under the Gas Infrastructure Development Cess (which continues to be under litigation). One can safely assume from this that the government’s 2015-16 budget would be under scrutiny and tax measures already agreed with Fund staff would be implemented. In this context, Business Recorder did ask the Fund team whether its objective was to raise revenue rather than to propose and implement a tax system that would be regarded as fair, with more income tax payers brought into the tax net. The response was that such reforms are unlikely to be introduced or implemented in the short term. Thus in next year’s budget one can safely assume that the federal government would continue to levy higher withholding taxes and enhance the rate on non-filers as major revenue source rise.
Finger also revealed that another prior condition relates to the power sector and the government has acknowledged a circular debt of 0.6 percent of GDP and agreed to half the circular debt in the next fiscal year and reduce subsidies by not passing on the entire reduction in international oil prices onto the consumers. He together with the IMF Resident Representative also insisted that privatisation is the way forward.
The Finance Minister during the press conference claimed that this was the first time that the country had gone as far as having the seventh review. Infrastructural challenges in a capital-starved economy will remain largely dependent on bilaterals/multilaterals injections. He also cited foreign reserves in excess of 17.5 billion dollars, an amount that was as per Finger’s definition, only 12.5 billion dollars (three months of imports) is available to the government. As of today, balance of payment (BoP) position looks comfortable; oil prices are low, home remittances are on the rise and SBP is building up forex reserves. However, trade deficit needs to be reduced. To achieve this objective, devaluation of PKR is neither necessary nor desirable. Instead domestic productivity and the supply line need to be improved. In other words, SMEs’ problems need to be looked at. Value added textiles are not going up because SMEs in Faisalabad and Gujranwala are facing energy shortages. And, SMEs that are Karachi-based require improvement in law and order. The government is trying to have better results. But one needs to ‘walk the talk’.
To conclude, Pakistan is on the road to reform as envisaged by the Fund staff and if it treads carefully along this path imbalances would be reduced and finally eliminated to pave the way for unbridled growth. However, the Fund team did acknowledge that governance remains an issue, in all sectors including the power and tax sectors, and proposed a technical assistance to help the government strengthen governance. We need to focus on generating more exportable surplus by raising the range of products. The forthcoming budget needs to enhance the country’s resource base, attract private investments (both domestic and foreign) and reward productivity. There are severe structural problems facing the economy. Mere tinkering will not suffice. The government, however, must not lose sight of the fact that it is also generally argued that IMF’s lending activities are actually unnecessary and probably even counter-productive. It always demands more emphasis on policy conditions to be attached to its loans. The lender knows that most countries, including Pakistan, have the ability to repay loans.