The International Monetary Fund (IMF) in the fourth and fifth staff reviews under the Extended Fund Facility (EFF) uploaded on its website, revealed that three end-September performance criteria were missed while progress on structural benchmarks was uneven. The missed targets included (i) overborrowing from the State Bank of Pakistan to the tune of 219 billion rupees – up from the 88 billion rupee missed target for end June, (ii) Net International Reserves target missed by 630 million dollars that accounted for the government decision to issue sukuk bonds in November, and (iii) Net Domestic Assets exceeded the ceiling by 25 billion rupees by end-September – down from 151 billion rupees by end-June reflecting government’s overborrowing from SBP and insufficient open market operations that would have sterilised the spot foreign exchange purchases.
The three missed performance criteria were not a surprise as relevant evidence was available on the SBP website. The reasons for missing these performance targets are sourced to what the review argues is ‘uneven progress’ on four structural benchmarks that were previously agreed with the government. First, energy sector reforms were derailed because of political uncertainty and the targeted 7 percent electricity price increase was not implemented in spite of the issuance of the notification. However, the decline in world oil prices enabled the government to raise power rate by 2.5 percent on October 1, 2014 when political uncertainty had not abated. The government further committed in the December 2, 2014 Letter of Intent (LoI) submitted as a prerequisite for IMF board consideration of the fourth and fifth tranche releases, to further increase electricity by 60 paisa per unit as additional surcharge and 14 percent increase in gas prices in January 2015. While one may understand the decision to defer tariff increase due to the sit-ins, yet the review’s revelation that circular debt has escalated to a whopping 2 percent of the Gross Domestic Product and transmission losses have declined by a mere 0.3 percent to 18.6 percent while unaccounted-for gas losses are 12.5 percent is disturbing. It reflects the failure of the PML-N administration to improve the performance of the power sector.
The commitment by the government to decrease power sector subsidies to 0.3 percent by 2015-16 would only be achievable if world oil prices remain low, which is forecast. The Fund, however, appropriately suggests that “any future government payoffs of circular debt” witnessed when the Pakistan State Oil’s liquidity issues disabled it from opening letters of credit “should be strictly conditioned on accelerated energy sector reforms and on specific actions by firms and regulators to reverse arrears accumulation.” Of concern to the Fund staff was the legal concerns with respect to Gas Infrastructure Development Cess (GIDC) which, if not resolved by next month, would lead the government “to put in place compensatory measures on the revenue side yielding at least 0.3 percent of GDP”.
Secondly, the review noted that the government missed the end-June SBP independence legislation performance criteria, which remains pending in the National Assembly and does not fully incorporate recommendations of the Safeguard Assessment Report though it acknowledges that SBP has met the benchmarks on improving internal operations and has adopted international financial reporting standards. However, few domestic economists and analysts are convinced that the federal finance ministry would allow independence of the SBP in letter and spirit as repeatedly committed to the IMF during the mandated reviews under the EFF.
Thirdly, privatisation plan proposed by the Pakistan government in its first LoI as a means to generate revenue for the government was partly postponed due to adverse world market developments (particularly with respect to OGDCL and PIA share issue); however minority share sales of UBL and PPL have been completed generating over 500 million dollars. The government also convinced the Fund to allow it to maintain in reserve some 0.2 percent of GDP in extraordinary SBP profits from the privatisation of public banks.
Fourthly, the benchmark to amend the Anti-Money Laundering Act and submitting it to parliament was missed as additional co-ordination was required with Fund staff. The Pakistan government has, however, partially met the debt management benchmark by issuing an order to consolidate debt management functions but “it fell short of what had been envisaged,” the review notes.
Tax-to-GDP ratio the review noted would rise to 11.5 percent this year, which is lower than the average of peer countries but higher than the 10.5 percent last year. However, the review notes that the “government will continue to restrain expenditures in the first nine months of the fiscal year as a cushion against any revenue shortfall” providing a comfort level to those who are aware of the failure of subsequent governments, including the incumbent, to achieve their budgeted revenue targets. The review urges the provincial governments to improve revenue collections and expresses its discomfort over a mismatch between expenditure and revenue decentralisation, which has left the federal government with a chronic deficit; and re-emphasised the importance of increased efforts to tackle tax evasion through use of the anti-money laundering regime.
However, the fact that the fourth and fifth tranches have been released indicates that the Fund staff was, by and large, satisfied that the government’s reform agenda was on track, albeit delayed. The review adds, that the government remains committed to (i) lowering the budget deficit to 4.8 percent in 2014-15, (ii) remaining within programme targets, (iii) broadening the tax base through elimination of concessions and exemptions, (iv) improving tax administration, (v) improving revenue collection at sub-national level, (vi) corrective action to reduce reliance on SBP financing, and (vi) strengthening public debt management. The list is exhaustive and extremely politically and economically challenging, prompting many economists to maintain that there may perhaps not be a sixth tranche release.
Business Recorder, however, is of the opinion that the IMF programme, this time, is not very substantive on reform. Fund’s views appear to be more coloured with the political situation (regional) than economic. And, the present government is merely borrowing its way for a living – than undertaking genuine reforms. Future generations will have to pay back these loans taken by the PML-N-led government. Forex reserves have gone up with borrowed funds and the credibility of the Fund’s programme is at best questionable. The present PML-N government has achieved nothing substantive as yet. With the country at war, all that needs to be done is to play ball with the donors and keep on the right side of the Fund. This is not what the economy needs. It needs genuine reform, which means a substantial improvement in the tax-to-GDP ratio; higher level of savings; more investment to generate employment opportunities; better productivity in agricultural as well as in the industrial sectors and lowering of government’s footprint in the economy.
For the above to happen Pakistan needs civil service reforms, as a starting point; and the government to extract itself from undertaking of business ventures and instead strengthen the regulatory framework by allowing the regulatory bodies genuine financial and administrative autonomy and staffing them with requisite knowledgeable persons, which can bridge the regulatory gaps.