The Federal Finance Secretary Waqar Masood informed the Parliament’s Standing Committees of both houses on Finance that the growth target for the next fiscal year has been fixed at 5.5 percent and development spending at 580 billion rupees. He has also clarified that the inability to meet the growth target for the current fiscal year by 0.9 percent is attributable to floods, a fall in commodity prices in the international market (though the decline in oil prices created fiscal space as well as reduced the trade deficit) and a decline in Large-Scale Manufacturing (LSM) growth – factors ostensibly beyond the control of government policies. However, one would assume that LSM sector may hold the government responsible for its poor performance on three counts: (i) failure to resolve the energy crisis that continues to plague the country’s productive sector accounting for Pakistan having the lowest GDP growth rate in the region today (barring Afghanistan), (ii) a rupee-dollar parity that is not helpful and which is causing an adverse impact on the country’s exports, and (iii) heavy domestic government borrowing that is crowding out private sector borrowing and disabling it from becoming the engine of growth.
Be that as it may, the government has in recent weeks highlighted positive macroeconomic indicators that have been appreciated by some notable foreign publications and include an improved rating by Standard and Poor’s – an internationally well-regarded provider of global credit benchmarks. The government has also pointed out that the inflation rate is down – a factor that is relevant to all oil importing countries given a fall in international prices. Independent economists, however, urge the government to develop an even-handed approach namely that if it is quick to take credit for external factors for improved macroeconomic indicators then it must also accept blame for external factors impacting negatively on those indicators as the extent of the damage reflects imbalances within the economy for which the government of the day is responsible. However, political governments rarely employ such even-handed logic and therefore it is relevant to determine whether the claims of success are genuine and based on policy reforms or simply the outcome of external factors.
There is ample evidence to indicate that any country’s credit rating will improve if it is on an International Monetary Fund (IMF) programme, as is Pakistan today, as other multilaterals and bilaterals develop a confidence level that the country would not derail its reform agenda for political reasons given the strict quarterly monitoring by the IMF. In other words, the country’s creditworthiness improves. Pakistan’s credit rating declined in 2010 because the IMF suspended the 2008 7.2 billion dollar Stand-By Arrangement (SBA) due to the failure of the then government to implement the agreed tax and power sector reforms. The present government remains engaged with the Fund even though (i) the tax to Gross Domestic Product ratio remains the lowest in the region (indicating the government’s focus on total tax collections or increasing taxes on existing payers as opposed to reforming the tax system), barring war-torn Afghanistan; (ii) the power sector circular debt has resurfaced to the same level as in 30th June 2013 – the day PML (N) government retired it; (iii) the practice of slashing development expenditure to meet the budget deficit targets continues with implications on the growth rate. Recent reports indicate that progress on development projects in the energy sector has been appallingly slow due to low releases; and (iv) the Finance Minister has rightly pointed out that the major impediment to foreign investment remains our poor law and order situation, however, in the absence of releases to implement the National Action Plan (NAP) some body has to bear a major part of the blame for any failures in that regard. This explains why foreign direct investment has continued to decline second year in a row; however, portfolio investment has risen with sceptics claiming that this may be due to acceptance of past profits without question and evidence by investors/brokers. Do we need to extend this even if this sector generates under 4 billion rupees in taxes whereas its potential is forecast at 100 billion rupees?
What is relevant however is that the IMF has begun to dictate prior conditions to the release of a tranche – conditions that are normally applied prior to the approval of the programme. Tranche releases are normally associated with amending some adjustors, but in the sixth review the prior fiscal conditions included a mini-budget which was delivered a week before the talks with the Fund began formally in the first week of February and included raising taxes on petroleum products from 17 to 27 percent, as well as introduction of additional fiscal measures, including a 0.1 percent of GDP reduction in electricity subsidies with a total yield of 0.3 percent of GDP and measures to recover part of the Gas Infrastructure Development Cess (GIDC) proceeds. Prior conditions for the seventh review according to Herald Finger, the head of IMF mission, include fiscal measures and GIDC again.
The price of a mini-budget is paid by the public and would continue to be paid by the public until and unless the government focuses on fuelling growth on the one hand and broadening the tax base on the other. This entails not only reducing its own borrowing from the commercial banking sector but also massively slashing current expenditure and raising the tax-to-GDP ratio through major reforms in the tax sector that must include broadening the tax base and enhancing documentation.