IMF program back on track means political promises will be broken
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In the wake of the recent transition at the Ministry of Finance, we discuss here the need for critical capabilities required to execute the promises made to the International Monetary Fund (IMF). Dr. Abdul Hafeez Sheikh departed as head of the finance division just days after he announced that Pakistan had successfully reached an agreement with the Fund and that not only IMF but other development partners would also soon release the held-up lending. These announcements gave a timely assurance to the markets which saw the Pakistani currency appreciate, PSX dashing forward, and an oversubscription of Pakistan’s international bonds.
It seems like the Cabinet realized on later what this agreement with IMF meant for their political future. First, the relaxation provided in fiscal slippages to accommodate the adverse socio-economic impacts of COVID-19 would no more be allowed by the Fund. Second, the program will ensure that the government is true to its commitment of removing tax exemptions. Third, given the delays in reforms necessary to curb circular debt, the government will now have to pass on higher energy prices to end-consumers. This could in turn push overall inflation upwards. Fourth, state-owned enterprise triage will be prioritized including a stronger commitment towards disposal of weekly performing state assets. Fifth, due autonomy will be provided to certain regulatory institutions including the central bank. Finally, IMF will continue to monitor Pakistan’s efforts to achieve compliance with demands from the Financial Action Task Force.
Once the early celebrations for bringing the Fund program back on track were over, the Cabinet finally measured what these conditions really meant for their image in the eyes of the citizens and potential voters in the near future. The government realized that the popular announcements they planned for budget 2021-22 will remain a distant dream. On the contrary, the finance team ended up agreeing to generate an additional PKR 700 billion in taxes; collect PKR 900 billion by increasing electricity charges by 34 percent; adding PKR 140 billion to corporate taxes by removing the exemptions allowed earlier.
The government realized that the popular announcements they planned for budget 2021-22 will remain a distant dream. On the contrary, the finance team ended up agreeing to generate an additional PKR 700 billion in taxes; collect PKR 900 billion by increasing electricity charges by 34 percent; adding PKR 140 billion to corporate taxes by removing the exemptions allowed earlier.
Dr. Vaqar Ahmed
Many have argued that the Fund should not be blamed for these steep targets, in fact it was the lack of imagination on the part of the economic team who could not get the lender to agree to less painful measures. This is an important argument as price inflation crossed nine per cent in March on the back of rising prices of food, energy, and other production inputs. This has bitten the rural economy relatively more. To some extent, this could also be the failure of administrative measures or price monitoring committees as globally, the prices of imported commodities including oil have not sharply risen yet. The recent removal of former Special Assistant to Prime Minister on petroleum also seems like an admission from the government that its own team was not capable enough to keep a check on the adverse speculative practices exercised by the oil marketing companies. Similar conclusions can be drawn from the sugar and wheat inquiry reports.
Another example of inexperience is the slow utilization of the federal development budget. During the first nine months of fiscal year 2020-21, the government could only spend 42 percent of the Public Sector Development Program (PSDP)- this too at a time when the economy needed public investment the most to recover from the effects of the pandemic. This will have implications for an already low projected economic growth rate of 1.5 percent for 2020-21 – the lowest in South Asia. And more important than that, public projects of strategic importance would now face time and cost overruns. These include the COVID-19 emergency program, Daimer-Bhasa Dam, Prime Minister’s package for South Balochistan, and the Karachi package.
Once the incidence of the pandemic becomes less intense, a certain outcome is that countries like Pakistan will be left with debt much higher than what is sustainable. The capacities of the bureaucracy may not be sufficient to even estimate how much debt Pakistan is currently carrying.
For example, the Ministry of Finance has admitted that the data on government guarantees from fiscal year 2015-16 was inaccurately reported. Some sovereign guarantees could not be reported in the budget. This violated the Fiscal Responsibility and Debt Limitation Act which demands that guarantees should not exceed 2 percent of GDP.
To discipline the fiscal side, the government will now face a shrunken space to sustain welfare initiatives including Ehsaan, Ramadan package, Naya Pakistan housing initiative, and Kamyab Jawan program. In most cases, the effectiveness of these grants and subsidies remains a question as in the absence of weak data, these giveaways remain un-targeted and often don’t reach genuine beneficiaries. A good starting point towards building capacities to manage the economy could be to ensure the availability of data, information, and intelligence necessary to plan, budget, and monitor outcomes that lead to inclusive economic growth.
– Dr. Vaqar Ahmed is an economist and former civil servant.
He tweets @vaqarahmed
