Preconditions to IMF’s Ninth Review
There is urgency in Dar’s behaviour after his return from the negotiations over the Eight Review of the IMF Programme. There were two waivers on the quantitative targets; a ceiling on borrowing from central bank which was missed marginally was not an issue. The real problem is the slippage in the fiscal deficit and that is linked to FBR’s inability to meet its revenue target. The government was also shy of another indicative target of ceiling on power sector arrears.
As far as revenue collection goes, the provinces written consent on meeting budget surpluses is missing too and it’s directly linked to the FBR’s revenue. The fund is not happy with all these shortfalls and it must have pushed Dar to fix the problems.
The autonomy of State Bank is one of the delayed structural reforms, on which things are now moving in Islamabad. The amendment bill has been passed by the Standing Committee on Finance; to envisage the formation of a Monetary Policy Committee. The idea is to make the decision of monetary policy, independent of the Finance Ministry. That is not the case at present. Dar is doing it on paper, but at the same time he is keeping control on the SBP’s board of governors. However, incorporating changes in law is the first step for long-term institutional independence of the central bank.
There is a shift in gears on the privatization plans as well. The bidding process for strategic sale of National Power Construction Company has commenced. But there is much more on the plate for the Cabinet Committee on Privatization that is lingering. What about privatizing DISCOs? What is the fate of Pakistan Steel Mills and PIA? The plans have been there for two years; but the process so far has remained painfully slow. Now with improving sentiments and better perception of Pakistan from global lenses, it’s time to expedite the execution.
The harder tasks, however, remain to meet the stiff FBR’s revenue targets and to curtail energy circular debt. Under the immense pressure of IMF, the fear is that Dar might take decisions which are counterproductive for growth. Some of the steps already taken, which are making our manufacturing sector uncompetitive include surcharges on the electricity and imposition of GIDC on captive power plants.
In the first two years of the regime, economic policies were focusing on the stabilization and the objectives were aligned with the IMF’s agenda. Now with the stabilization is achieved – foreign exchange reserves approaching $19 billion and inflation is at rock bottom. This year, the budget, at least on paper, is trying to spur growth. However, the Fund is persistent about the continuation of the stabilization policies; in the process, growth will be compromised.
For instance, the government so far is unable to cut down circular debt significantly despite of massive fall in oil prices. The IMF is pushing to charge higher rates from consumers. That is not the solution as theft will remain there and receivables will build up again. On the flip side, higher electricity cost is not helping the manufacturing sector which is already struggling to find growth momentum due to high cost of doing business.
Similarly, GIDC was imposed to bridge the gap between revenue and expenditure. The objective sought was to finance infrastructure for importing gas from Middle East, Central Asia and Iran. But the money is simply being used by Dar to cut-down government borrowing from the central bank which again is to meet the Fund’s target. The imposition of GIDC on captive power plants is making our exports struggle and making it hard for domestic industry to compete with imported goods.
GIDC on fertilizer is increasing cost of farmers in days of depressed commodity prices. There is a clear trend of increasing reliance of vegetable imports from India making hard for domestic farmer to sell. The cost of agriculture inputs in India is heavily subsidized while at home only a few sectors are anchored by support price leaving minor crops cultivation uncompetitive. How can growth be achieved in these circumstances?
Similarly, IMF is concerned with FBR’s total revenue and is no way ready to compromise on it. The good step envisaged by the government, in this regard, is to impose WHT on all the banking transactions – the objective should have been to document the businesses, especially for trading community. However the focus appears to be on Rs35 billion sought from this step, instead of a long-term objective of improving documentation. The rumours are that Dar has told IMF that he might not be able to impose this tax. And if that is true, he might look for other options, to tax those who are already paying, to get another Rs35 billion.
This should not be the objective. The dire need is to find high growth momentum and document the economy. The government should not break to the trading community’s pressures. It can lower the rate but should get all transactions recorded. The beauty of this tax is that it has changed banks’ secrecy law and now they are liable to share all the transactions data with government. The FBR should collect this data and may exempt the traders from audit for three years, as an incentive. During this time, they should get into the habit of filing true returns and get ready to pay their due share of taxation.
