ANJUM IBRAHIM
Uploading the first review report on the International Mone-tary Fund (IMF) website on the weekend (Saturday), eight days after the Board approved the release of the next tranche, three days after the tranche was released, indicates the veracity of the general perception that was noted in the report “the 37-month Extended Arrangement under the Extended Fund Facility (EFF), approved on September 25, 2024, is on track. All seven Quantitative Performance Criteria’s and five of eight Indicative Targets were met at end-December” – the period under consideration.
The Fund then proceeded to reaffirm the appropriateness of its program design by stating that “continued strong and timely program implementation remains critical to safeguard recent hard-won economic stability and support sustainable growth.” It was indeed hard won, but the price was paid by the general public and therefore what is critical is for the IMF to revisit its program design in light of its three majorly inaccurate assumptions given that negotiating skills incorporating an inbuilt in-house out-of-the-box reforms have not yet been forthcoming from the Pakistani economic team leadership.
First and foremost, the Fund expressed satisfaction at the full execution of the Benazir Income Support Programme (BISP) budget, which included a 27 percent nominal increase over last fiscal year after raising the benefit from 10,500 to 13,500 rupees for three months – an increase that the Fund maintains included inflation adjustment (which was understated through data manipulation – clearly and unambiguously evident when petroleum prices were kept constant the Pakistan Bureau of Statistics indicated a decline no doubt in reference to the actual import cost rather than the price payable by the public), a one-time additional adjustment to increase the stipend’s generosity level (the use of the word generosity anathema to the Pakistani public as it was compelled to pay indirect taxes to the tune of 75 to 80 percent of all Federal Board of Revenue collections whose incidence on the poor is greater than on the rich) while absorbing an additional 700,000 families into the program, bringing total enrolment to 10 million this fiscal year (an observation that does not take account of a World Bank report maintaining that 1.9 million more were pushed to below poverty level with 42.4 percent remaining below poverty levels in this country this year).
The Fund argues that the government reduced electricity tariffs because of the reduction in the discount rate – from 22 percent last year to 12 percent (the recent reduction to 11 percent did not feature in the report) - enabling Muhammad Ali to finally get Fund approval for his 2024 rejected proposal to procure loans from commercial banks to retire the circular debt. One would assume that Fund was unaware of input from intelligence agencies in negotiations with the banks. Be that as it may, the word used by the Fund for the outcome was wisely not definitive, and instead it maintained that it “anticipated” the “CD flow should continue to decline through the end of the operation (repayment of the sukuk) in FY31, and with it the need for budgeted power subsidy (a third of which is currently dedicated to CD stock clearance).” In the event that the anticipation was not realized, the Fund warned that “it is imperative, given limited fiscal space, that payments for the operation are entirely financed out of the existing debt service surcharge (DSS). While DSS flows are expected to fully cover payments, the authorities must remove the existing DSS cap (end-June 2025 new SB) to ensure that the DSS can be adjusted if needed to cover payments should there be any shortfall.” And added that “going forward, timely notification of the annual rebasing for FY26, set at cost recovery and incorporating cautious assumptions that take account of the sensitivity of costs to internal and external factors.” Or, in other words, if push comes to shove the onus of full cost recovery would again fall on the hapless consumers.
The federal and provincial governments’ non-interference in the wheat procurement market to meet the IMF condition led to a reduction in the price for the consumers, but it may not be possible next year as farmers are likely to sow a more lucrative crop which would lead to shortages of this staple and the need for imports.
Second, the failure to achieve the budgeted tax collections – 26 percent achieved instead of the unrealistic budgeted 40 percent rise – was noted in the report however the authorities have pledged to implement the Taajir Dost Scheme (which needless to add previous administrations including the incumbent government last year pledged but failed to implement due to the threat of country-wide retail sector strike action) as well as the farm income tax scheme which the government has committed would be implemented from 1 July this year though its applicability would be from 1 January 2025 (a tax that needs refinement as the government’s capacity to determine income needs clarity and its implementation remains suspect given that federal and provincial assemblies are heavily represented by the rich absentee landlords).
The report notes that “as a pilot initiative, all tax policy proposals for the FY26 budget will undergo cost-benefit analysis, with a full review of tax expenditures also being conducted so that cost in effective measures to be phased out starting July 1, 2025.” One of course would hope that the cost takes account of the prevailing elite capture with the FBR focus remaining on withholding taxes levied in the sales tax mode while dishonestly placing them under direct tax collections, as well as the street power by the retailers/wholesalers/other productive sectors with extremely politically influential organisations reflected by their success in compelling the government to withdraw taxes.
However, what is telling is that the Fund envisages the tax to GDP ratio of only 10.5 percent in the current year, with actual achievement projected at 10.6 percent (projected at 12.3 percent next year that one would assume is unlikely unless fiscal policy is even more contractionary than this year with obvious negative fallout on growth). The remaining amount is from on-tax sources with half accruing from the petroleum levy that is a tax placed under other taxes so as not to share the proceeds with the provinces and SBP profits but not from privatisation as the investment climate is simply not conducive to any sale.
Finally, the insistence that the tight monetary policy is the reason behind low inflation, though this time around the Fund did note that “effective communication will help the public better understand the MPC’s reaction function and build support for its policy decisions.” There has been little effective communication simply because the general perception based on Fund reports uploaded on its website clearly indicate that the discount rate is determined after consultation with the Fund and given the country’s current dependence on external borrowing, all tied in with the country remaining on a strictly monitored Fund programme, this appears to be rather a facetious statement. In addition, the Fund’s failure to identify the fact that remittance rise was sourced to SBP purchasing dollars from the market and crediting them under remittances as well as the persistent negativity of the large scale manufacturing sector with the rise in credit to the private sector not earmarked for output but to the stock market indicate another program design failure.
The Fund highlights significant risks to three flow indicators (debt-service to the fund as a percent of government revenues, exports, and gross international reserves), which are all above 75 percent of comparator group, as well as risks to policy implementation resistance to adoption of reforms, underperformance of tax revenue, high gross financing needs, low gross reserves, and sizeable net FX derivative position of the SBP, coupled with socio-political tensions, which could erode repayment capacity and debt sustainability.
To conclude, the IMF notes current expenditure to remain within the budgeted 18.9 percent of GDP this year while development outlay will rise from 2.3 to 2.5 percent of GDP, a claim not backed by data released by the Planning Ministry, while projecting current expenditure at 17.8 percent of GDP for next fiscal year though that would be contingent on a projected 3.6 percent growth which again maybe suspect with the expected further removal of fiscal and monetary incentives to industry and agriculture as per the Fund program conditions. The time lag between reducing these incentives and promoting a more vibrant productive base with more potential for export promotion is likely to take more than a couple of years.
