Pakistan: IMF shows a growing wariness

The International Monetary Fund (IMF) seems to be quite unhappy with the performance of Pakistan's economy. According to a news item carried by Business Recorder on 3rd October, the IMF is very much concerned about the country's fiscal framework in the face of growing gap between revenues and expenditures. In a two-day policy-level talks on Post-Programme Monitoring (PPM) of the Stand-By Arrangement (SBA), which concluded on 2nd October, 2012, the Fund challenged the authorities' projections of revenue collection of Rs 2.381 trillion, arguing that revenue collections for the current year are expected to remain Rs 2.2 trillion. The amount of subsidy allocated for the energy sector is insufficient to cover the losses in the power sector. The inability to reform the energy sector poses a serious challenge to economy's growth prospects. The low gas prices, which had brought the rate of inflation to a single digit is also not a healthy sign. The country director of the Fund was also worried about election-specific expenditures by Federal and provincial governments, increased borrowings for deficit financing, reduction in credit space to the private sector and their impact on the prospects of growth. Apprehensions were also expressed about mechanisms to bring the provinces on board regarding commitments with the Fund, especially after the passage of 18th Constitutional Amendment. Chairman, FBR is reported to have defended the tax amnesty scheme and tried to allay the concerns of the Fund about the challenges in its enforcement. He stated that the tax amnesty scheme was expected to be implemented in two months to bring 3.8 million people into the tax net. The representatives of the State Bank were, however, not satisfied with the investment situation and role of the banking sector and also showed concern about the evolving balance of payments position. The concerns shown by the IMF during talks on PPM of the SBA, in our view, are quite genuine and need to be thoroughly looked into by the top hierarchy of the government. An IMF programme involving the disbursement of its resources together with continuous monitoring of the agreed policy framework is supposed to improve the fundamentals of the economy and place it on a sustainable path of development. The basic idea behind such programmes is to ease the pain of adjustment by making the resources of the IMF available to a member country on a temporary basis and ensure that the country does not only revert to the trajectory of development but is also able to repay the Fund's resources under a stipulated timeframe by improving its balance of payments position. In Pakistan's case, while the country had utilised most of the resources made available under the SBA, it has failed to meet the objectives of the programme and now finds it difficult to repay the borrowed amount under the SBA. The country is obliged to pay dollar 3.4 billion in 2012-13, dollar 3.43 billion 2013-14 and dollar 1.35 billion in 2014-15 to the IMF and most of the analysts anticipate a default situation in the absence of some extraordinary developments like a steep fall in the international prices or another programme with the Fund which could only be concluded with some very harsh upfront conditions. Anyhow, more worrying is the tendency of the concerned authorities in Pakistan to mask the facts and try to paint a rosy picture of the economy. For instance, it seems impossible for the FBR to collect Rs 220 billion a month to meet the yearly target during the remaining three quarters of FY13 when it was able to collect only about Rs 134 billion a month during July-September, 2012. The amnesty scheme which itself could be questioned for a number of reasons would not be able to widen the coverage as expected by the authorities and generate the anticipated level of resources as suggested by such schemes in the past. About energy sector, the less said the better. Its appetite for subsidy seems endless and the improvement in line losses is only on paper as indicated in one of our editorials several days ago. The IMF is right when it says that the country's fiscal deficit during 2012-13 could be as high as 6.1 percent of GDP as against the target of 4.7 percent of GDP. A slight or even a moderate deviation between the projections of the government and estimates by reputed agencies like the IMF was understandable but such a large divergence between the two could be due to the deliberate efforts of the government to disguise the reality on the ground. In our view, such an attempt fools nobody and undermines the credibility of the country which once lost is very difficult to redeem. The wariness shown by the IMF in its latest talks with the government authorities should at least tell us that it is better to be truthful if we want to engage others in a meaningful way and resolve the problems of the economy on a lasting basis. Recognition of the intensity of disease is the first step towards proper treatment and a healthier lifestyle.