According to a Business Recorder exclusive, the next government would be under considerable pressure to request another International Monetary Fund (IMF) package by November this year as the balance of payment (BoP) position would have deteriorated to dangerous levels by that time premised on several repayments to the IMF scheduled from May onwards. The repayment schedule is as follows: in May 382.34 million dollars, in June 175.5 million dollars, and 1.1 billion dollars during July-November of the current calendar year defined as fiscal year 2013-14.
The assessment sourced to the Ministry of Finance that the need go to the IMF would arise in November is no doubt based on certain historically prevalent conditions in Pakistan: the sustained failure to undertake three major fiscal consolidation measures. First, the government needs to reform the tax structure through a constitutional amendment with the specific objective of developing a tax system which is equitable, fair and non-anomalous. This must include compelling the rich landlords sitting in the country's national and provincial assemblies to pay a tax on their farm income commensurate to other income groups including the salaried class, and eliminating exemptions granted to some influential groups. Responsibility of sales tax collection also needs to be given to the provinces for both goods and services while shifting income tax collection on all kinds of income (including on agriculture sector) to the centre. The collection of certain taxes also needs to be in the domain of the local government for improvement in collection such as: a fixed tax on retail and doing away with professional tax. Pakistan needs a total reconstruct and depoliticization of the revenue collection mechanism and reassignment in responsibility. Second, all untargeted subsidies need to be eliminated. Why should the supply of electricity or fuel for its production be subsidised to all and sundry? Direct delivery of targeted cash handouts to the needy through the BISP is now possible. In addition, the federal government has also historically been engaged in extending subsidy towards commodity operations. Even the provincial purchase of wheat is guaranteed by the Federal government against credit provided by banks. What has been particularly galling for economists is the decision by the PPP-appointed economic team to show subsidies to the power sector as a separate one-off. Further, the federal government twice (and likely do it once again) has converted bank loans into bonds and this appears as a debt owed to banks. How can a one-off loan every year be not accounted for in fiscal deficit at all? This accounting gimmickry must stop as it disables any economic team from formulating a realistic budget and making informed macroeconomic forecasts.
Thirdly, the budget also faces annual haemorrhaging from state-owned entities and huge bailout packages each year has implied good money being pumped after bad. What will possibly happen if the Fund logically demands a reduction in subsidies and a cap on direct budgetary support from SBP, as per SBP's own Act, or via SBP's open market operations (OMOs)? A definite rise in interest rates is an almost certainty. The Fund would also like a targeted build-up of forex reserves so that Pakistan can pay back the loan provided by the Fund. Would the Fund not vigorously advocate depreciation of PKR? The answer will be in the affirmative. The thinking in the Fund may have changed and may not be as typical as seen in the past. But its stand on domestic taxation (without a raise in rates) through improvement in tax-to-GDP ratio is not likely to change. Similarly, its insistence to introduce target subsidies by doing away with across-the-board subsidies that are unsustainable would definitely raise alarm among many powerful segments of society such as agriculturists who could encounter a rise in urea prices as well as water rates. Phasing out subsidies might lower the pain if done on an extended time base. One more conditionality the Fund is likely to impose would be strengthening of regulatory bodies. Depoliticizing the regulatory process is painful but can be transitory or ephemeral if regulators comprise high quality professionals and are allowed to stop the government siphoning off funds in the name of fiscal needs. This would require politicians to take a back seat. The transformation for the better may not come in months but in years.
There is no doubt that the elected government would procure the new IMF package with the primary objective of facilitating repayments to the 2008 SBA but the fact remains that until and unless we proactively undertake fiscal consolidation, Pakistan would remain in the economic morass it faces today though it may periodically hold its head above water in years when farm output has been good, for which weather plays a role, and our major export items - consumables mainly - command high international prices. Reliance on these external factors must stop and in-house reforms need to be implemented with or without a Fund programme. Taking loans and investing in growth-oriented projects does help but loans for meeting current and non-development expenditure badly shrink growth space. This is absolutely unacceptable.
Tuesday, May 7, 2013
IMF: (Pakistan) inevitable crutch
According to a Business Recorder exclusive, the next government would be under considerable pressure to request another International Monetary Fund (IMF) package by November this year as the balance of payment (BoP) position would have deteriorated to dangerous levels by that time premised on several repayments to the IMF scheduled from May onwards. The repayment schedule is as follows: in May 382.34 million dollars, in June 175.5 million dollars, and 1.1 billion dollars during July-November of the current calendar year defined as fiscal year 2013-14.
The assessment sourced to the Ministry of Finance that the need go to the IMF would arise in November is no doubt based on certain historically prevalent conditions in Pakistan: the sustained failure to undertake three major fiscal consolidation measures. First, the government needs to reform the tax structure through a constitutional amendment with the specific objective of developing a tax system which is equitable, fair and non-anomalous. This must include compelling the rich landlords sitting in the country's national and provincial assemblies to pay a tax on their farm income commensurate to other income groups including the salaried class, and eliminating exemptions granted to some influential groups. Responsibility of sales tax collection also needs to be given to the provinces for both goods and services while shifting income tax collection on all kinds of income (including on agriculture sector) to the centre. The collection of certain taxes also needs to be in the domain of the local government for improvement in collection such as: a fixed tax on retail and doing away with professional tax. Pakistan needs a total reconstruct and depoliticization of the revenue collection mechanism and reassignment in responsibility. Second, all untargeted subsidies need to be eliminated. Why should the supply of electricity or fuel for its production be subsidised to all and sundry? Direct delivery of targeted cash handouts to the needy through the BISP is now possible. In addition, the federal government has also historically been engaged in extending subsidy towards commodity operations. Even the provincial purchase of wheat is guaranteed by the Federal government against credit provided by banks. What has been particularly galling for economists is the decision by the PPP-appointed economic team to show subsidies to the power sector as a separate one-off. Further, the federal government twice (and likely do it once again) has converted bank loans into bonds and this appears as a debt owed to banks. How can a one-off loan every year be not accounted for in fiscal deficit at all? This accounting gimmickry must stop as it disables any economic team from formulating a realistic budget and making informed macroeconomic forecasts.
Thirdly, the budget also faces annual haemorrhaging from state-owned entities and huge bailout packages each year has implied good money being pumped after bad. What will possibly happen if the Fund logically demands a reduction in subsidies and a cap on direct budgetary support from SBP, as per SBP's own Act, or via SBP's open market operations (OMOs)? A definite rise in interest rates is an almost certainty. The Fund would also like a targeted build-up of forex reserves so that Pakistan can pay back the loan provided by the Fund. Would the Fund not vigorously advocate depreciation of PKR? The answer will be in the affirmative. The thinking in the Fund may have changed and may not be as typical as seen in the past. But its stand on domestic taxation (without a raise in rates) through improvement in tax-to-GDP ratio is not likely to change. Similarly, its insistence to introduce target subsidies by doing away with across-the-board subsidies that are unsustainable would definitely raise alarm among many powerful segments of society such as agriculturists who could encounter a rise in urea prices as well as water rates. Phasing out subsidies might lower the pain if done on an extended time base. One more conditionality the Fund is likely to impose would be strengthening of regulatory bodies. Depoliticizing the regulatory process is painful but can be transitory or ephemeral if regulators comprise high quality professionals and are allowed to stop the government siphoning off funds in the name of fiscal needs. This would require politicians to take a back seat. The transformation for the better may not come in months but in years.
There is no doubt that the elected government would procure the new IMF package with the primary objective of facilitating repayments to the 2008 SBA but the fact remains that until and unless we proactively undertake fiscal consolidation, Pakistan would remain in the economic morass it faces today though it may periodically hold its head above water in years when farm output has been good, for which weather plays a role, and our major export items - consumables mainly - command high international prices. Reliance on these external factors must stop and in-house reforms need to be implemented with or without a Fund programme. Taking loans and investing in growth-oriented projects does help but loans for meeting current and non-development expenditure badly shrink growth space. This is absolutely unacceptable.
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