The Executive Board of the IMF must be thanked once again for its very sympathetic eighth quarterly review of Pakistan, as part of the Extended Fund Facility. Two more waivers have been given against the violation of key quantitative performance criteria. Cumulatively, twelve waivers have been granted. Never before in previous programs has the Fund shown such understanding and support for Pakistan.
However, the press note released after the Board meeting reveals a number of misperceptions about Pakistan. The first is the statement ‘that economic activity is picking up pace and vulnerabilities are gradually receding’.
Unfortunately, there is not much evidence of economic activity showing revival. In 2014-15, the large-scale manufacturing sector grew at 3 percent, as compared to 4 percent in the previous year. The major crops sector achieved a growth rate of less than 1 percent as compared to 8 percent in 2013-14. These two sectors are the principal drivers of growth in the economy. It was only through some exaggeration that a GDP growth rate of over 4 percent was shown for 2014-15.
During the quarter under review, that is, the last quarter of 2014-15, exports also declined by 5 percent and foreign direct investment virtually ceased. Therefore, the statement about economic activity picking up pace is not consistent with the ground reality. In fact, in the first two months of 2015-16, exports have dropped further by 7 percent.
The next question is: are vulnerabilities gradually receding? No doubt, the precipitous fall in the oil prices will reduce the import bill by almost 8 percent, but export prices are also simultaneously declining. Consequently, the agricultural sector is facing a big negative shock and farmers will be at least partially bailed out by a big relief package announced by the Prime Minister. The fiscal cost of this package is almost Rs 146 billion, equivalent to over 0.4 percent of the GDP. There was only partial provision in the 2015-16 Budget for this cost.
On top of this, Pakistan is also experiencing financial contagion effects due to volatility in global stock markets, especially in China. During the last two months, the KSE index has fallen by 10 percent and almost $100 million have been withdrawn by foreign investors. On the balance, vulnerability has probably increased, rather than decreased.
The press note highlights that further steps are needed to increase revenue mobilization, including by broadening the tax base and strengthening tax administration. But the three budgets presented by the PML (N) Government, with prior agreement of IMF, have mostly involved enhancement in tax rates, frequently of a regressive character. The standard GST rate has been raised, withholding taxes enhanced, minimum import duty imposed on food items and other essential imports, taxes enhanced on petroleum products and natural gas, etc. The burden of the stabilization process under the IMF program has fallen disproportionately on the lower income groups.
There has been little broad-basing, with the number of income taxpayers increasing by only 65,283 in 2014-15. FBR has already experienced a significant shortfall of 7 percent in relation to the target for the first quarter of 2015-16.
The Press note next states that ‘strengthening coordination with Provinces will help safeguard fiscal discipline’. The implicit point here is that the provincial governments are more prone to profligate behaviour. They did generate a much smaller surplus of Rs 87 billion in 2014-15 as compared to the target of Rs 289 billion. However, this was due to lower transfers of Rs 179 billion from the Federal Government, primarily due to the large shortfall in FBR revenues in 2014-15.
In fact, the four Provincial Governments cut back their development spending in 2014-15 by Rs 151 billion, as compared to a reduction of Rs 36 billion by the federal government. The provinces actually face a ‘hard budget constraint’ because of virtually no access to borrowings from the domestic capital market. As opposed to this, the Federal Government had made a commitment in the 2014-14 budget to reduce non-salary costs by 30 percent. Instead, these costs went up by 8 percent during the year, and by 11 percent in 2014-15.
The press note appreciates the fact that ‘foreign exchange reserves have continued to increase, benefiting from windfalls from lower import prices’. Reserves did increase substantially by $ 1917 million in the last quarter under review of 2014-15. But the trade deficit only improved by $147 million. The major factors contributing to the rise in reserves were privatization receipts, jump in net foreign aid inflows and a large net credit from the IMF. In the first quarter of 2015-16, up to September 25, reserves have actually fallen by $124 million.
Mention is made in the press note that ‘reforms should aim at securing a reliable supply of electricity and gas and reduce fiscal risks posed by these sectors’. In 2014-15, electricity consumption increased only modestly while that of the natural gas declined. The tariff differential subsidy to the power sector was higher by Rs 36 billion over the budget estimate. Similarly, there was a big shortfall in revenues from GIDC of Rs 88 billion. The circular debt in the power sector has approached Rs 300 billion.
Finally, the press note recommends ‘an accelerated pace of privatisation and restructuring of public enterprises’. Up to now the government has pursued the easy policy of selling-off shares of profitable entities to help build foreign exchange reserves. Meanwhile, subventions continue to PASMIC, PIA and the Railways. Restructuring is proceeding at a slow pace.
The first quarter of 2015-16, which has just come to an end, has not been characterized by good performance of many indicators like exports, tax revenues, size of fiscal deficit, reserves, etc. When the 9th review of the Fund programme takes place at least two more waivers may be required. We look forward to the same understanding and support from the IMF.
(The writer is the Managing Director of the Institute for Policy Reforms and a former Federal Minister)