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Huzaima Bukhari, Dr. Ikramul Haq & Abdul Rauf Shakoori
“Among the most difficult problems faced by developing countries is that of balancing a budget that is swollen by the cost of development. This problem is enhanced both by the slowness with which revenues grow and by technical difficulties in controlling expenditures. The Fund is alive to the importance of the problem and is now able to offer help to its members in this field”—Jakob Saper and Timothy Sweeney, The Fiscal Problems of Less Developed Countries
Pakistan’s dependence on the International Monetary Fund (IMF) dates back to 1950 when we approached the global lender for redressal of our fiscal challenges. Since then, Pakistan has opted for twenty-two IMF programmes. However, except for one negotiated by Muhammad Ishaq Dar, as federal finance minister, our governments have failed to execute the reforms agenda agreed with the IMF to improve fiscal management. There can be a debate on the terms and conditions mentioned in the staff level reports published after agreement from both sides. However, it is apparent that since 1950, our successive governments have been circumventing initiation of fiscal reforms—in totality—sincerely and diligently. On the contrary, they prefer to opt for easy solutions to comply with key action items only. Resultantly, Pakistan has miserably failed to achieve the goal of sustainable growth and fiscal discipline.
The current IMF’s 39-momth Extended Fund Facility (EFF) Programme of US$ 6 billion, singed by the coalition government of Pakistan Tehreek-i-Insaf (PTI) in July 2019, led by Imran Khan, like earlier ones, contains a long list of reform actions, broken down into performance criteria, indicative targets, and structural benchmarks for release of agreed tranches. The parameters were to be reviewed at regular intervals and IMF linked every periodic disbursement to a successful review. The latest review report, published in February 2022, mentioned a long list of outstanding actions, and it was expected that the next tranche would be subject to the satisfactory implementation of the reforms programme as per the agreement. Since opting for the IMF programme, a single-digit policy rate went up and is presently close to 15%. Inflation remained double-digit (will continue in this range), growth decreased and no wonder that the IMF has started dictating to us.
After the change of PTI government it was hoped that that the new coalition government of Pakistan Democratic Movement (PDM) will focus on structural reforms by addressing the circular debt, strengthening policy framework, restructuring loss-making state-owned enterprises to improve their efficiency, and making the business climate viable including reforms in governance and countering corruption—all agreed with the IMF. However, they too are so far following in the footsteps of PTI government—trying to meet fiscal gap by raising energy prices, one of the many terms agreed with IMF.
Despite being in office since April 2022, the present government has made no policy statement to deal with circular debt that has reached an alarming level. We have highlighted in previous columns that the power sector’s circular debt has increased from Rs. 1.1 trillion in June 2018 to over Rs 2.5 trillion now. Similarly, gas sector’s circular debt has reached Rs. 1500 billion. These two alone cost around Rs 4,000 billion. However, our defence budget for the fiscal year (FY) 2022-23 with an increase of 6% percent will be around 1.53 trillion. The Finance Ministry needs to share the policy to achieve an ambitious and sustained decline in the accumulation of power sector arrears. It appears that accumulation of huge circular debt has clogged the production capacity and resultantly load shedding has returned to haunt us. Extra efforts need to be made by the government to address this problem beyond the required compliance level otherwise the country will face a severe energy crisis.
It was also agreed with the IMF to pursue medium term reforms to reduce costs and current account deficit for which the government was supposed to introduce smart metering, cutting off delinquent consumers, scaling up transmission and distribution infrastructure be at par with generation capacity to reduce commercial and technical losses. The present government should share its roadmap for implementing these measures so that extra burden on the treasury can be reduced.
Loss-making State-Owned Enterprises (SOEs) are draining our resources as well. It is mentioned in the IMF staff report dated February 2022 that the total value of assets held by non-financial commercial SOEs was around 44% of the total GDP in 2019, however, contribution towards the provision of employment was only 0.7% and the performance of many SOEs was weak, with about one-third entities consistently generating losses.
In its report the World Bank states that the value of losses of SOEs is about 8-12% of GDP in South Asian countries, including Pakistan and are several times greater than the country’s expenditure on education in 2019-2020. Pakistan agreed with IMF to streamline this sector with stronger governance by decreasing the state’s involvement to improve efficiency. We were supposed to introduce regulatory and policy framework for SOEs including the introduction of SOE law in line with IMF recommendations by June 2022. The additional steps agreed upon were defining ownership policy, amending several SOEs’ Acts, and operationalising a central monitoring unit within the Ministry of Finance to increase the capability of curtailing fiscal risks, including minimising the state footprints in the economy except with SOEs considered strategic. The incumbent government has yet to reveal its strategy to address the terms agreed with IMF in respect of SOEs. It is a fact that streamlining of circular debt and SOEs in the light of agreed terms can resolve our fiscal deficit issues in the long run.
The PTI government extended preferential tax treatments to some, compromising resource allocation for others and also creating disparities amongst various sectors. The IMF’s agreement clearly required avoiding preferential tax treatments and/or exemptions. The government was to reform Personal Income Tax structure by revising rates and income tax slabs to simplify the tax system—aimed at increasing revenues around 0.3% of GDP. The draft legislation in this regard was to be prepared by end of February 2022 but nothing was available for debate on the given date leaving it to the new government to address this issue in the budget 2023 to be announced today.
The government departments/bodies place substantial funds with private banks that remain unutilized. They generally keep higher buffer amounts till the last quarter to avoid expiration but the government of Pakistan takes loans from scheduled banks to bridge its cash flow issues. Now there is certain exclusion from this that is to be added into the scope of the Treasury Single Account enabling the government to use its funds in a more efficient manner. For better financial management, the IMF has asked the Ministry of Finance to ensure complete implementation of Treasury Single Account operations.
Moreover, IMF has been asking for the removal of existing exchange restrictions that can only be done once the ‘balance of payments’ condition stabilizes. Currently, there is a restriction by way of imposition of 100% cash margin requirement (CMR) on imports of certain goods and the list is continuously expanding. However, without addressing the chronic issue of Balance of Payment crisis, Pakistan cannot afford to offer any flexibility. The government needs to reform its policies and offer facilitation and ease of doing business so that exports can grow and compensate for the adverse balance.
To facilitate socio-economic protection initiatives, the Benazir Income Support Program is an important tool for direct subsidy allocation. However, IMF requires that beneficiaries’ database must be regularly cleaned and updated to avoid any misallocation of funds. It is possible through data audits and synchronisation of beneficiary details with other databases. Further, Pakistan has received significant financial and non-financial grants during the COVID period. The government also announced a package of Rs. 1200 billion to tackle endemic-related challenges. However, transparency of this spending is yet not ensured. It is pertinent to mention that any leakage or misappropriation can adversely affect the confidence of global as well as local donors and for which the government must publish details of COVID-related expenses along with relevant contracts. IMF has also required beneficial ownership information of bidding and awarded legal persons.
The most critical item on the list from prior actions is ensuring the implementation of petroleum development levy (PDL) to Rs. 30 per liter—obviously leaving no possibility of offering any subsidy. However, this commitment was dishonored and negatively affected the fate of ongoing EFF. In its latest release after meeting new Finance Minister, Miftah Ismail, the IMF mission emphasised the urgency of policy actions in the context of removing fuel and energy subsidies.
Unfortunately, despite having complete support from all the stakeholders, the PTI government failed to introduce any structural reforms agreed with the IMF. Its focus remained on meeting fiscal gaps through raising indirect taxes, enhancing policy rates, and offering higher interest rates on hot money, hiking fuel and electricity prices. Resultantly, the growth rate went down, tax collection targets were met through imports or extorting maximum from the existing taxpayers. This has led us to a point where IMF is imposing its terms in budgetary and policy matters. The current government, in office since April 2022, has not given any roadmap for introducing structural reforms to end fiscal deficit. It is also apparently following in the footsteps of its predecessors for meeting fiscal gaps.
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Huzaima Bukhari & Dr. Ikramul Haq, lawyers and partners of Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS), members Advisory Board and Visiting Senior Fellows of Pakistan Institute of Development Economics (PIDE). Abdul Rauf Shakoori is a corporate lawyer based in the USA and an expert in ‘White Collar Crimes and Sanctions Compliance’. They have recently coauthored a book, Pakistan Tackling FATF: Challenges and Solutions