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IMF Tranche: Bailout or Deathblow

By Dr Ikramul Haq

Dr. Ikramul Haq, a leading international tax counsel, is a well-known author specialising in international tax, press, intellectual property, corporate and constitutional law. Dr. Ikram is Chief Partner of Lahore Law Associates (fax: +92 42 7226953, e-mail: irm@brain.net.pk; website: http://www.paktax.com.pk). He is also a member of the visiting faculty of the Institute of Direct Taxes in Lahore. He served for 12 years as Deputy Commissioner of Income Tax. He studied literature, journalism and law, for his Masters and Doctorate degrees. He has written many books on various aspects of Pakistani law, some of which are co-authored with his wife, Mrs. Huzaima Bukhari, Additional Commissioner of Income Tax. He has been awarded Doctorate of Law for his research: Tax Reform in Quasi-Constitutional Perspective.

The mood of jubilation in the military junta camp in Pakistan on getting much-awaited IMF tranche irritated the independent economists and leaders of political parties. They strongly criticized the Generals for what they called a misplaced happiness. Many were irked by the hypocrisy of the General Musharraf that on the one hand he boosted that he would pull the country out of economic enslavement and on the other he showed a great satisfaction and relief on getting just US$ 596 million from the IMF and that too on very harsh terms.

Pakistan withdrew SDR 150 million (about US $ 192 million) after the Executive Board of the International Monetary Fund on November 29, 2000 approved a Stand-By Credit until end-September 2001 in an amount equivalent to SDR 465 million (about US $ 596 million) to support the government’s economic program for 2000-01.

Pakistan government agreed to reduce overall budget deficit to 5.2 percent of GDP in the year 2000-2001, from 6.4 percent in 1999-2000. This implies that the Fund gave relaxation on the fiscal deficit target, as the overall deficit target envisaged in the Budget for 2000-2001 was 4.6 percent of the GDP. In absolute terms, it permits the expenditure and resource gap to increase to Rs 363 billion as against Rs321 billion envisaged in June last year. According to the Fund, “a key element of the program is maintenance of a competitive and flexible exchange rate that is determined by market forces”. This implies that the differential between the rupee-dollar kerb rate and the inter-bank rate must remain confined to today’s level of five percent. The third important aspect was that the State Bank of Pakistan agreed to keep the interest rate at the present level and would only use its monetary tools for reducing it once the pressure on the Pak rupee subsides and the reserve position improves to $1.74 billion at end-June 2001 as against $916 million a year earlier.

 The Monetary Director of the IMF, Horst Kohler, told the Executive Board “since there is a significant uncertainty surrounding the short-term impact of revenue measures on the budgetary position, the authorities should stand ready to take additional measures if revenue falls short of expectations”. Pakistan also pledged to undertake concrete measures to “integrate financial markets, improve the financial position of public enterprises and banks, liberalize international trade, and accelerate privatization”. Enhanced governance would be critical, besides “broadening the tax base, strengthening tax administration, and reforming the civil service which is of particular importance,” says the Fund. With Pakistan on-track with the Fund Program, other IFIs such as the World Bank and Asian Development Bank also decided to release the held-up loans in support of Pakistan’s structural reform effort.

The Finance Minister of Pakistan, Shaukat Aziz claimed, “there was no political conditionalities attached to the new loan under the Standby Arrangement. “There is no non-economic conditionality in this 10-month new program with the IMF.”

He claimed that all members of the IMF board had supported the resumption of assistance to Pakistan except the United States. “The US official in the board abstained because the law of the United States does not permit funding to Pakistan under the present circumstances”. The finance minister termed the approval of the loan a milestone in the effort of the government to rebuild the economy.” Although it was a painful fact, we had no hesitation in sharing the reconciliation problem with the Fund authorities. Indeed we came out clean and credible from this experience,” he said. A number of measures, he added, had to be put in place both to ensure that this did not recur and to improve the quality of fiscal reporting, reconciliation of data and timing of availability of information. The Finance Minister of Pakistan, Shaukat Aziz claimed, “there was no political conditionalities attached to the new loan under the Standby Arrangement. “There is no non-economic conditionality in this 10- month new program with the IMF. “He claimed that all members of the IMF board had supported the resumption of assistance to Pakistan except the United States. “The US official in the board abstained because the law of the United States does not permit funding to Pakistan under the present circumstances”. The finance minister termed the approval of the loan a milestone in the effort of the government to rebuild the economy.” Although it was a painful fact, we had no hesitation in sharing the reconciliation problem with the Fund authorities. Indeed we came out clean and credible from this experience,” he said[1].

The independent economists contested this official point of view and claimed that the IMF tranche would not help Pakistan to achieve its budgetary targets as the macro-economic indicators are not showing improvement, business community and analysts said. The business community was found less interested in the IMF loan saying that the temporary arrangement was not the solution of grave economic problems.
Many independent analysts believed that a mini-budget was a must to increase the government’s revenue that was falling far behind the target. In the first five months of the financial year 2000-2001, the Central Board of Revenue (CBR) collected about Rs 132 billion and the rest Rs 298 billion was to be collected within the next seven months[2].

 The IMF conditionalities coming with the latest tranche are viewed as rather impossible to be achieved. Gross official reserves (excluding gold, foreign assets relating to foreign currency deposits contracted after May 1998, FE25s, and foreign assets relating to short-term swap and forward operations) are supposed to increase by a wholesome 89.96 percent from the current $916 million to a target of $1.74 billion by end-September. By the time a review becomes due we ought to be at around $1.2 billion. How is that to happen? Apparently, no one has the answer, neither the IMF nor the ministry.

The target for budgetary deficit is 5.2 percent of GDP or no more than Rs 160 billion. Right now Pakistan is running a budget deficit of no less than Rs 200 billion. The target, thus, demands a saving of Rs 40 billion. By the end of the fiscal year, Pakistan would have spent more on defense than was originally allocated. Budget 2000-2001, announced by Shaukat Aziz, allocated Rs 80.2 billion for “running of civil government” a shocking 67.4 percent increase over last year (this includes Rs 26.1 billion for military pensions that has now been transferred to this head). In all certainty, as the fiscal year proceeds, the ministry of finance under tremendous pressure from the IMF to meet targets will not be able to avoid using tricks out of the old loot bag. That takes us to ‘budget fudging’ and ‘doctoring of figures’. As an old formed habit, the ministry almost never accrues expenses but routinely accrues revenues. Refunds due to taxpayers are never made on time and show up as increased revenues. Public sector companies, like the OGDC and PSO, borrow heavily (open in dollars and at very high interest rates) and transfer funds into the treasury through mere book entries. The government classified its really worthless equity in KESC, WAPDA, OGDC and PSO as cash development loans (CDL) and accrues interest on them. These entities lack the resources to pay either the principal or the interest but the government keeps on booking its profits and then comes up with a lower budgetary deficit[3].

Pakistan has been asked by the IMF to reduce its total public and private external debt by end of June 2001 to 266.2 per cent of the total foreign exchange receipts from 281.6 per cent recorded at the end of June 2000.Actual debt servicing on the other hand is required to be brought down to 28.9 per cent by the end of June 2001 against 35.2 per cent of foreign exchange receipts recorded on June 30, 2000.Merchandize exports and imports are required to go up to 15.3 and 17.1 per cent of the GDP respectively by the end of the current financial year against 13.3 per cent and 15.6 per cent of the GDP, respectively, of last financial year. The real GDP at factor cost is expected to slow down during the current financial year to 4.5 per cent from 4.8 per cent recorded last year and the rate of inflation is required to be kept at around 6 per cent during the current year up from 3.6 per cent recorded in the last year. Gross national saving during the current year is required to go up to 13.9 per cent of the GDP from 13.3 per cent in the last year with the private savings contributing as much as 14.3 per cent against 15.3 per cent last year. However, the improvement in the gross national saving is to be achieved by reducing the negative public savings from 2 per cent of the GDP last year to 0.5 per cent in the current year. The gross capital formation is required to go up to 15.5 per cent of the GDP in the current financial year from 15 per cent in the last year with the public sector capital formation going up from 4.5 per cent of the GDP last year to 4.7 per cent in the current year and the private capital formation going up from 10.5 per cent 10.8 per cent. The budgetary revenue in the current financial year is required to remain at 16.5 per cent of the GDP, the same as last year, and the budgetary expenditure is required to come down from 22.9 per cent of the GDP in the last year to 21.8 per cent at the end of June 30, 2001.

The net foreign assets are required to go up to 5.6 per cent during the current year from last year’s 1.5 per cent and net domestic assets in the same period are required to come down to 5.7 per cent from 7.8 per cent in the last year. Credit to private sector from these assets is required to go up to 6.9 per cent during the current year against 1.4 per cent in the last year and at the same time the credit to public sector is required to come down to 1.2 per cent in the current year from 3.1 per cent in the last year. In the same period broad money is required to go up to 11.3 per cent from 9.4 per cent in the last year.

To stem the pressure on the rupee and bring official reserves to more comfortable levels, a stabilization program supported by Fund resources was needed urgently, said the IMF executive board while approving the standby credit. The board also noted that in the meantime, the external financial situation had become even more fragile (than what it was when the military government came to power in October 1999), partly because of large debt service payments and increased capital outflows as well as loose macroeconomic policies (of the present government).[4]

The Secretary General of Jamaat-e-Islami Pakistan bitterly criticized the Musharraf Government on the issue of what he called begging before the foreign masters. He said, “military governments are responsible for the anarchy in the country… the present rulers have pushed the motherland to the brink of destruction…While they are talking about reducing the debt burden, they are begging the international monetary institutions for more loans”[5].

The State Bank of Pakistan(SBP), in its Quarterly Report for July-September 2000, released on December11, 2000, issued serious warnings about the possible repercussions of the IMF conditionalities. “The agreement reached with the International Monetary Fund (IMF) would lead to massive unemployment and higher prices of petroleum products, which would be passed on to retail customers”, the SBP warned[6]. The SBP said, “Pakistan’s risk of default on external debt has mitigated after successful conclusion of an agreement with the IMF but the country still faces risks attached to the IMF conditions”.

“The public sector’s capacity to generate new jobs will be impaired on account of fiscal austerity,” it said, adding: “Other measures including large-scale privatization, will create massive unemployment as well as an immediate burden on the government to pay golden handshake and voluntary severance package.[7]” The report said the IMF wants Pakistan to drastically cut its non-development expenditure in order to reduce fiscal deficit to 5.2 per cent of gross domestic product (GDP) in 2000-01. The report added market forces would now determine the exchange rate. The rupee has already lost over 12 per cent against the US dollar since the third week of July.

The report noted that the removal of subsidized export finances was also a condition, which, according to exporters, might affect export performance. “These costs will ultimately benefit the economy at large, in effect, the country is currently paying the price for avoiding politically sensitive decisions (in the past),” the SBP said. “One of the greatest risks is non-compliance with specified performance criteria,” the central bank said. The bank urged the government to redouble its efforts on tax and revenue collection and strictly follow the IMF dictates or face consequences. The State Bank also hinted at a second debt rescheduling agreement with bilateral, multilateral and commercial creditors in January following the approval of the IMF loan, adding, the inability to service Pakistan’s external debt has been mitigated.

But the SBP again cautioned the government the IMF program contained its own risks and potential vulnerabilities. “Establishing a track record of meeting these performance criteria is essential to enhance Pakistan’s credibility both domestically and internationally,” the SBP said.

The State Bank also warned the government over the shortage of water in the early part of fiscal year, which would have an impact on cotton, sugarcane and rice crops, adding the 3.2 per cent annual agriculture growth target for major crops might not be met in 2000-01.

The central bank said, “Pakistan have to maintain growth in exports, which have jumped 11 per cent since July, to ensure that foreign commercial lending does not cross limits”[8]. “The government has to achieve a revenue target of Rs 435.7 billion in the current fiscal year”, which the central bank in its annual report had already termed as quite ambitious, “to remain within the limit of fiscal deficit target of Rs 162.1 billion in monetary terms”[9].

The central bank said the first quarter of this fiscal year witnessed higher net budgetary borrowing by the government despite constraints on deficit financing. However, the SBP somewhat defended its measures of borrowing and tight monetary policy that also resulted in low credit disbursement to the private sector as all these acts contributed to controlling disturbances in the later period, meaning containing the rupee’s free fall.

However, the State Bank was nervous that despite tight money supply growth, inflation has started to pick up, following price increases for medicines and higher international oil prices that will translate into hike in domestic retail prices and increase in Treasury Bill rates. Commenting on rising external imbalance, the central bank said it could only be addressed by reducing current account deficit, which should include measures to revive worker remittances, other than focusing on exports. The SBP noted 18.8 per cent growth in remittances during July-Sept as compared with the same period last year.

The rather naïve attitude of the Finance Minister towards the ramifications of the IMF conditionalities was indirectly criticized by the Governor State Bank to issue a very timely warning that there was nothing for the military junta to be complacent about the ground realities of Pakistan enslavement and difficulties it was likely to face while meeting the harsh conditions imposed by the IMF. The conditions imposed by the IMF while releasing the fresh tranche in no way can be termed as bailout, rather it is yet another deathblow for the already ailing economy of the country.

[1] Dawn, December 1,2000.

[2] Business Recorder, December1, 2000.

[3] IMF’s unattainable conditionalities, Farrukh Saleem, Dawn, December 11, 2000

[4] IMF wants Pakistan to cut debt by June, M. Ziauddin, Dawn, December 2,2000.

[5]  Statement of Secretary General of Jamaat-e-Islami Pakistan, Munawar Hassan, at a Press conference, December 3,2000 reported in daily The News.

[6] Quarterly Report July- September 2000, State Bank of Pakistan published in Business Recorder, December 12,2000.

[7] Ibid.

[8] Ibid

[9] Ibid

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