Dar is very dear to IMF


-Editorial

WEB DESK: Finance Minister Ishaq Dar and the mission leader for the International Monetary Fund’s 6.64 billion dollar Extended Fund Facility Harald Finger held a joint press conference in Dubai where it was announced that a staff-level agreement on the completion of the tenth review has been achieved.

Many may regard this agreement as, unhelpful and pressuring the government to take decisions that are anti-poor (reduction in energy subsidies) and anti-employment (privatising as opposed to restructuring the badly-run state-owned entities) as they propound a focus on making the country self-sufficient through indigenous resources and out of the box solutions.

However, we support the endeavours of the Finance Ministry in procuring the next tranche as failure to reach an agreement may have led to a run on the domestic markets as well as a marked decline in borrowing from multilaterals and bilaterals had the staff-level agreement not been reached and led to the EFF suspension. In that scenario, the country would have quickly used up its foreign exchange reserves and placed the economy right back to where it was in 2013 when the PML-N formed the government: an unsustainably high budget deficit with its composite flailing key macroeconomic indicators.

Those who had argued that the Fund staff would raise objections to the tax amnesty scheme – a logical presumption, given that Finger in a conference call from Washington DC with the local media on 12th January had expressed concern over the scheme – were checkmated. This was made possible by the astute decision of the government to have parliament approve the tax amnesty bill on 27th January making it inappropriate for the Fund to raise objections.

Others had argued that the Fund may express reservations at the failure of the government to make the tax structure fair, equitable and non-anomalous were also proved wrong as the Fund team for the EFF appears to be focused on total government revenue as opposed to the source of that revenue. This implies that the Fund team accepts the accounting jugglery at work during the past two and half years of the PML-N government. This includes taking items from non-tax revenue into other taxes (to the tune of over 300 billion rupees) thereby showing a higher tax to Gross Domestic Product ratio as well as enhancing taxes on existing taxpayers rather than bringing the rich operating in some specific sectors into the tax net.

The Finance Ministry press release reiterated the claim that in spite of a reduction in fiscal deficit “we inherited the budget deficit of over 8 percent of GDP which has been brought down to 5.37 percent of GDP in FY 2014-15…allocation for Public Sector Development Programme (PSDP) doubled and social safety net expenditures tripled through three budgets of the current government.” Three points are in order. First, the rise in deficit in the last year of the tenure of the PPP led coalition government to 8 percent was partially attributable to the PML(N) government because of its decision to borrow to retire around 400 billion rupee circular energy debt on the second last day of fiscal year 2012-13.

Second, PSDP outlay increased from 378 billion rupees in 2012-13 to the budgeted and yet to be realised 700 billion rupees in the current year, a target that may be met, however the federal government has increased its pressure on provinces to increase their surpluses – from 62 billion rupees in 2012-13 to 297 billion rupees budgeted for the current year with obvious implications on social sector spending given the devolution of such subjects subsequent to the passage of the 18th amendment.

The Ministry’s claim that Benazir Income Support Programme outlay has been tripled is valid; however, there is greater access to external borrowing for the government given that it is on a Fund programme; in contrast the PPP-led coalition government took what it believed was a political astute decision not to implement tax and energy reforms already agreed with the Fund under the 2008 Standby Arrangement (SBA) which in turn led to SBA suspension thereby drying out other external sources of programme support.

The Finance Ministry’s press release also notes that “we are determined to continue on a path of fiscal consolidation to achieve our budget deficit target of 4.34 percent of GDP in FY 2015/16. We are also committed to reducing public debt and lay the foundations for a more sustained growth.” The focus on deficit reduction accounts for a slowdown in growth and this is particularly so given the government’s heavy reliance on commercial borrowing (as borrowing from the central bank is not allowed under the EFF) which is posing a serious threat private sector borrowing.

The Finance Ministry’s claim that it would improve business climate by ‘one stop shop’, a long-standing policy of the PML-N government which has yet to bear fruit, and national financial inclusion strategy, which is also facing procedural bottlenecks, is widely believed to be insufficient measures to enhance private sector growth. What is required are a range of policies including no delays in tax refunds, ending load shedding and competitive energy prices, a realistic rupee value and providing a strike-free as well as peaceful environment for the private sector to operate in.

There was no direct mention of the ongoing PIA crisis in either the Finance Ministry’s statement or the IMF press release. As expected, however, the former refers to “we are working to reform or enter into strategic partnerships with private sector partners for PSEs, focusing on improving performance, reducing losses and improvement in service delivery,” while the latter notes that with respect to structural benchmarks ‘measures pertaining to the energy sector reform and restructuring of loss making public enterprises are yet to be implemented,’ and urges the government “to set in motion competitiveness enhancing improvements in the business climate.”

Be that as it may, the Fund acknowledges foreign exchange reserves of 15.2 billion dollars (though Dar inaccurately adds the reserves held by the private sector) even though as stated by Finger during the 12th January conference call most of these are debt enhancing. And finally, the Finance Ministry claims that it is continuing to “diversify financing from both domestic and external sources, lengthen the maturity profile of domestic debt and, improve the balance between domestic and external debt.” Commitments that are easier made than implemented with one billion dollar 7.5 percent five-year tenor Eurbonds due in 2018 plus the start of repayment of the ongoing EFF as well as repayment on loans acquired from the Paris consortium.

The first two loans were acquired by the present government and interest on domestic debt has risen from 952 billion rupees in 2012-13 (though 845 billion rupees was budgeted by the PPP government and part of the rise is due to Dar’s borrowing to eliminate the circular debt) to 1170 billion rupees in 2014-15 or a rise of a disturbing nearly 19 percent.

Source: Business Recorder

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