Predictable programme

Predictable programme

 By Shahid Kardar | 7/9/2013

SO the inevitable has transpired. Heralded by some chest-thumping theatrics on `negotiating only on our terms` we have signed our 20th IMF programme since the late 1950s.

Although the IMF functions as a lender of last resort, providing temporary respite to a country struggling to meet its external obligations, we have been a long-term user of its assistance, viewing it as permanent source of funding.

This programme is, therefore, yet another reminder of our style of governance and financial management and of our unwillingness to reform. We expect repeated bailouts from the international community, which we have continued to get because of our `nuisance value`. The pronouncements of government spokesmen that we need this money to repay the Fund`s previous loan support this claim.

The main components of the programme will become public after it has been approved by the IMF board in September but some intelligent guesses can be made about its contours. First, despite a series of `prior actions` that it will seek for gaining eligibility to Fund resources, the programme will be softer than was being envisaged by commentators based on the scale of the problems.

The early signs of this are that the IMF will more than likely give the additional $2 billion (it has already agreed to an assistance of $5.3bn) the government has requested; some adjustments have not been set out as `prior actions`; and there`s no mention of the need to extend the scope of the general sales tax to the retail level and to the way the GST regime has been further emasculated in this budget.

Secondly, as a prior action for the release of funds, it will demand more tax measures to ensure that budgeted revenues are mobilised. With the Federal Board of Revenue (FBR) collecting only Rs1,942bn in the year ended June 2013 (overstated by extracting Rs60bn in the form of advanced tax from banks, multinationals, etc.), the IMF understandably regards the targets as too ambitious.

Especially in a tenuous, unstable domestic and international environment. It is justifiably concerned that it will not be possible for us to sustain revenue deficits of close to 4.5pc of GDP (because of structural reasons), especially since a mere one percentage point increase in interest rates will jack up debt-servicing costs by Rs90bn.

The IMF will want tax reforms to make the system fair and efficient through broadening and enforcement. It will be seeking quality fiscal reforms that are of a permanent nature, involving a decisive shift away from our tradition of temporary, ad hoc changes that are reversed as soon as there`s either slight improvement or political pressure exerted by powerful lobbies.

In this context it will insist on withdrawal of tax exemptions, especially those provided through a host of SROs so that the government does not have to seek parliamentary approval including the phased elimination of 4,000 tariff-related SROs.

One suspects it will also be unhappy with the prevailing anomaly of a GST of17pc at the federal level and the provincial rate of 16pc on services. Not only is it likely to stipulate the adoption of a standardised rate of 17pc it will also be looking for the extension of GST to more `services`. To ensure that the provinces accede to this command (and their reported insistence that provincial budgetary deficits be pruned) the IMF is purportedly asking for the Council of Common Interest`s (CCI) consensus on these matters.

It is difficult to see KP and Sindh agreeing to all this without at least an assurance that the federal receipts indicated to flow to them next year under the NFC Award will materialise.

Considering that the CCI is a constitutional body it is strange that the IMF is being allowed to intrude in such areas.

Moreover, the Fund will be rightly concerned about the continuing breakdown of leadership at the FBR which will be suffering from a lack of adequate experience at the highest levels and the degree of cooperation needed for achieving the ambitious budgeted revenue target. This would be at a time the complementary strengthening of institutional capability is critical for improving the character and quality of its performance.Thirdly, the Fund will draw attention to the high levels of defence spending but then stop at that and on untargeted subsidies relating to electricity, wheat/wheat flour, fertiliser, etc. It will then focus on phasing out the electricity subsidy through a significant upfront (as prior action) enhancement of tariffs.

This will start with industrial and commercial connections, followed by a revision in domestic rates immediately after Eid, so that the IMF management can take our programme to the board for approval following the implementation of these prior actions. The overall increase in electricity tariffs will be of the order of 65pc over the next three years, combined with further rationalisation of gas prices.

Fourthly, on matters concerning the State Bank it will be demanding that a) the State Bank should stop lowering the policy rate only to defend this reduction by pumping in money into the bankingsystem, and should allow interest rates to rise; b) cease intervention in the currency market (considering that the SBP has already watered down its scarce foreign exchangereserves using more than $2bn for this purpose) and tolerate the sliding of the rupee by 6pc to 7pc bearing in mind that the Indian rupee has depreciated by almost 10pc in six weeks.

Timely financing of our external liabilities will give Islamabad headaches on how a draw down in foreign currency reserves may affect the rupee`s value and related market sentiment. Hence, one is surprised at the unnecessary risk the government seems to have taken by delaying some actions by more than month.

Finally, since an IMF macro-economic stabilization programme is by definition growth restricting, pushing the economy onto a higher growth path will require fundamental structural reforms.

This would start with further deregulation and liberalization, opening up of the economy through rationalisation of import duties and their consolidation into just three to four slabs, privatisation of public-sector enterprises, supporting the development of a transparent and competitive environment and the government`s withdrawal from commodity markets, etc.