Shakespearian saying, “uneasy lies the head that wears the crown”, proved very true for Mian Nawaz Sharif who is trying to handle triple “E-crisis” (i.e., energy, economy, and extremism) since his party won the general elections.
The severity of crisis forced PML-N government to utilise three vital lifelines within first month of coming into power. The first lifeline was Saudi Arabia. There were reports about Saudi oil, up to the tune of US$ 15 billion, on deferred payment basis. However, this lifeline did not work and the government had to resort to second and third options, i.e., seeking a bailout package from IMF and rushing for Chinese support mainly in energy sector.
Before the Premier’s current visit to China, Pakistan had signed 400 MOUs with China, including a Free Trade Agreement (FTA). However, more than 350 of such MOUs were just photo-shoot opportunities and could never get materialize. The effectiveness of this lifeline would not depend on the number of MOUs signed during Premier’s visit but on the fact that how many of those would turn into legally binding agreements.
Chinese investment in Pakistani energy sector is quite a viable option provided we can offer an “easy entry and easy exit” policy to foreign direct investors. The biggest bottleneck for FDI in Pakistan is not physical security threats, but the policies and procedures that turn both entry and exit of any investor extremely difficult and painful process. So one has to wait and see if this lifeline brings any relief for current Government.
The third lifeline, IMF is comparatively safer bet than the other two. However, the staff level agreement of providing Pakistan an Extended Fund Facility (EFF, a long term support for economic reforms and to improve balance of Payment) needs to be vetted by IMF’s Executive Board in September 2013, before any transaction can be made to Pakistan.
This vetting would depend on “front loading” by September 2013 of “home grown solutions” committed by Ishaq Dar’s team. Before discussing the pros and cons of this home grown solutions, let me talk you through on how IMF engages with its member countries.
A country decides to go to IMF when its economy is not performing well and outflows exceed inflows. This situation leads to a balance of payment crisis and that is where IMF comes handy. The major component of Pakistan’s outflows in 2013 is debt servicing to IMF. We have just made a hefty payment to the fund in June 2013 and need to pay another US$ 3 billion within next few months. As we don’t have enough forex reserves to make this payment, hence we have to borrow more.
EFF is an engagement for next 10 years. The mark up would be 5.75 per cent ( 3 percent add on US Federal treasury markup which is around 2.75 per cent) and its repayment would start after 4 years. This implies that PML-N would be paying off the major portion of this EFF in its next tenure only if it gets another turn in 2018 elections; alternatively its successors would accuse PML-N of financial mismanagement and may have to resort to another loan to clear this debt.
The cycle where the successive governments have to take tough decisions for its predecessor’s “economic wrong doings” results in lack of political ownership of IMF agreements.
IMF’s prescription is to reform the economy through reducing fiscal deficit. The member country seeking help from IMF has to present a plan on how it would curtail expenditures and increase revenue. This plan is usually known as “home grown solution”. The expenditures of Government of Pakistan consist of debt servicing, defense & security, day to day administration, and development.
The former three are inflexible and more or less sacred so there cannot be any reduction here. It means any home grown solution to reduce expenditures would mainly hit the development expenditures and to some extent (ritually) day to day administration expenditures. This would hit the poor, lower middle class, and middle class the most.
On the other hand, the government of Pakistan’s major revenue sources are non-tax revenue, indirect taxes, and direct taxes. Indirect taxes are applicable on everyone, whereas direct taxes are applicable on taxable class only. While we know Pakistan’s tax to GDP ratio is extremely low, we also know that majority of Pakistanis, irrespective of their social status, are paying some sort of indirect tax. The implementation of taxation policy is highly tilted in favour of elites.
The Finance Minister was adamant that he would not impose new (direct) taxes, and would not abandon the SRO (statutory regulatory order) regime which provides exemption from taxes and duties to selected few. It is true that certain SROs are legitimate and necessary (such as duty free import of medical equipment/ambulances by a charity hospital). However, most of the SROs are a source of tax evasion.
Lack of political will for increasing the direct taxes would lead the government to increase its revenue through indirect taxes and non-tax revenue. Both of which again hit the poor, lower middle class, and middle class the most.
The federal budget 2013, prepared in hurry to present something tangible to the IMF mission who were to start its visit on 17th June, included the above mentioned cost saving and revenue enhancement measures.
One agrees that the economy should be documented; non targeted subsidies should be abandoned; loss making public sector enterprises should be revamped; power sector should be reformed; and austerity measures should be adopted. However, one also expects that on revenue enhancement side, more people should be brought in tax net and direct taxes should be levied. Income above a certain threshold should be taxed irrespective of the fact that it is generated through industry, services, or agriculture.
Developing countries’ experiences with IMF are neither very pleasant nor very helpful. However, unless any other lifeline works, IMF is a quick fix solution. While availing this solution, it is governments’ duty to ensure that majority of Pakistanis who fall in low income group are protected from side effects of front loading of home grown solution. Life of people belonging to middle and lower income groups is already miserable. They should not get the undue share of uneasiness for the crown they never wore.
This article was originally published at: The News
The opinions expressed in this article are the author's own and do not necessarily reflect the viewpoint or stance of SDPI.