Budgeting under the IMF
During the last three weeks – since the IMF reached a staff-level agreement on economic policies with Pakistan for a three-year Extended Fund Facility (EFF) – Pakistan’s economy remained on a roller coaster. The market stumbles and then bounces back – to the pressure of what seems to be the ‘prior actions’ of the government for getting the agreement approved by the executive board of the Fund.
Fluctuation in the value of the rupee versus the dollar is getting people used to living in a currency exchange regime where the State Bank of Pakistan will not interfere much. The rise and fall of value of the rupee over the last two weeks (after the initial depreciation of its value after May 12) should have discouraged late investors from hoarding dollars as the rate of return is no more predictable.
The latest increase in fuel and electricity prices and the discussion on providing cheaper petrol with slightly lower research octane number (RON) for two and three wheelers indicate that in an attempt to reduce energy circular debt and primary deficit (fiscal deficit-interest payment), the government, while trying to protect the low and lower middle-income class petrol consumers, is in no mood to give subsidy on energy.
The monetary policy affects borrowers and, in our case, the largest borrower from the domestic source is the government itself, so common people usually ignore the monetary policy issued every two months by the State Bank of Pakistan. Hence, on this count too it is easy for the government to meet prior action for the EFF.
Politically difficult prior actions would include tax revenue mobilization and making the tax burden equal and transparent, giving concrete plans to overhaul loss-making public-sector enterprises, and engaging provincial governments on exploring options to rebalance current arrangements in the context of the forthcoming National Financial Commission (NFC).
In order to increase tax revenue under contractionary economic policies and slowed down economic growth, the government cannot just keep on tightening the noose against existing taxpayers (such as withdrawal of the tax relief given to the salaried class in the last budget) and increasing indirect taxes (such as increase in GST by one percent, as was done by the PPP and PML-N in their first year after coming to power). The government will also have to bring the taxable non-taxpayers into the tax net, and abolish the tax exemptions.
The FBR chairman has got it right when he says that out of 100,000 companies registered with the FBR, only 50 percent file returns. He also identifies that 301,000 of the 341,000 industrial electricity connection holders are not registered with sales tax, and out of 3.1 million commercial electricity connection holders, more than 90 percent are outside the tax system. However, such statistics were no secret to any government. The major task is how to bring them into the tax net since challenging the status quo is not an easy job. Furthermore, it would have inflationary pressure, which would mean tightening of the monetary policy and an increase in the interest rate, which would result in government’s debt servicing, which would lead to fiscal deficit, which would necessitate further borrowing – which is why IMF suggestions are seen as bitter pills.
Apart from prior actions, the IMF has also suggested an ambitious structural reform agenda including, ‘Improving the management of public enterprises (read: privatization), strengthening institutions and governance (read: autonomy to regulators), continuing anti-money laundering and combating the financing of terrorism efforts (read: clearance from the FATF), creating a more favourable business environment (improving ease and cost of doing business), and facilitating trade’. IMF or no IMF, most of these reforms are in Pakistan’s own interest.
Implementing the IMF programme in letter and spirit can help us reduce the energy circular debt and overhaul loss-making public-sector enterprises. It would also strengthen our systems to counter lacunas that may be misused for money laundering and terrorism financing. The net result will not just be a $6 billion EFF, but also a letter of comfort for engagement with the Asian Development Bank, the World Bank, engagement with global funds and assurance for foreign direct and portfolio investors.
However, to me the bitterness of the IMF pill would be justified if under this programme the government were compelled to bring the taxable tax-evaders into the tax net. In the medium run, a more equal and transparent distribution of the tax burden, a comprehensive plan for cost-recovery in the energy sectors and state-owned enterprises will help save and divert scarce government resources to substantial increase in social spending. In the IMF’s words, “it would help to scale up the Benazir Income Support Program and improve targeted subsidies, with the goal of protecting the most vulnerable segments of society”.
All the above would require not only political will by the government but also a political consensus on a charter of economy among all mainstream political parties. But for a charter of economy, the government would have to take the lead, lower down the political temperature and engage the opposition. The economy is too serious a business to be left to economists. Is the government ready to handle this business effectively?
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The opinions expressed in this article are the author's own and do not necessarily reflect the viewpoint or stance of SDPI.