Spearhead Analysis – 16.04.2019
By Farrukh Karamat
Senior Research Coordinator, Spearhead Research
The government having been berated for delaying the negotiations on the bail-out package with the International Monetary Fund (IMF), finally appears to be moving towards closure on something that could have been concluded as early as August 2018. In the process valuable time has been lost as the key macroeconomic indicators continued to decline and the cost of borrowing kept rising. The governments’ argument that it was not going to accede to the IMF demands appeared flawed from the very beginning and it seems that egos were at stake, as the Prime Minister had promised to break the proverbial begging bowl. Perhaps, there was also a false belief that the so called ‘friendly’ countries and the ‘patriotic’ overseas Pakistanis would flock to the economic and financial rescue, and Pakistan would emerge from the crisis with ample funds to manage the state of affairs. Unfortunately, reality is quite different from dreams for “If wishes were horses, beggars would ride”.
With high expectations of change and a departure from the past, the people were anxiously waiting for change in all facets of life with an influx of opportunities and an environment for attracting investment. Perhaps, the PTI Finance team had over-estimated their own capabilities in dealing with the economic situation; maybe they were over-confident about their competence levels; or they had simply not done their homework to be able to realize the magnitude of the problems facing the country. In the past eight months the people have witnessed many instances of glaring incompetence, inaction, and the inability to deliver. In the process there has been ongoing Rupee devaluation with no appreciable increase in exports or workers’ remittances; higher and rising inflation; higher interest rates; rising debt, including a rapidly ballooning Circular Debt; declining business confidence levels; lower business activity; a rapidly declining stock market; lower growth estimates; and limited to declining employment opportunities.
Where the focus of the government should have squarely been on an economic revival, what unfolded were a series of unfortunate events that kept compounding the problems and making the lives of the ordinary citizens more difficult. The Federal Board of Revenue (FBR) started to openly harass the existing tax payers, with extortion methods bordering on black-mailing tactics. The National Accountability Bureau (NAB) launched a relentless policy of initiating cases against all the opposition leaders. The Courts issued verdicts, which have led to serious questions being raised within the broader legal community. The people were suddenly burdened by unprecedented levels of utility bills. While the focus should have been on reforming the FBR and the taxation structure, the Prime Minister declared that perhaps the FBR is beyond reforms and therefore a new tax organization should be set up. The Government instead of harping on corruption all the time should have focused on the economy and let the NAB do its work impartially in the background without all the media hype, which has served to create an environment of fear. It would also have been much more productive to reform the utility suppliers with better control over line losses and theft, instead of burdening those who are already paying with excessive bills. In a word, there should have been a focus on structural reforms to move forward constructively.
It is time to let go of the past and to enact regulations to avoid instances of the past being repeated in the future. It is all good blaming the past governments for all that ails Pakistan, but that will not take the country forward. What is required is a vision for the future and the ability to deliver on that vision, without repeatedly delving into the past. If the systems are put in place, the past will be taken care of and Pakistan would be able to march forward towards the Naya (New) Pakistan.
The Finance Minister after returning from the United States has said that Pakistan and the IMF have finalised, documented and signed a bailout package on exchange rate, public finance, fiscal deficit and energy prices and an IMF mission will be visiting Islamabad in the third week of April to work out the technical details. It is expected that the bailout package would be in the range of US$6-8 Billion, with further inflows from the World Bank, and Asian Development Bank. The total financing could be around US$22 Billion over the next year period from the different multi-lateral agencies. He has also stated that Pakistan has dispatched a compliance report to the Financial Action Task Force (FATF) for review, with an on-ground inspection expected in May.
At the same time the Government is actively working on launching yet another Amnesty Scheme to facilitate the non-tax filers and non-tax payers. Unfortunately, some of the largest evaders within the political and bureaucratic circles would be unable to avail the scheme and therefore its impact is expected to be muted as in the past. There is also talk of a Bond being launched to raise financing, which would essentially place additional debt burden on the economy. Once again after having berated the past government for its Amnesty offering and the excessive loans, including those from the IMF, the present government is following the exact same path, having failed to come up with any innovative ideas or solutions for revenue enhancement.
The IMF has said constructive discussions were held in Washington DC for IMF-supported programme. Some of the conditions proposed by the IMF are said to include:
- Making the State Bank of Pakistan independent,
- Market-oriented exchange rate,
- Expanded tax target by Rs. 5,000 Billion,
- Ending income tax concessions,
- More taxes on salaries, and amount of taxable income from Rs.1.2 Million a year to Rs. 0.4 Million,
- Reduction in electricity and gas losses,
- No government interference in NEPRA and OGRA policies,
- Recovery of Rs.140 billion electricity and gas revenue losses from consumers.
The IMF is also insisting on full disclosure of all financial cooperation between Pakistan and China, and details of more than US$6.5 Billion of commercial loans Pakistan has received from China in the past two and a half years.
The Finance Minister is of the view that proposed IMF conditions would not put a financial burden on the people, and would help to correct the economy. He is also on record on the floor of the Parliament, when he explained devaluation using the example of Guavas and Bananas higher demand during Ramazan. One hopes he knows what he is saying, as the word of a Finance Minister carries a lot of weight in setting the fiscal tone in any economy. OGRA has already announced that there would be a 70-80 per cent rise in gas bills from the next fiscal year. In a scathing letter to the Prime Minister, Dr. Farrukh Saleem has put forward the economic travesties facing the common man in the face of rising cost of living and dwindling opportunities. Business is coming to a virtual standstill, the stock exchange has experienced sharp declines, and with the added burden from the measures being proposed by the IMF including the additional debt being contracted, the life of the common man is likely to become more difficult during the ‘stabilisation’ phase of economic recovery. Pakistan has limited options and one hopes that the finalization of the IMF package would be followed up with resolution of the FATF issue; and constructive policies to expand the revenue base to infuse confidence amongst investors to march forward to a full recovery mode. There is no need for the government to focus on corruption or create media hype about it, there are institutions and courts in place to deal with that issue – the government should be working towards evolving regulations to deter corruption in future and harnessing the massive parallel economy to mainstream it. Despite all the odds, Pakistan has proven to be a resilient nation – what is needed is a clear direction on the economic front, that that unfortunately has been lacking till now. One hopes that this IMF bailout package would help the country march forward constructively, something that has not happened in the last 13 such engagements.