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Graduation with grace marks

Graduation with grace marks

AFTER 10 attempts since 1988, Pakistan finally passed, for the first time, the psychological barrier of completing an IMF programme, albeit with some grace marks. To be precise, Pakistan was granted 15 waivers on benchmarks since it entered into $6.4bn Extended Fund Facility in September 2013.

The only past opportunity Islamabad came this close to was given up by former finance minister-turned-prime minister Shaukat Aziz to boast ‘breaking the begging bowl’. All nine other programmes ended in failures, mostly in the early stages.

The successful completion of the eleventh programme has been declared by the government as ‘highly satisfactory’ on the basis of comparative economic and financial stability. However, this has not impressed independent economists. In fact, most of whom were disappointed over the programme outcomes.

Dr Kaiser Bengali, a noted economist, said the government had piled up international reserves through the IMF programme and the issuance of bonds and receipts from other lenders, but it could not be described as a success because it did not put Pakistan in a sustainable position.

He explained that exports were now stagnating or declining in absolute terms and the trade deficit was increasing while remittances were also now slowing down. The reserves would remain stable as long as oil prices remained low because cash flows were not commensurate with projected outflows. Pakistan appeared to be going back to the IMF once oil prices bounced back.

He said the stock exchange was bullish but it was mostly based on insider trading by a few brokers and did not reflect the state of our real economy in anyway. The IMF programme did not lead to promised economic reforms as could be seen from little progress on privatisation. He said the government had been consistently defaulting on commitments and then given waivers by the IMF. “The IMF has never been so kind, which worries me”.

Former principal economic adviser to the federal government Sakib Sherani said the short term impact of the completed IMF programme will be positive. Market sentiment would be boosted because it suggests programme completion has at least some basis.

But markets have usually a short term view without looking towards the long term: whether we’ll need another programme or not. So the initial euphoria will be positive, buying the government narrative of successful completion.

But some analysts would question whether it is a successful completion. They think the country would need another programme somewhere in 2019, 20 or 21 depending on oil prices.

He said the government under Finance Minister Dar has stifled the formal economy because of the IMF programme, by taxing everything possible to increase revenues. Had there been no IMF programme, the government would have given more thought to a growth oriented tax design. But because of the programme, revenue is being collected sub-optimally — except for the recent taxation on property transactions, almost all other revenue measures have been anti-growth and anti-investment.

Therefore, this programme had also harmed us, he said, adding the government had not been able to introduce any real reform, “something that China, Bangladesh, Turkey and now India have been able to do. We have been working on GST reform since early 1990s but have not been able to make any real progress. Even with property taxation, Mr Dar is still thinking of revenue as the main goal instead of structural reform.”

Dr Ashfaque Hassan Khan, Dean of Business School at National University of Science and Technology (Nust), said the completion of the IMF programme meant two things: first, the programme is being completed second, nobody is talking about an immediate international default.

Second, the programme has been a self-serving instrument for the IMF because it was designed in a manner to ensure repayment of its loans. Otherwise, it has damaged the country’s growth potential and under its umbrella the government has damaged the national social fabric.

All targets were achieved by changing definitions and granting waivers, said Dr Khan, but this had not delivered on objectives it was contracted for. For example, the basic theme of the programme was to fix the energy crisis which has not been the case in three years.

The installed capacity has declined according to the latest Economic Survey and the circular debt was still at Rs663bn and growing. “Somebody will have to make payment at some time. So there is no improvement here.”

The basic objective of tax reforms was to expand tax base and reduce tax rates. We have failed miserably here as we have the highest sales tax rates at present. We have not expanded the tax base but were able to withdraw some tax exemptions. The government has changed the definition of surcharges and included them in ‘other taxes’ to show the performance of the FBR and higher tax-to-GDP ratio. “You go back to the pre-2012 treatment of surcharges and the FBR performance and tax-to-GDP ratio will tumble”.

He said exports declined because of falling competitiveness under the IMF programme. The definition of debt was changed and its classifications redesigned as the public debt started to get out of hand. The government moved two million workforce outside the system to show a lower unemployment rate at 5.9pc which actually stands at 8.5pc according to the previous definition.

The government has also changed the definition and different heads to show budget deficit on the lower side. He said Pakistan would remain under the IMF’s post programme monitoring because of a higher than deserved support programme. Any adverse comment going forward would negatively weigh on inflows from other lenders.

Muzammil Aslam, managing director Emerging Markets Research, said the IMF through its quarterly reviews helped to secure bailouts from other multilateral and bilateral lenders who went by the IMF’s analysis of Pakistan’s economy. The same was the case with the CPEC agreement with China.

However, he said the country’s debt stock was growing and Pakistan also had to repay the IMF’s $6.4bn in a few years, while there was no backup programme in sight to ensure repayment.

Syed Suleman Akhtar at NBP Fullerton Asset Management said that fiscal deficit and inflation had come down under the IMF programme although oil prices were the key driver. However, the promised structural reforms were not carried forward by the government and if some improvement was seen, it could be termed as piecemeal progress at best.

He lamented that some revenues improved as in the share of the recent real estate sector, but the agriculture and services sectors were mostly outside the effective tax net even though these were central promises of the IMF programme.

Published in Dawn, Business & Finance weekly, August 8th, 2016

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