Managing the Economy After IMF Package

Chronic issues facing Pakistan’s economy include: low tax-to-GDP ratio, loss-making public sector enterprises, low export base, energy circular debt, and non-targeted subsidies further reinforcing the elite capture. As a result of these issues our economy faces two types of deficits, i.e., rupee deficit (gap between income and expenditures or fiscal deficit) and dollars deficit (gap between dollar outflow and inflow or current account expenditures). 
These issues are chronic and one can argue that the state of economy that the present government inherited from the previous government was not much different from what it inherited from its predecessor or what it inherited from the government preceding it. Unlike the previous two governments, current government resisted going to IMF for the first seven months in office and tried to manage the twin deficit (fiscal and current account) not only through mobilizing support from friendly countries, but also through voluntary measures of curbing imports by levying regulatory duties, depreciating value of rupee, and cutting non-developmental expenditures etc. 
While present government did some symptomatic treatment, the quantum of twin deficit (fiscal and current account deficits) and the negative impact of voluntary contractionary policies got further aggravated due to the uncertainty created by lack of a clear signal from the government whether, and if yes, when would it go to the IMF. This in turn further slowed down the economy. 
Real estate sector is no more lucrative for investors since previous government’s decision of May 2018 to put certain conditions for non-filers of tax returns to invest in this sector. Resultantly, most of the non-filing (read non-taxpaying) investors started buying U.S. dollars. This led to dollarization of economy and put pressure on supply of dollars in open market. The current account deficit numbers reflect that State Bank of Pakistan encashed USD 24 billion from 2013 to 2017. The data also reveals that another “hard borrowed” USD 20 billion were encashed by the State Bank from 2017 to March 2019 to keep the value of rupee (supply of dollars in open market) stable. It means State Bank was injecting USD 6-7 billion per annum for the last six years to keep the rupee overvalued. Apart from dollarization of economy, this led to subsidization of imports. Imported goods seemed cheaper as rupee was stronger against dollar. Likewise, energy circular debt and loss-making enterprises each were costing more than Pakistan’s one year’s defence budget. 
In these circumstances, symptomatic treatment of economy was not sufficient and government had to approach “lender of the last resort”, i.e., IMF. In May 2019 a USD 6 billion staff level agreement was reached between Pakistan and the IMF mission. The approval of staff level agreement from IMF Board is subject to the timely implementation of prior actions (policies and actions that Pakistan has to take in advance) and confirmation of international partners’ financial commitments (Saudi oil supply on deferred payment was one of such commitments).
IMF asks the borrowing member to commit certain measures that would help stabilize its economy. Under the current deal, Pakistan is committed to manage public enterprises (read: privatization) and energy sector losses (read: no more untargeted subsidies for energy consumers); reduce inflation (monetary policy); mobilize tax revenue; follow market determined currency exchange rate (no more intervention of State Bank to keep the rupee overvalued); strengthen institutions and governance, and continue anti-money laundering and combat the financing of terrorism efforts (clearance from FATF) among others.  
On conclusion of staff level negotiations the IMF statement noted that the program aims to support the authorities’ (Government of Pakistan’s) strategy for stronger and more balanced growth by reducing domestic and external imbalances, improving the business environment, strengthening institutions, increasing transparency, and protecting social spending.  
In other words, the program would support Pakistan to reduce deepening current account deficit; to reduce domestic imbalances; to reduce energy circular debt; to give autonomy and independence to the regulatory bodies including State Bank of Pakistan, OGRA, and NEPRA; and to let the market demand and supply determine the exchange rate of rupee against dollar. To insulate against any side effects of the above-mentioned measures, the ‘program’ talks of strengthening social spending (Benazir Income Support Program, and new initiatives Ehsaas, Kifalat etc.)
The prior actions committed with the IMF are not in public domain yet and this lack of information led to the knee jerk reactions of markets after the IMF staff level deal was concluded. It has also prolonged the economic uncertainty which was supposed to come to an end with the government going to the IMF.
The politically difficult prior actions include: tax revenue mobilization, making 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 forthcoming National Financial Commission (NFC).
Appreciation of value of dollar after the deal might not have been a prior action. However, absence of any communication from government on this issue gave ample cushion to speculative buying of dollar, leading to further depreciation of rupee. 
Speculative buying turned into panic buying when dollar kept on appreciating despite Prime Minister’s clear instruction to leaders of Forex Association to keep the exchange rate around 144 rupees per dollar (In my opinion, this meeting should have been avoided at first instance). 
Fluctuation in value of rupee versus dollar is getting people used to living in a currency exchange regime where State Bank of Pakistan would not interfere much. The rise and fall of value of rupee over the last two weeks before Eid break should have discouraged the late investors from investing and hoarding dollars as the rate of return is no more predictable.
Cascading effects of depreciation of rupee negatively affected the stock market, which was also adjusting to a tightening monetary policy, and, on brokers’ demand, the government had to announce a “market support fund”. 
Curbing energy circular debt, not only the amount of debt but also aligning the whole energy supply chain and bringing all concerned entities (refineries, oil and gas distribution companies, NTDCs, Power Generation Companies/GENCOs, Power Distribution Companies/DISCOs, K-Electric etc.,) on the same wavelength is crucial for Pakistan’s energy and fiscal sustainability.  
A quick glance at numbers reveals that in 2013 the accumulated losses of 10 DISCOs were Rs. 20 billion. In 2018 these losses shored up to Rs.296 billion. In 2013, the three DISCOs; FESCO (Faisalabad), LESCO (Lahore), and IESCO (Islamabad) reported Rs. 24 billion, Rs. 14 billion and Rs. 10 billion profit respectively, whereas in 2018 they reported losses of Rs. 40 billion, Rs. 42 billion, and Rs. 27 billion respectively.  
Although the credit goes to previous government for improving the power supply situation during the last 5 years (2013 to 2018), however, this supply improved at a hefty cost in the form of accumulated losses of DISCOs, tariff subsidies, and the capacity charges (minimum payment to be made to generation companies). The combined effect of tariff subsidies and losses of DISCOs in FY2018 was Rs. 492 billion and the numbers are piling up mainly due to the capacity charges. For fiscal order, IMF wants these losses to be passed on to consumers and rationalize the tariffs in a manner that in future such losses don’t accrue. This would mean increase in electricity tariff for all except the consumers consuming less than 300 units per month. 
The increase in fuel and electricity prices before Eid break 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 to reduce primary deficit (fiscal deficit minus 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 the borrowers and, in our case, the largest borrower from domestic source is the Government itself so common masses 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 Extended Fund Facility (EFF). 
In order to increase tax revenue under contractionary economic policies and slowed down economic growth, the government, in addition to tightening the noose against existing taxpayers (such as withdrawal of tax relief given to salaried class in the last budget) and increasing the indirect taxes (such as increase in GST by 1% as was done by previous two governments in their first year after coming to power), would also have to bring the taxable non-tax payers into tax net, and would have to abolish the tax exemptions. 
The Chairman Federal Board of Revenue (FBR) 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. Even during PPP government, a list of few million tax evaders was prepared (and shelved). The major task is to bell the cat and bring tax evaders in the tax net. 
Increased taxation would have inflationary pressure, which would mean tightening of monetary policy and increase in interest rate, which would result in increase in government’s debt servicing, leading to further accumulation of fiscal deficit, which in turn would necessitate further borrowing and this vicious cycle would go on if the chronic issues facing Pakistan’s economy (mentioned in opening paragraph) are not addressed consistently and holistically.
On the expenditure side, the government has to take care of four “Ds” i.e., debt, defence, day-to-day administration, and development. After paying the share of provinces from federal divisible pool, the federal government can barely manage the two non-discretionary expenses i.e., debt payment (mark-up and principle amount) and defence budget. For meeting all other expenses (running of civil government, pensions, salaries, subsidies, public sector development etc.) it must borrow. The fiscal year starts with few trillion rupees deficit and this fiscal imbalance needs to be managed either through increase in revenue or decrease in expenditures.
To shore up development funds for former tribal regions and Balochistan, Armed Forces of Pakistan have voluntarily agreed not to take an increase in defence budget. This act needs to be matched by both the people and the civil leadership of the country, too. People would have to learn to live in “targeted subsidy regime” letting go of non-targeted subsidies which strengthen elite capture. The federal as well as all the six governments in confederating units should reduce the size of cabinets and merge the ministries and departments to reduce the day-to-day expenditures.
With these austerity measures in place, key priorities on the expenditure side, both for the federal and provincial governments, should include boosting quality of education, reforming job markets to cater for the needs of fourth industrial revolution and diversifying economies, addressing key infrastructure gaps, and improving the cost and ease of doing business environment.  
Coming back to current IMF program and its prior conditions, IMF has been suggesting such measures to all our previous governments who availed past IMF programs. All of them have been making commitments with the fund authorities which they could never fulfil. The detail of what our successive governments committed with IMF in the last 21 programs is available on IMF portal.  
Had we implemented half of what we committed in past programs, most of structural issues facing our economy would have been addressed by now. Repeated failures of owning and implementing economic reforms has led us to a situation where pain of not being in 22nd IMF program could have been much higher than what we would bear now.
Within or without IMF, someone had to address the problems of energy circular debt, loss-making public sector organizations, and low tax base. We are already strengthening our financial and institutional systems to improve upon deficiencies that may be misused for money laundering and terrorism financing. Taking these measures under an IMF program would not only bring us USD 6 billion EFF, but also 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.
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 to save and divert scarce government resources to substantial increase in social spending. In the words of IMF, “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 the political will by the government but also political consensus among all mainstream political parties. To achieve political consensus (read: charter of economy), the government would not only have to keep political temperature low but also need to engage the opposition, especially the Sindh government, in the context of prior action on NFC. At operational level, implementing an IMF program does not only require administrative and policy measures. It requires perception and expectation management, too. Current opposition parties should also keep in mind that while criticising the government on its economic policies, it should not over-stigmatize fiscal discipline under the forthcoming IMF program. 

The writer heads independent policy think-tank Sustainable Development Policy Institute (SDPI). 
He tweets at @abidsuleri. 
E-mail: [email protected] 

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