Dire IMF forecasts

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SOURCEBusiness Recorder
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In its latest report the International Monetary Fund (IMF) has projected debt and Gross Domestic Product (GDP) growth figures based on existing policies of the Khan administration that should have rung warning bells on the outcome of the appropriateness of the surgery on the economy claimed by Finance Minister Asad Umar as well as on the narrowing gap between the government and the Fund with respect to specific conditions of the yet to be negotiated bailout package.

The report’s contention that Pakistan’s budget deficit is 2.5 percentage points higher than budgeted indicates the extent of the lack of credibility of our budget data. In this context, it is relevant to note that while the PML-N government’s April 2018 budget projected a deficit of 4.9 percent, a forecast widely believed to be overoptimistic given that 2018 was an election year, yet, disturbingly, the PTI government in spite of presenting two supplementary finance bills 2019 did not bother to readjust or restate the budget deficit based on altered expenditure and revenue measures. Additionally, the first amendment bill envisaged revenue generation from sources that were suspect, particularly the over 70 billion rupees from technological improvements, a view based on failure of previous attempts in this regard. The second amendment bill envisaged higher expenditure, to jump-start the stalled industrial sector, which again has so far not borne any fruit. That there may be a lag between policy implementation and results is perhaps relevant; however it is unlikely that this period would be less than six months, or well after the end of the current fiscal year.

The Fund has forecast a budget deficit of 7.2 percent at least for the current year (though based on its assessment of 2.5 percent higher than budgeted the deficit should be 7.4 percent). The budget deficit for 2018-19, as opposed to the current account deficit, is attributable to the present administration’s economic policies principally because the Khan administration took oath on 20 August last year and, barring the passage of two months (July, August), could have taken the trouble to formulate and present a detailed budget. This estimate is close to State Bank of Pakistan’s (SBP’s) upper projection for the first six months of the current year of 6 to 7 percent. One would assume that the additional expenditure envisaged in the second supplementary bill raised the deficit estimate beyond 7 percent.

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Also Read: Economic reforms: looking beyond the IMF

Pakistan’s gross debt is projected to rise from 72.1 percent of GDP in 2018 to 77 percent this year and to 79.1 percent next year while net debt is projected to rise from 67.2 percent last year to 72.2 percent of GDP this year and 75.3 percent next year. Some critics maintain that this projection does not include details of loans from China under the China Pakistan Economic Corridor as statements by senior members of the incumbent government indicate that so far 50 percent of the data has been shared with the Fund.

Critics of the IMF may argue that these dire forecasts not only reflect the Fund’s serious concerns about the Khan administration’s policy measures till date (revenue as well as expenditure) but, perhaps, also indicate the Fund’s more rigid positioning during the forthcoming negotiating talks for the bailout package than is being envisaged by the Pakistani authorities.

Be that as it may, the government would do well to acknowledge that the IMF is a lender of the last resort and that necessarily entails implementing policies designed specifically to narrow the fiscal deficit. The government is likely to have some flexibility on how to achieve this and one would hope that the Khan administration mirrors some flexibility in terms of agreeing to raise revenue which given the dire forecast would, by necessity, entail raising existing withholding taxes in the inequitable indirect tax mode and negotiating with domestic institutions to voluntarily reduce current expenditure so that development expenditure, a major component of investment in this country, can continue and thereby not impede the growth rate.

The Khan administration remains focused on the challenge of corruption and one must support its focus, acknowledged in the Fund report: “countries that managed to reduce corruption significantly were rewarded with surges in tax revenues as share of GDP (for example Georgia by 13 percentage points, Rwanda by 6 percentage points)” adding that “less corrupt countries dedicate a higher share of resources to social spending”.

However, the Fund conclusion was that “fighting corruption requires mustering political will,” which is abundantly in evidence in Pakistan today; however, the report adds that “to ensure lasting improvements…it also requires developing good institutions to promote integrity and accountability throughout the public sector.” Those institutional reforms sadly continue to be awaited and the government may do well to take some tips from the Fund report that include: (i) A high degree of transparency and accountability and what is reportedly missing from the reform measures under formulation, independent external scrutiny to allow audit agencies and public at large to provide effective oversight; (ii) improve mutually supportive institutions to tackle corruption, for example, tax, administration may have a greater pay off if tax laws are simplified and discretion of officials reduced; and (iii) merit-based hiring and remuneration of civil servants. In this context, we urge the government to establish a mechanism of hiring/promotion that is divorced from the executive.

(This news/article originally appeared in Business Recorder on April 12th, 2019)

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