AT the conclusion of the ongoing talks with the IMF’s staff mission in Dubai on Thursday, Pakistan will be seeking at least two waivers over its non-compliance with benchmark criteria.

This will take to 12 the total number of waivers under the $6.2bn Extended Fund Facility approved in September 2013, under which Islamabad has so far received over $4.05bn.

Under all previous fund programmes, particularly those during the PPP’s tenure, the IMF’s directors had showed impatience over non-compliance with performance targets and used to take strong positions after granting 2-3 waivers.

A major problem during the last quarter has been the government’s inability to deliver on the privatisation front. The first two days of talks in Dubai are believed to have been consumed by issues on the privatisation agenda

In view of the Dubai talks, the government has been engaged with traders over the issue of the withholding tax on bank transactions to clear the way for the eights instalment of around $500m. In this case, a standard provision would suffice to satisfy the IMF mission saying ‘the government stands ready to take additional measures in case of hiccups on revenue side going forward’.

But while the IMF has been quite accommodative over some benchmark targets thanks to geopolitical reasons, the challenges going forward would be much stronger than those during the initial stabilisation phase because they have more to do with a cultural change in governance, as opposed to fiscal and monetary tightening in the first phase.

However, the good thing is that positive signals originating from the fund and penetrating through the rating agencies and investor advisories could have a positive impact on investor sentiment, provided that the government and the armed forces are able to transform it into a stable investment climate by sustaining the ongoing fight against terrorism and political instability.

A major problem during the last quarter has been the government’s inability to deliver on the privatisation front despite repeatedly pushing forward deadlines for the sale of state-owned entities, particularly those in the energy sector. The first two days of talks in Dubai have already believed to have been consumed by issues on the privatisation agenda.

Of immediate concern is the botched sale of the Heavy Electrical Complex (HEC), which exposed the government’s pre-privatisation scrutiny process. The successful bidder, whose prequalification credentials were being questioned in the media since the very beginning, appeared to have been dodging the Privatisation Commission all along until its bogus cheque to pay for the sale proceeds was dishonoured by the bank and it declined to go ahead with the transaction.

Now, the government will have to secure a waiver not only in the case of the failed sale of the HEC, but also for the delay in the privatisation of the National Power Control Centre. The case of other power companies is no different, but at least their cut-off dates are still to come.

It is in this background that the government is now advocating for six-monthly IMF reviews instead of quarterly assessments, with the argument being that the structural reforms require longer periods of time to progress.

Meanwhile, another waiver would be required for the fiscal deficit, which is being estimated at around 5.5pc. And while the government is yet to come up with the fiscal operations data for end-June, it obviously has to be shared with the IMF staff. The FBR’s revenue collection stood short of the Rs2.81tr budgeted target by more than Rs225bn; in fact, it failed to go beyond Rs2.585tr even after committing with the IMF before the 2015-16 budget to deliver Rs2.691tr.

Even in achieving a 5.5pc fiscal deficit against the targeted 4.8pc, innovative solutions were implemented. For example, the privatisation proceeds from the offloading of Habib Bank Limited sales — worth around 0.4pc of GDP — were shown in the profit of the State Bank of Pakistan, as the central bank was the owner of the sold stakes of the privatised commercial bank.

Expected to act as an independent and non-partisan regulator, the central bank could not be expected to be the owner of an entity. Even from accounting traditions, the privatisation proceeds have always been treated as ‘below the line items’.

Secondly, the gas infrastructure cess was shifted from tax revenue to other taxes of the FBR.

While the government has been quite generous over repeatedly increasing power tariffs through various means, the structural issues in the power sector have remained where they were two years ago, if not gone worse. There has been virtually no difference in terms of recovery of outstanding receivables, improvement in the current bill collection, or reduction in theft, administrative and technical losses.

The only exception was that a few executive engineers were suspended without completing codal formalities, while their chief executives stood restored after court interventions because of weak actions.

Published in Dawn, Economic & Business, August 3rd, 2015

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