Coming full circle with IMF

March 24, 2018

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WHEN the incoming government of the PML-N signed on to an IMF programme in late December 2013, it made a series of commitments to put the economy on a sustainable track. One of those commitments was to reduce the fiscal deficit to 3.5pc of GDP by the time the programme ended, and to make the tax system “more efficient and equitable”. In the three years that this programme ran, until 2016, this commitment was delivered in fits and starts, with the fiscal deficit declining as a proportion of GDP in successive years — even if the pace of decline did not always match what was projected. But serious problems have arisen since the programme ended, as markedly demonstrated by the latest IMF projection that the deficit at the end of the current fiscal year is set to come in at 5.5pc of GDP. At the start of the programme, this figure was computed at 8.6pc, but only because the massive retirement of the circular debt that the government undertook in its earliest days was factored into the deficit figures for the outgoing PPP government. Without that, the deficit at the start of the PML-N government’s tenure would have been closer to 6pc.

So instead of bringing the deficit down after three years of an IMF programme, the government now appears to be coming full circle, at 5.5pc GDP, even though the FY2018 budget projected it at 4.1pc. For the last fiscal year, the Fund says that the deficit was actually 6.3pc of GDP, whereas the government has put it at 5.8pc. The Fund’s logic is that the government included money from one-off asset sales, but if that money is excluded, the deficit rises. This year the Fund is assuming that development spending will be contained by as much as Rs200bn, in the interest of staying within the deficit ceiling. But given election year pressures, and the words coming from the government’s own finance chief, this assumption seems to be challenged, meaning the deficit could touch 6pc. This means the economy would have come back to where matters were at the start of the programme, and the circle would be completed in a record one year after the end of the programme.

This is an old story, but one that needs to continue being told. The same pattern repeats itself where other indicators are concerned, such as the current account deficit, and especially structural reforms. Promises are made, partially abided by, and when the programme ends, the old dysfunctions re-emerge. One more time, no sooner has the programme ended, we are witnessing all the indications that things are beginning to unravel. In the meantime, trillions of rupees have been spent on massive development projects, and the government appears to be counting on these to boost future growth and rectify the imbalances. This sounds more like wishful thinking than sound economic management.

Published in Dawn, March 24th, 2018