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Are provinces blocking access to the IMF?

Updated September 17, 2018

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ANALYSTS with a populist bent have been toying with the idea that Pakistan can steer clear of the International Monetary Fund (IMF) mainly by borrowing dollars from Beijing and Riyadh. These voices are becoming louder as the PTI-led coalition government keeps putting off the formal decision to seek an IMF bailout despite the mounting gap between external liabilities and available foreign exchange.

But economists who have the ear of the prime minister and his finance team are of another view. “The IMF option is inevitable. No one else will give you better rates under these circumstances,” said Dr Ijaz Nabi, a World Bank veteran who now serves on the prime minister’s Economic Advisory Council (EAC).

The delay by the federal government in seeking funds from the IMF is partly because of a “background discussion” that’s taking place between the federal and provincial governments, Dr Nabi said.

For the record, he stated his comments should not be taken as reflective of EAC discussions.

Belt-tightening is an essential feature of any IMF programme. The Washington-based lender typically asks governments to quickly slash fiscal deficits. Governments usually respond by cutting back on expenditures because boosting revenues in the short run is more difficult.

According to the rules governing the federation, even one province can indirectly stall the federal government’s talks with the IMF by not agreeing to expenditure cuts

But the post-18th Amendment governance structure has reduced the fiscal space for the federal government. This means Islamabad is fairly dependent on consent from the provincial governments if it wants to commit to an expenditure-cutting programme with the IMF.

“The deficit is huge. It’s not easy to figure out which expenditures to cut back on. This discussion has to take place with the provinces. This is a complex discussion that we need to have before going to the IMF,” he said.

According to the rules governing the federation, even one province can indirectly stall the federal government’s talks with the IMF by not agreeing to expenditure cuts. The PTI is in power in three provinces, but the Sindh government is led by the rival PPP.

“This is a difficult debate. But it’s underway. Some of it is taking place behind closed doors. Some of it will take place openly in the near future. That’s why it’s taking some time. I’m sure they will soon go to the sources that give them the best possible deal,” Dr Nabi said.

The Sindh government has so far vehemently refused to let go of any gains the province had in the aftermath of the seventh National Finance Commission award announced in 2010. The share of the provinces in the so-called divisible pool — income and corporate tax, sales tax on goods, and excise and import duties collected by the federal government — went up to 57.5 per cent from 47.5pc as a result of the last NFC award. Simultaneously, it reduced the share of the federal government by 10 percentage points to 42.5pc.

Although the revised formula for money distribution gave the provinces fiscal independence, the simultaneous devolution of critical subjects means the provinces have to bear the responsibility for basic services like education and health.

Dr Nabi shied away from extending outright support for a cut in the provincial share in the NFC. But he contended that the current NFC award does not incentivise the provinces to increase their revenue base “in any way”.

“If the provinces don’t mobilise their own resources in a time of hardship, then it will be a very tough discussion (about cutting expenditures). In provinces where the PTI is in power, this discussion will be relatively easy. In the other province, it’ll be very difficult,” he said.

It is true that the provinces have largely failed to grow property and agriculture income tax collection. But the Sindh government has been meeting its annual collection target for sales tax on services every year since 2011-12.

From Rs16 billion in 2010-11 when the federal government was responsible for its collection, the Sindh Revenue Board increased its mobilisation to Rs100bn in 2017-18. This shows an annualised growth rate of almost 30pc.

According to economist Dr Kaiser Bengali, the IMF recipe for bringing down the overall deficit by forcing the provinces to run a surplus is not logical. “Why should I go without dinner if you can’t make your ends meet? If it’s your deficit, you bridge it. The federal government has made no attempt to reduce its expenditure in any way, yet it is eyeing to cut the provinces’ share,” he said.

With the abolition of the concurrent list as part of the 18th Amendment, the ministries on that list were also supposed to be abolished, which would reduce federal expenditures. But that didn’t happen.

“You know there are 42 (federal) divisions, including one on national harmony. The agriculture ministry has become the food security ministry. There are 23 education-related departments that are still in Islamabad... curriculum wing and whatnot,” he said, adding that the federal government failed to keep its end of the bargain and is now demanding unfairly that the provinces cut back on their spending.

Published in Dawn, The Business and Finance Weekly, September 17th, 2018