Between a rock and a hard place

February 17, 2020

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The ‘inconclusive’ discussions between Islamabad and the International Monetary Fund (IMF) mission on the second review of the Fund’s bailout package betray the tight spot the Imran Khan government has been led in to by its failure to, inter alia, broaden the tax net, fix the power sector, initiate the privatisation process, and shield the common people from rising prices and increasing burden of indirect taxation.

The statement issued by the IMF on Friday acknowledges the progress made by Islamabad in meeting the six end-December performance criteria and completing the structural benchmarks. But, in the same breath, the Fund made it abundantly clear that the two sides had not reached the staff level agreement, which is necessary for its executive board to consider and approve the review before releasing the tranche. That means the IMF requires assurances from the government that the ‘programme will be implemented steadfastly to pave the way for its board’s consideration of the review’ before the money is released.

If ‘considerable progress’ is made in advancing reforms, all performance criteria met and structural benchmarks completed, where is the disagreement? Since neither side has openly talked about the contentious issues, the reports carried by media suggest that the IMF mission wasn’t comfortable with the idea of a government plan to delay implementation of the decision to raise the energy prices to provide relief to the people reeling under runaway food and energy prices, or its request to further revise down the revenue generation target for the present financial year.

While it is important for the embattled government to delay the increase in energy prices in order to assure the people at large that it is doing something to reduce the pain of rising prices being felt by them to stop further erosion in its popularity among the middle classes, it is now clear that it will not be able to collect the targeted tax. Some estimate that the government will not be able to rake up more than Rs4.8 trillion in taxes, which is more than half a trillion rupees less than the revised target of Rs5.2tr agreed with the IMF in November. The original budgeted target was Rs5.5tr.

The government hopes to make up for the below-the-targeted tax collection with more-than-targeted nontax revenues. But can it?

The present increase of below 17pc in taxes is just a little more than the nominal economic growth as real GDP is projected to expand by 2.4pc and headline inflation estimated to escalate by around 13pc this year. The good news is the government has shelved the plan — if it had one — to bring the ‘mini budget’ and decided to take additional tax measures in the next budget.

Where could they dig out new taxes from in this slowing economy with little room left for imposing more indirect levies? How will the government achieve the budgeted revenues if the IMF refuses to further cut down the tax target? The government hopes to make up for the below-the-targeted-tax collection with more-than-targeted nontax revenues. But can it? Officials are not much hopeful as the tax hole is constantly getting bigger.

Moreover, until December, the government appeared confident of persevering with its plan under the Fund programme to periodically raise the electricity prices. No more. In January it put on hold the gas price increase in the face of sugar and wheat flour shortages that sent the rates of these two essential food items through the roof in many parts of the country.

With January inflation rising to 14.6pc, it even more difficult to raise the energy prices at the moment in spite of insistence of the IMF to go ahead with the plan to control the circular debt, which has shot up to over Rs1.8tn. With little or no success achieved so far in curbing the huge line losses and theft in the power sector, or fully recover the electricity bills, it is finding itself between a rock and a hard place.

The speech delivered by the prime minister’s advisor on finance, Dr Abdul Hafeez Sheikh, on the floor of the National Assembly shows that he is not happy with his boss’s populist decision to digress from the commitments given to the international lenders and fears a backlash from them. He was reported to have warned his government that it would also fail like its predecessors if correct economic decisions are not taken.

“If we do not take right decisions, it is likely that we would also fail. The last government did not maintain fiscal discipline for the sake of protecting its popularity and winning elections (and left a massive mess for its successor to clean up). The previous government left a circular debt of more than Rs1.2tn. For a sustainable development, taking right decisions remain the biggest challenge,” he said, defending his austere economic policies.

Indeed, the Imran Khan administration is in a tough spot. On the one hand, it is trying to delay unpopular decisions and on the other it is facing difficulties in convincing the IMF to drop such demands that would impact adversely on the impoverishing middle class households. It remains to be seen if it can wriggle itself out of this difficult situation politically unharmed without further burdening the man on the street and jeopardising the Fund programme.

Published in Dawn, The Business and Finance Weekly, February 17th, 2020