Impasse with IMF?

Published July 2, 2021
The writer is a former member of the prime minister’s economic advisory council, and heads a macroeconomic consultancy based in Islamabad.
The writer is a former member of the prime minister’s economic advisory council, and heads a macroeconomic consultancy based in Islamabad.

THE ongoing programme with the IMF is experiencing a temporary pause as the Fund considers the parameters and implications of the government’s growth push. A number of factors have contributed to the pause. Pakistan announced suspension of some of the actions agreed when the programme parameters were reworked in March this year, including steep hikes in electricity tariffs in two steps. In addition, the federal budget deviated from the path of fiscal consolidation set under the Fund programme as it sought to break free from austerity strictures, and transition to higher growth.

As a result, even with its somewhat leap-of-faith assumptions on the revenue side, the budget aims for a fiscal deficit of 6.3 per cent of GDP against the reworked target of 5.5pc under the IMF programme. More relevant, the budgeted primary balance is a deficit of 0.7pc of GDP, versus the 0.3pc surplus envisaged under the IMF programme’s latest targets. Hence, all other things unchanged, the budgeted overall fiscal deficit is 0.8pc of GDP over and above the agreed target with the IMF, while the primary balance is 1pc of GDP adrift.

The difference between the budgetary stance and the IMF programme targets becomes wider if the underlying assumptions are made more realistic. On the revenue side, budgeted FBR tax collection of Rs5,800 billion rests on new measures yielding Rs260bn and ‘enforcement’ measures contributing a further Rs240bn, on top of the approximately Rs5,300bn expected to be yielded by a combination of economic growth as well as inflation.

Revenue yield from enforcement measures has always proven to be elusive. Even in the case of the target under this head in the current budget, it has been reported that FBR has expressed reservations about achieving the coverage of point of sale machines, and the resultant revenue collection, that has been assumed. A significant slippage can be expected under this head.

The programme is experiencing a pause rather than a derailment.

With regard to the new measures, some of these have been rolled back under pressure from the affected industry or from parliament members. Hence, some degree of shortfall appears likely under this head too, unless offsetting measures are introduced.

Another potential problem relates to the targeted collection under the petroleum levy. At over Rs600bn, the petroleum levy is an important part of overall federal government revenue, more so since it does not form part of the divisible pool and thus is retained in full by the centre as a much-needed source of own revenue. To attain this target, either the volume of petroleum sales in the country has to increase substantially from current levels, or the tax the government collects for every litre of petroleum product sold has to be jacked up. The latter will significantly increase the pump price of petrol and diesel (assuming international oil prices remain elevated), and lead instantly to a spike in inflationary pressure, which the government will seek to avoid.

Finally, the federal budget banks on provinces generating a combined surplus of Rs570bn to keep the overall fiscal deficit at 6.3pc. However, the announced budgets of the provinces indicate a substantial shortfall from the federal government’s expectation. Putting all the potential revenue-cum-resource shortfalls together, it becomes clear that the federal budget faces some very real risks, and a significant variance from the path of fiscal consolidation agreed with the IMF.

Nonetheless, on the positive side, there are a couple of inbuilt ‘automatic stabilisers’ that will offset some of the pressures on the budget highlighted above. The first of these is that economic growth in 2021-22 could be higher than programmed. Higher growth, if more than the budget estimate, will translate into higher-than-budgeted tax revenue. It would also dampen, at the margin, the fiscal and primary deficits in relation to GDP.

In addition, with so many sops and budgetary allocations under a variety of expenditure heads, actual spending can remain underutilised for many of the lower-priority items. This is likely to be the case with development spending as well at the end of the fiscal year, though election dynamics are likely to generate pressure to spend every rupee allocated, if not to overspend.

Read: Sequencing IMF reforms

All told, the bottom line is still likely to be a wider fiscal deficit than agreed with the Fund — in addition to non-performance on power sector conditionality. There are three options vis-à-vis the Fund programme: 1) The IMF staff does not relent (or makes minor concessions) and Pakistan is forced to meet the conditionality agreed in March to resume the programme; 2) The Fund staff is persuaded by higher powers to show forbearance, accept Pakistan’s growth strategy as well as its path of power and tax reforms and resume the programme with reworked parameters; and, 3) Pakistan decides not to follow through on its March commitments and risk a prolongation of the pause in the programme.

The third option cannot be sustained for long given Pakistan’s external financing requirements in the medium term. The second option may or may not happen depending on the US’s political stance vis-à-vis Pakistan. That leaves a negotiated settlement between Pakistan and the IMF on the way forward as the one our negotiators will have to prepare for as the most likely or feasible option for now.

What should strengthen Pakistan’s hand in the next round of negotiations with the Fund is its over-performance with regard to growth in 2020-21 despite the very challenging context, its handling of the Covid-19 pandemic, its above-expectations performance on tax collection, the significant reduction in the accumulation of power sector circular debt — and the country’s stellar performance on its FATF obligations in a short space of time. Public debt is also on a declining path, a key objective of fiscal consolidation. Hence, Pakistan can argue it has ticked many boxes.

Despite these successes, however, progress on many fronts remains elusive, and Pakistan will have to bring to the table a reform roadmap that demonstrates a clearer path and stronger commitment.

The writer is a former member of the prime minister’s economic advisory council, and heads a macroeconomic consultancy based in Islamabad.

Published in Dawn, July 2nd, 2021

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