The IMF has completed the third review of Pakistan’s PRGF supported programme and also at the same time concluded Article IV consultation with this country for 2002.

Reports regarding these two events put out by the Fund secretariat in Washington would certainly be welcomed by the outgoing/incoming government of President General Pervez Musharraf as both the documents are full of praises for the economic management of the three-year long military regime.

While approving the disbursement of next instalment of $114 million from the three-year the PRGF’s $1.03 billion facility, the fund has commended the authorities for further consolidating gains in macroeconomic stability and progressing with structural reforms in a difficult economic and political economic and political environment. According to the fund, economic activity is picking up, inflation remains low, and strong private capital inflows and remittances have contributed to a strong building up of official reserves. The fiscal deficit for end-June 2002 was lower than programmed, even though tax revenue collected by the Central Board of Revenue (CBR) regrettably fell again short of target. Encouragingly, the pace of social sector spending is reported to have accelerated and is in line with the programme target for the year.

In approving the disbursement, the executive board of the fund, however, granted waivers that addressed Pakistan’s non-observance of its quarterly CBR revenue target for the period ended June 30,2002; the absence of bringing the Karachi Electricity Supply Corporation to the point of sale by end-July 2002; and for granting new tax exemptions in the review period.

And while concluding the Article IV, consultation with Pakistan the executive directors of the fund noted that despite various adverse shocks, which took a toll on economic activity, Pakistan has succeeded in consolidating macroeconomic stability over the past two years. Growth appears to be picking up , inflation remains subdued, and the external accounts have strengthened considerably owing to high worker remittances, sizable capital flows and , more recently, improved export performance.

The strong external position has allowed the central bank to build official reserves to unprecedented levels, reducing its vulnerability to external shocks. Structural reforms have focused on tax policy and administration, energy pricing, privatization, fiscal accountability, transparency, and governance.Fund Directors said they were encouraged that the fiscal deficit has declined and social sector spending is increasing as local government have become operational. The CBR revenue shortfall through June 2002 is, however, regrettable and calls for a decisive efforts to reinforce revenue collection.

As could be seen, both the documents while complimenting the military government for its performance on the external sector have expressed regrets over its failure to meet the revenue collection target once again in 2001-02. In fact one of three waivers that the fund had allowed while approving disbursement of PRGF instalment had referred to this very failure. And further down the fund has urged the authorities to strongly enforce tax collection and determinedly reduce the drain from loss making public enterprises on the budget.

The second wavier had referred to the government’s failure to bring the KESC to the point of sale by the end-July 2002. And further down it makes it clear that forceful implementation of the restructuring strategy for the two power utilities, the Water and Power development Authority (Wapda) and the KESC, is essential for putting an end to their persistent drain on budgetary resources and providing Pakistan’s economy with reliable power at competitive prices.

The focus of the reforms needs to be on reducing leakages, fraud, and administrative costs, and better enforcing bill collection as set out in each utility ‘s financial improvement plan. And privatization of KESC and of certain components of WAPDA will be critical to achieve the targeted efficiency gains, the Fund insisted.

In the report on Article IV consultation, the fund directors have observed that the high public debt burden continued to constrain needed investments in human development and infrastructure, and that private investment and economic growth remain insufficient to reduce rapidly Pakistan’s high rate of poverty. The key policy challenges for the medium term are therefore to improve public debt dynamics further through fiscal adjustment, and to address Pakistan’s “social gap” through enhanced provision of basic social services.

The directors stressed that progress on these fronts will critically depend on strong tax collection efforts and improved financial performance of public enterprises, especially the utility companies. They urged the authorities to step up the allocation of resources to basic education and health as well as to ensure the efficient use of these resources, which will be key to improving productivity and growth prospects.

The directors supported further reduction of the budget deficit planned for the next year. Noting that the budgetary position remains vulnerable and subject to regional tensions, they urged the authorities to ensure the attainment of the revenue objectives and to keep tight control over expenditure, while protecting social and poverty related spending. In this regard, They highlighted, in particular, the need for carefully following through on CBR reforms, and several Directors suggested to explore the feasibility of more ambitious revenue plans going forward. A number of Directors also urged the authorities to continue exploring the possibility for saving on defence expenditure.

Clearly, the fund wants Pakistan to continue to keep a tight leash on public spending because the CBR is still as inefficient as it was in October 1999 and the utilities like the KESC and Wapda are still as fraught with corruption and fraud as they were then. And it has also allowed Pakistan to deduct the money spent on defence in 2001-01 from the budgetary deficit calculations which has enabled both the government and the Fund directors to sleep well believing that the budgetary deficit at the end of June 2002 was not 6.6 per cent the highest ever in the last several years but only 4.2 per cent. It is not known how could defence expenditure( no matter for what reason) goes out of hand, it could be taken out from the public accounts and allowed to disappear from the books.

What has happened in the last three years is, the government and the Fund have failed to get the CBR to collect enough revenues to finance even the declining public expenditures. On the other hand the continuing corruption in utilities and pressure from security concerns have made it impossible for the government to keep to the budgetary deficit targets despite frequent increases in the utility charges.

And this has adversely affected the private investment both domestic and foreign causing in its wake shrinking of the economy. This has curtailed the economy’s ability to produce enough jobs or adequate revenues causing further expansion in poverty.