KARACHI, July 5: In the latest review report, the IMF has listed risks to the Fund’s supported reform programme. And political risk is the first one to be focused by the multilateral agency.
The IMF notes: “The formation of the new parliament was completed in February 2003 with the senate elections, which paved the way for completion of the cabinet. However, the opposition’s rejection of constitutional amendments under the previous military government has so far prevented the resumption of normal parliamentary business.”
Given the small majority in the parliament and strong and vocal interest groups, the IMF stresses that “the government will have to make a strong effort for maintaining a consensus on fiscal consolidation and reform.”
If the MMA public protests against the Peshawar High Court judgment can serve as an indication, the continuing confrontation between the government and the opposition on the LFO may not remain confined to precincts of the parliament and may assume a new dimension of street politics. The politics of confrontation does not augur well for the economy.
To quote the IMF, the second risk to reforms emerges from the strong macro-economic results, which have increased the populist pressures. The Fund’s views are supported by an analysis of the fiscal budget 2003-04 carried out by a foreign bank. The bank report describes it as a political budget with “populist measures” (salary increases of government servants) claiming an estimated Rs11-15 billion. The budget also contains a doze of fiscal stimulus (tax incentives of Rs6 billion) and envisages an increase of development spending by Rs32 billion.
Pakistan has also assured the IMF that it would continue with the traditional practice of allowing members of the parliament to select a few projects for their constituencies within the development budget (altogether one per cent of the GDP), which will be executed through normal government channels.
“It will be helpful in bringing local development concerns into the formulation of the development budget and in strengthening links between parliamentarians and their constituencies, thereby strengthening democracy,” says an official document.
The third risk emerges from regional tensions which, the Fund says, “have not fully abated.”
Elaborating, an IMF report states that the situation at the Indian and Afghanistan borders continue to involve deployment of significant security forces, though tensions appear to be subsiding. The IMF report prepared in the second quarter of current fiscal reckons that regional tensions may inflate defence spending and upset fiscal projections.
To protect the budget from these risks, the government has promised to adjust other non-priority expenditures and/or take appropriate action while protecting the key social spending.
The draft fiscal responsibility law approved by the cabinet will soon be submitted to the parliament. It lays down fiscal deficit targets.
To improve transparency, the IMF has asked the government that the fiscal cost of supporting public enterprises should be explicitly budgeted. In the past, the subsidy to Wapda and KESC has been treated as one time expenditure and has not been accounted for while arriving at the fiscal deficit.
However, the IMF has given a waiver in respect of money spent on restructuring “of two insolvent banks” currently on the privatization agenda. The banks are ABL and IDBP.
According to the Fund review report, “the deficit target may be adjusted upward for one-time expenditures incurred for the restructuring of two insolvent banks and for higher grant-financed social sector spending.”