Saturday, October 17, 2015

Bigger Begging Bowl

Majyd Aziz

Come election time, the election speeches of politicians usually hype up and sincerely promise three pledges: elimination of corruption, provision of infrastructure, and breaking the proverbial begging bowl (Khaskol in local parlance). The rent-a-crowd and the hangers-on go into frenzy, and then the full-throated campaign slogans are raised. The large gathering seems convinced that deliverance time has finally arrived.

Good governance pledges and promises are merely for reassurances because every incoming government sets in motions strategies to mint for itself huge financial benefits at every available opportunity. Grandiose infrastructure projects are announced without ascertaining the actual costs or feasibilities. However, when the government in power fails to withstand the imperatives of fiscal mis-management and burgeoning deficits, its immediate reliance is on external financing channels, notwithstanding the solemn pledge to desist from taking this step.

The penchant for propagating the feel-good factor becomes a hollow boast when representatives of international lenders land in Islamabad or when the economic managers have flown out to Dubai or Washington. After drawn out negotiations and acceptance of tough terms and conditions, a deal is reached and these managers heave a sigh of relief, despite the fact that most of the conditionalities would be difficult to achieve. The primary reason for the requirement of additional external finance is that the fragile economic situation, dwindling levels of foreign exchange reserves to meet the foreign obligations, and financing the rising import bill become alarming signals of a possible default. There are a number of other factors responsible for the vulnerability of the economy like heavy debt servicing, low investment inflows, a devastating law and order situation, poor governance, and the after effects of the recession of 2008 that negatively impacted on scarce employment opportunities and overall demand for goods and services.

The Federal Board of Revenue convinces Finance Ministers that it has the potential and capability to rope in non-tax filers and is confident of achieving the revenue targets. Even then, knocking at the portals of the international development financing institutions should be a priority to obtain resources for mega projects, for budgetary support and for boosting foreign exchange reserves. This is how the governments are pushed into the abyss. Akin to a beggar who prefers to live a life of begging by braving the elements of nature, the derogatory comments of the citizens, and the hardships of soliciting meager Rupees and Paisas, the government of the day is saddled with tough conditionalities, censures and criticisms of the multilateral agencies. Sovereignty is shaken, vulnerable, and mortgaged.

The present government faced an acute dilemma after assuming power when its economic team became aware of the dire economic situation. The Finance Minister was ill prepared and possibly uninformed of the situation at hand when he had just a few weeks to present the budget, another vivid example of a bureaucratic budget. At the same time, the government was not keen to lay total blame on the previous government and hence assumed the responsibility of moving forward, carrying the excess baggage inherited from the outgoing government.

Take IMF, for instance. The favorite of Finance Ministers and economic managers. Pakistan has a long history of borrowing from the Fund. Pakistan has signed five Stand-by Arrangements (SBA), three Extended Credit Facilities (ECF), and three Extended Fund Facilities (EFF) agreements till now for stabilizing the fiscal situation. However, none of the loans in the past accounted for that enormous amount as taken in 2008 and 2013 under SBA and EFF respectively. Loans are given under Special Drawing Rights (SDR) and Pakistan has so far been granted 16.734 billion SDRs.

In summer of 2013, a strong IMF team set up base in one of Islamabad's five-star hotel. The economic functionaries were rushing in and out of the meeting halls requisitioned for the IMF team. I had gone to there to meet a senior official. He informed me that the environment was like a missionary high school classroom and the manner in which they were grilled and the way they were being lectured was astonishing. It reminded me of the popular Big Nate comics and its two characters, Nate Wright and his social studies teacher Mrs Godfrey. Just as Nate had a difficult time convincing his nemesis who always saw through his antics, lack of preparedness and outlandish behavior, in the same way the visitors from Washington saw through the presentations and pledges of the Pakistani officials. Nevertheless, IMF too could not afford a default by Pakistan, and thus taking cognizance of the ground realities as well as the smooth transition under a democratic process, the team's recommendations were positive, albeit with tougher conditionalities.

The major requirements of the present EEF need highlighting:

·         Fiscal Adjustments: This core requirement relates to enhanced levy on natural gas, strict tax measures, fundamental structural and administrative measures, extensive purchase of US Dollars from the open market, and maximum reduction of subsidies in energy sector.

·         Gas Levy: The perceived shortages of natural gas, the program to finance the expected Iran-Pakistan Gas Pipeline, and the planned TAPI Gas Pipeline gave the government a valid reason to increase gas prices as well as impose the Gas Infrastructure Development Cess. The stakeholders have challenged the GIDC in courts.

·         Broadening the Tax Base: Pakistan's Tax-to-GDP ratio is still in single figures. IMF proposed a fast track broadening of the tax base. Resultantly, FBR issued notices to a huge number of non-filers but the response has been pathetic. In the 2015-16 Budget, the Finance Minister introduced a Withholding Tax of 0.3% on tax filers and 0.6% on tax non-filers on every bank withdrawal above PKR 50,000. The government expected revenues of PKR 35 billion. However, the business community, especially small traders, vehemently protested and there is a deadlock since both sides are adamant in their stands.

·         Structural and Administrative Policy: IMF decreed that State-Owned Enterprises on the privatization chopping block should be developed and a reform strategy prepared for most of the SOEs. IMF wanted privatization of 26% shares of PIA to a strategic investor. It ordained that legal framework of various codes, laws, and procedures dealing with electricity theft need to be strengthened.

·         Purchase of US Dollars from Open Market: This was the preliminary demand of IMF that State Bank of Pakistan must increase purchase of the greenback to shore up the Forex Reserves.

·         Tariff-Rate Elevation and Phasing out Subsidies: Another pre-requisite for the EFF was that the government should develop and approve a three-year plan for phasing out Tariff  Differential Subsidies and increasing the weighted average tariffs by 50% on industrial, commercial, and bulk users and reduction of subsidy on second group of consumers through enhancing the weighted average tariffs by 30%. This measure has been implemented and has led to increase in cost of production and consequently in erosion of the purchasing power.

·         Relief measures: The Benazir Income Support Program, the largest targeted social assistance mechanism, has been extended to mitigate the impact of removal of subsidies and to provide economic assistance to the less-privileged citizens.

·         Other Economy, Business and Trade Measures:  IMF wanted a commitment to simplify the Tariff Structure, normalizing trade relations with India and eliminating the negative list, taking full advantage of GSP Plus status granted by European Union, improving Balance of Payments regime, and approaching World Bank, Asian Development Bank, and countries such as USA, UK, Japan, and China etc for mega projects such as energy, roads, and housing etc.

The adoption of various measures and adherence to the conditionalities normally puts a heavy toll on the country. Pakistan is no exception. The loan is never disbursed in one tranche and thus every further tranche is approved after intense meetings (nowadays in Dubai) where IMF officials and the Pakistani economic managers led by the Finance Minister deliberate, debate and analyze the progress and the future course. So far, Pakistan has managed to get a green signal for the next tranche. The drastic reduction in global oil prices and some prudent fiscal management has enabled Pakistan to withstand the effects of economic pressures. These have resulted in a very low inflation rate, reduction in Discount Rate, decrease in oil bill, and increased inflows of external financing for major development projects.

On the other hand, exports have stagnated, foreign direct investment is despondently low, energy shortages are perennial, government expenditures are wasteful, the tax base is still a matter of grave concern, while political instability, war on terror, belligerent actions and outbursts of neighborly countries, distrust of trade and industry for government policies, and escalating corruption are a detrimental impact on the economic prosperity of Pakistan. IMF loans are granted for sustainable progress of a country and not as financial crutches for the government of the day.

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