Stop-go cycles

When the immediate risk of crisis recedes, Pakistan's reform programs go off track, says IMF

Stop-go cycles
Pakistan renewed its relationship with IMF after the Nawaz government took charge. A 36-month agreement was signed on September 4, 2013 under the Extended Fund Facility that approved 6.64 billion dollars in total to help the country put together its tattering economy. The deal, obviously, came with some strings attached. In over a year, IMF released six payments – each amounting to over or around 500 million dollars. It also cautiously tied every installment to a review to ensure that proposed economic reforms were followed through.

The multiple weak areas in the economy that arguably needed a quick and solid fixing included:

• saving the windfall from falling oil prices to strengthen buffers including foreign exchange reserves, and the fiscal stance against adverse shocks,
• preventing a further loss of export competitiveness,
• reducing electricity subsidies,
• introducing compensatory measures to cover the revenue shortfall,
• steps to broaden the tax base and improve tax administration,
• progress on safeguarding financial stability and expanding credit growth, and
• enhancing structural reforms in the energy sector, central bank independence, anti-money laundering framework, public debt management, trade, and favorable business climate.

Pakistan claims progress in all these areas.

The ultimate success of these economic reforms are debatable but the Finance Minister Ishaq Dar has already started quoting British economist Jim O’Neill’s projections that Pakistan would become the 18th largest economy (with a GDP of $3.33 trillion) in the world by 2050. Dar claims that such status could be achieved because his government has a reformed economic agenda. Currently, Pakistan stands at the 44th economy in the world with a GDP of $225.1 billion.

Dar visited Washington last week to attend the IMF/World Bank Spring Meeting. In almost all the meetings, he touted that foreign exchange reserves were expected to hit a historic high this year and marked over $17 billion. “Our next target is to cross the past highest level of $18.29 billion in reserves this year. We have not had the luxury of a front-loading IMF facility as was the case when that level was achieved, but we have built up reserves on the basis of a range of policy measures and macroeconomic stability,” he said.

In its official report submitted to the agency, the Finance Ministry pointed out that fiscal consolidation remains on track bringing the budget deficit from 8.3 percent of GDP in FY2012/13 to 5.5 percent in FY2013/14 and toward the program target of 4.8 percent of GDP in FY2014/15. “Revenue collection at the federal level, however, was below the indicative target, partly due to continued legal challenges against the Gas Infrastructure Development Cess (GIDC) as well as lower tax receipts from the fall in oil prices. To achieve the deficit target, we have restrained expenditures,” the report indicated.

The IMF in return has acknowledged some of Pakistan’s steps yet remains skeptical on various other points, advocating that the country should persist with reforms. Jeffery Franks, the IMF’s outgoing mission chief for Pakistan, stated that the country confronts a major challenge with its security situation, and that the lack of energy remains a serious growth constraint.

In an interview with IMF Survey, Franks appreciated that the country was tackling costly and inefficient electricity subsidies. “Those subsidies have come down from almost 2 percent of GDP to 0.7 percent this year, and they are expected to fall to 0.3 next year,” he said, adding that “the government has also made progress on improving the tax system.” SROs – which grant tax exemptions and concession – were riddling the tax system with loopholes. Earlier this year, the government eliminated a significant number of SROs, and its expected to improve tax collection by about 0.3 percent of GDP.

However, he said that more can be done to increase revenue collection at the provincial level. The division of taxes and responsibilities between the federal government and the provinces was not balanced, and that the authorities need to revisit that to avoid future problems with their ability to reduce their deficit.

The survey also pointed out that since Pakistan was a net importer of oil, the decline in oil prices would help the country save a billion dollars, and ease the balance of payments problems. The IMF has advised the authorities to take advantage of the positive shock and move more quickly to fix the major imbalances in the energy sector. Dar, on his tour, assured that a number of power projects had been undertaken and around 4,000MW projects were already ensured to be added to the national grin which would ultimately reach 7,000MW by 2017. He thanked World Bank for supporting Dasu Dam and Diamer Bhasha Dam project, and also highlighted other projects to exploit energy resources. International financial institutions have been objecting on coal based projects, and have offered Pakistan to find alternative means.

IMF also insists that Pakistan should break out of its stop-go cycle. “In the past, when the immediate risk of a crisis receded, previous programs often went off track. A key challenge for Pakistan is to continue the policies that it has begun and push the reforms through,” the agency said, adding that if the country could have a 7 percent growth rate like China or India and sustain the figure for over a decade or more, it could experience significant transformation. Dar was pleased and proud after his meetings and a virtual pat on the back, but he talked less about major challenges that need equal and imminent attention including education.

The seventh IMF review is due early next month, and hopefully its “legitimate concern about the need to boost education in Pakistan to improve long-term growth prospects” is also addressed with the same enthusiasm.