19 November, 2013
By Dr Ashfaque H Khan
Many, including this writer, have been highlighting the weaknesses of the current IMF programme for Pakistan. We are of the view that this programme was put in place in haste and, as such, many errors have been committed – inadvertently or otherwise. It is well-known that the IMF mission came to Pakistan on June 19, 2013 for Article IV Consultation. When they landed here, the Pakistani authorities asked them for another programme.
The mission extended its stay for few more days and hurriedly put together a programme. When errors were highlighted, prudence demanded that the mission chief would look into these errors and make an effort to correct the mistakes in the broader interest of the success of the programme. However, it is regrettable when the mission chief takes these comments as criticism of the programme.
I have the highest regard for an institution like the IMF because its staff is has always been professionals. However, my recent interaction with the current IMF mission chief has been disappointing indeed. His attitude was un-IMF-like, unprofessional and at times full of arrogance. From his attitude one could easily infer that he was under tremendous pressure from his management with regard to the criticism on the design of the programme.
Instead of listening to criticism on the programme in a professional manner, the attitude of the mission chief was highly unprofessional and against the principles of the IMF. The IMF management needs to look into the matter.
Why is it felt that the design of the IMF programme is faulty? This programme has failed to bolster market confidence. The IMF programme was meant to build Pakistan's foreign exchange reserves. It is strange that its reserves declined to a five-year low at $3.9 billion on October 4, 2013, in the midst of the programme. Pakistan sought IMF assistance to prevent default and yet it reached dangerously close to exactly that. Furthermore, the size of the release of tranche is such that the net inflow from the IMF continues to be negative. In other words, Pakistan received $547 million as the first installment in September but repaid the IMF to the tune of $720 million, implying a net outflow of $173 million. Isn't that strange?
One of the mistakes of the programme is the forecast of current account deficit. Projection of the current account deficit for the year 2013-14 was $1318 million while the current account deficit for the first quarter (July-September) stood at $1234 million as against the IMF projection of $904 million – a forecast error of 36.5 percent. There are indications that the IMF has revised projection of the current account deficit to $3.2 billion for the year as against the original projection of $1.318 billion – a forecast error of almost 143 percent.
How can the IMF staff go wrong in such a massive way? Such a large forecasting error in the first quarter speaks volumes about the professional ability of the mission chief. This is not the IMF of the past. Two things appeared to have happened. Either they have committed grave errors in projecting numbers or the staff deliberately understated the current account deficit to show a lower financing gap to build a case for smaller amount of releases. In either case, it is the credibility of the IMF that is on stake and requires thorough investigation, at least at the concerned director level.
Another mistake of the programme is the wrong sequencing of power-sector measures. Power tariff has been increased by an unprecedented proportion in one go without addressing many loopholes. For example, little or no effort has been made to stop power theft, reduce technical losses, increase recovery of electricity bills, stop free electricity provision to Wapda employees, undertake technical audit of power plants and, most importantly, to change the heads of the Gencos and Discos.
Without addressing the core issues listed above, the unprecedented hike in power tariff will fail to address the energy issue. Circular debt to the tune of Rs175 billion has re-emerged. This was bound to happen since we failed to address the sources that lead to the build-up of circular debt.
One of the chapters of the IMF programme document is titled: 'Toward Higher and More Inclusive Growth'. Interestingly there has been no discussion whatsoever on growth or inclusive growth. In fact, growth and employment are not on the radar of the programme at least in the medium-term. The philosophy of the programme is that Pakistan needs to stabilise its economy first to create condition for growth beyond the programme period. We are being told that these are the bitter pills we have to swallow for a prosperous future; but prosperous future for whom?
Disregarding growth and job creation is perhaps the greatest mistake of the current IMF programme and also against the newly received wisdom of 'job-rich growth' as propounded by the G-20 and supported by the IMF itself. By failing to address growth and employment, not only will the future of millions of youth be sacrificed but this will also gravely damage our long-term growth prospects. The youth, after having remained unemployed for a long period, will eventually become unemployable.
Commentators have been critical of the programme for insistence on sharp fiscal correction, and that too by cutting development spending, at a time when the economy is depressed, leading to prolonged periods of low economic growth. It is in this perspective that I have been emphasising that a balance is needed between stabilisation and growth and that the pace of adjustment also needed to be moderated.
Given the demographic structure of Pakistan, where nearly 50 percent of the population is below the age of 20, promoting growth and job creation in the short- to medium-term without compromising on stabilisation is an absolute necessity.
On the taxation side, the IMF programme has failed to bring the rich and the powerful into the direct tax net. Instead of broadening the tax base, raising tax rates has been used as the principle of taxation. The burden of taxation has been placed on those already paying taxes. No efforts have been made to bring those sectors into the tax net that have either remained under-taxed or untaxed thus far.
The programme sheds little light on the ill-conceived NFC Award 2010. The award, which emerged as the principal source of fiscal crisis in Pakistan over the last four years, has not been adequately addressed in the programme. It has simply been left to the government to address its weaknesses in the new NFC Award, consultation over which will begin in 2014-15. These are some of the drawbacks of the IMF programme.
The writer is the principal and dean of NUST Business School. Email: firstname.lastname@example.org