What has the IMF Programme Achieved? | Khurram Husain

IN a recent conference call with journalists, the Fund’s mission chief for Pakistan was asked what the ongoing programme has achieved now that we are entering its final few months. His reply focused on three areas. He said government borrowing from the State Bank has been brought down to nearly zero, and given how inflationary this borrowing tends to be, this is a big positive.

He also pointed to the elimination of many SROs, which the accompanying special report says have brought down the cost of tax expenditures (the amount of revenue foregone as a result of giving special exemptions to specific parties) by 0.9pc of GDP, a considerable amount. The power to grant special exemptions has also been limited to a few exceptional cases only, and will require ECC approval, making the decision a little less discretionary. Nevertheless the Fund’s staff see “further need for rationalising overgenerous tax expenditures, which pose a considerable threat to the integrity of the tax system”, meaning much of the job remains to be done.

In addition, the mission chief pointed out that coverage under the Benazir Income Support Programme (BISP) has increased to 5.14 million beneficiaries by the end of 2015, an appreciable increase. The BISP is a good programme and has undergone various levels of scrutiny after being vilified as a patronage machine in the year that it was introduced. An increase in its coverage is undoubtedly a positive development.

Next to the commitments that were made, the deliverables pointed to by the mission chief appear downright puny.
But despite these positives, one cannot help but feel disappointed by the answer. Consider some of the objectives spelled out in the earlier reviews of the facility. Measures were promised that would “lower the deficit to around 3.5pc of GDP” in the last fiscal year of the programme, and “place the debt-to-GDP ratio on a firmly declining path”. The debt-to-GDP ratio is not on a “firmly declining path”, and whether or not the fiscal deficit will come in around 3.5pc of GDP remains to be seen.

The biggest failures appear to have been in the area of public-sector enterprises. Consider this commitment on PIA, given in the December 2013 Letter of Intent by the government to the Fund: “We will hire financial advisers by end-March 2014 to seek potential strategic private-sector participation in the company. We plan to privatise 26pc of PIA’s shares to strategic investors by end-December 2014.”

And consider also this commitment regarding Pakistan Steel Mill: “We have appointed a professional board and will hire financial advisers by end-March 2014 to prepare a comprehensive restructuring plan and seek for (sic) potential strategic private-sector participation in the company.”

Needless to say, neither of these happened. Today, at the start of 2016, PIA is no closer to having a strategic private-sector partner than it was three years ago, and they’re talking about dumping the steel mill on the Sindh government instead. What sort of a track record does the Sindh government have in running large commercial enterprises? Meanwhile accumulated losses at PIA have risen to almost Rs300 billion.

The story is similar in the power sector. The Fund finds that the power sector is still accumulating arrears that progress towards implementing a multiyear tariff as preparation for private investment is still lacking.

In the power sector, the December 2013 commitment made by the government included a list of measures to improve monitoring of power plants, rehabilitation, and increase private-sector investment in power generation. At the end of the paragraph, they included this specific target: “The expansions are expected to generate additional 2000 MW by 2016.”

Yet, almost exactly a year later, a number of private power producers threatened to invoke their sovereign guarantees to ensure recovery of outstanding amounts owed to them by the government as liquidity constraints continued to bite. In the year 2015, oil prices dropped precipitously, opening a window of opportunity to tackle the financial constraints that were hampering power generation ever since the price of oil spiralled in the middle of the 2000s.

Yet “power supply did not show any major improvement through most of the fiscal year” said the State Bank in its latest annual report in 2015. The financial constraints to power generation don’t seem to have been alleviated in line with the commitments made back in December of 2013.

The circular debt made a comeback, rising to Rs648bn by June 2015, after the government had started its tenure with a one-time payoff totalling Rs582bn in June of 2013. Out of this, Rs313bn was fresh accumulation, according to the State Bank. To offset this, the government resorted to imposing three different surcharges on power tariff totalling almost Rs2 per unit. The maximum tariff for electricity for domestic consumers is Rs17, so these surcharges represent an 11pc increase for consumers, brought about through a classic firefighting mechanism that requires no consensus-building exercise, like an open hearing or a debate in parliament.

One could go on and on, giving example after example. The government made strategic commitments at the start of the programme. They promised to take steps to ensure the circular debt does not return, that public-sector enterprises stop being a burden on government expenditures, that the tax base would be broadened to increase revenues without burdening existing taxpayers, that the State Bank’s autonomy would be enhanced to meet international standards, that an energy act would be passed to strengthen the power sector and so on.

Yet all we have today is an increase in the GDP growth rate of less than 1pc, and high level of reserves. Next to the commitments that were made, the deliverables pointed to by the mission chief appear downright puny. The Fund still has a few months to demonstrate its effectiveness as a catalyst for domestic reform, but the sad part of the equation is that the Fund cannot want reform more than the authorities do.

Published in Dawn, January 14th, 2016

Source: http://www.dawn.com/news/1232800/what-has-the-imf-programme-achieved