IMF bailout package may not be bad deal for Pakistan, say experts

Suggest govt should introduce fiscal responsibility, rely on direct taxation .

Waqas Naeem July 22, 2013
"The major problem with IMF loans is that there is no particular ownership for the loans among the political class," SDPI Executive Director Dr Abid Suleri. PHOTO: FILE

ISLAMABAD: The International Monetary Fund (IMF) loan agreement may not be a bad deal for Pakistan, but the government must introduce fiscal responsibility and reduce indirect taxation for any meaningful economic gains in the future.

These thoughts were expressed by experts at a seminar titled “Pakistan Federal Budget 2013-14 and Role of IMF”, organised by the Sustainable Development Policy Institute (SDPI) on Monday.

The IMF has indicated a loan package worth $5.3 billion for Pakistan, subject to approval from the Washington-based fund’s executive board in September, which will be payable over ten years. Pakistan had applied for a $7 billion for balance of payment support.

Speakers at the seminar said that perhaps IMF was not coming to Pakistan to dictate policies, but to point out the difference in expenditure and revenues. They said Pakistan has a 48% mismatch in expenditures and revenues according to the Federal Budget 2013-14.

Farrukh Pitafi, an analyst and columnist, said the previous government had also negotiated with the IMF to improve the balance of payment situation. He said the promise of financial reform failed to materialise then because of a coalition government that could not develop consensus on the issue. Pakistan had abandoned a previous $11.3 billion loan programme in 2011, according to a previous report by The Express Tribune.

The speakers agreed that Pakistan should be happy someone is helping out the country in tough economic times.

“If the IMF loan agreement can help the country widen its tax-to-gross domestic product (GDP) base and overcome the energy crisis, then to me it is not a bad deal,” said Dr Abid Suleri, executive director of the SDPI.

But Suleri said unless the country wants to head towards another IMF fund facility in the future, we must practice fiscal discipline and cut down on indirect taxes, which punish the poor.

“The government needs to give a roadmap to reduce indirect taxation,” he said.

Suleri said the Federal Board of Revenue (FBR) does not go for direct taxation, because indirect taxation is an easy source of revenue for them.

Speakers said Pakistan Muslim League-Nawaz (PML-N) government decided to continue the Benazir Income Support Programme not because of some political generosity, but because IMF does not allow reduction in social safety related programmes as a policy.

Safiya Aftab, an economic expert and financial consultant, said the number of Pakistanis who file direct tax returns – a dismal 1.2 million Pakistanis file direct taxes and it is not certain how many of these actually pay taxes – has remained roughly stable over the past 10 years. Aftab said an optimistic assessment would be that this number can be doubled in the next five years through governmental effort, especially if the undocumented economy is brought under the government’s radar.

Responding to a question during the discussion, she said the government should not tinker with the allocation for provinces in the National Finance Commission award but put some conditionality in the award for provinces to generate their own revenue streams.

Suleri said the major problem with IMF loans is that there is no particular ownership for the loans among the political class. One government blames the loans taken by the previous governments creating a vicious cycle, he said.

The speakers said there is no solution in the short or medium term for cheaper electricity, and therefore the circular debt situation is going to persist. They urged the government to focus on improving governance and subsidising alternative energy solutions to cope with the power crisis.

Published in The Express Tribune, July 23rd, 2013.

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Alami Musafir | 10 years ago | Reply

@Meekal Ahmed I used the phrase per capita standard of living, which I admit is a vague term. I really meant prosperity, as measured by the percentage of the population living below the poverty line. This measure is complicated in Pakistan's case for two main reasons. One, because in 2006 the IBRD challenged Pakistan Government's figure of 23.9%, saying that it averaged 27% instead (Ref 1). Two, and this is more serious, Pakistan government is accused of cooking the books during the period 2003-2007 to spuriously boost growth and reduce poverty (Ref 2).

For the period prior to this time, we can use the July 2002 ADB report Poverty in Pakistan (Ref 3), which considers the period 1970 to 1999, and states: "The declining trend in poverty in Pakistan during the 1970s and 1980s was reversed in the 1990s." It shows that those below the poverty line rose from an average of 23.7% in 1991 to 33.7% in 1999 (ibid Table 2.1). For the latest situation, the only source I found was Dawn TV Urdu edition, whose report states that those living below the poverty line rose from 29.6% in 2009 to 58% in February 2013 (Ref 4).

References 1) 2) 3) 4)

meekal a ahmed | 10 years ago | Reply

"IMF does not allow reduction in social safety programs as a policy".

I am taken aback with this statement. Generally the reverse is said about the IMF. They don't like subsidies and they don't like social safety nets. They are anti-poor and anti-growth, and so on.

In truth, the IMF has no problems with either provided they do not burden the budget. If the subsidy is open-ended, untargeted, wasteful and burdensome, and mainly benefit the rich, good fiscal management demands that they should be phased out and the poor and vulnerable compensated in other ways (such as direct cash transfers).

On the BSIP, I believe the World Bank gave it a good chit. The NS government obviously knows that the program has done well and has, for the first time, reached the poorest of the poor. No wonder they are expanding it -- and they can call it whatever they want.

To Mr Musafir, you are kidding when you ask whether per capita income today is higher than it was 30 years ago? Per capita income in Pakistan is around 3,200 when measured in terms of purchasing power parity and you can look up what it was 30 years ago in the Economic Survey.

Indeed, Pakistan is now a "lower middle-income country" -- believe it or not. One downside of that is that we are no more eligible for concessional assistance from either the IMF or the two multilateral banks. We are now a "blend" country.

Even then, the terms on which we are able to borrow externally are highly concessional. Low interest rates and long repayment periods -- unlike domestic borrowing which is high interest and short-term. But we assume that the government will not default on it's domestic debt, right?

I hope that is true.

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