The Fund’s anti-inclusive growth prescription

IMF seems to be killing off any hope of inclusive growth by advising the government to withdraw electricity subsidies


M Ziauddin June 30, 2015
The writer served as Executive Editor of The Express Tribune from 2009 to 2014

In the last week of June, following the completion of the seventh review of Pakistan’s economic performance under a three-year programme supported by an Extended Fund Facility (EFF) arrangement, Mr Mitsuhiro Furusawa, deputy managing director of the International Monetary Fund and acting chair, said: “Progress toward macroeconomic stabilisation is encouraging, thanks to strong performance under the programme and despite significant legal, political, and security challenges. Macroeconomic imbalances are being gradually addressed. Building on these gains, continued efforts are needed to make the economic reform more sustainable and boost inclusive growth.” Perhaps, the Fund’s understanding of “inclusive growth” is different from what countries like Pakistan understand from the term.

On September 4, 2013, the Executive Board approved the three-year extended arrangement under the EFF in the amount of SDR4.393 billion (about US$6.18 billion, or 425 per cent of Pakistan’s quota at the IMF). And since then Pakistan has been managing its economy on the lines prescribed by the Fund, that has resulted so far only in increasing the gap between the rich and the poor — in fact, as a result, the rich are becoming richer and the poor poorer. Mr Furusawa further said: “The planned fiscal adjustment in the context of the FY2015-16 budget is appropriate. The authorities’ plans to broaden the tax base, including eliminating tax exemptions and concessions, are welcome, though significant scope remains for increasing tax compliance and enforcement.”

In the first place, one is hard put to identify any attempt in the incoming federal budget to undertake planned fiscal adjustment, appropriate or inappropriate. Secondly, where is the so-called plan of the authorities to broaden the tax base? The ‘Herculean’ effort has hardly made any significant dent in the 1,900 SROs that are robbing the treasury of billions every year. The significant thing that has been done is to withdraw the authority to issue SROs, exempting a particular business entity or individual from paying taxes. This authority now rests with the finance ministry. But who does not know that without the prior approval from the finance ministry, the FBR, in any case, even if it was authorised to do so, would never have exercised the authority on its own. Nevertheless, without the withdrawal of income-tax exemption from the feudal aristocracy, there is no way Pakistan can hope to mobilise enough in the foreseeable future to fund its own needs and embark on a sustained inclusive growth. And by expressing his reservations about the government’s ability to increase tax compliance and enforcement, Mr Furusawa seemed to have actually covered his back lest the collection at the end of the year were to, once again, fall too short of the target.

Despite several attempts by the Fund’s prescription, the State Bank of Pakistan is still far from being independent of the finance ministry. And the banking sector is showing profitability — not because it is lending to the right sectors but because of the unusually large spread it continues to enjoy. Most of the failures of the economy are linked to inefficient regulatory bodies to which the Fund does not pay any attention. And the Fund seems to be killing off any hope of inclusive growth in this country by advising the government to withdraw electricity subsidies. No doubt, you cannot break even if you are generating electricity from costly, imported fuel. But today, electricity is the fundamental right of every citizen.

Of course, no citizen has any right to waste this costly power by running a dozen air-conditioners round the clock. But every citizen needs power according to his minimum needs at an affordable price. Also, if the cost of input went up steeply because of the escalating power rates, then countries like Pakistan would never be able to embark on export-led growth. According to one rough estimate, nearly 20-25 per cent of the costly power that we are producing is leaked out of the system because of faulty transmission lines, most of which are, perhaps, as old as Pakistan. Plugging this leak would, perhaps, resolve a good part of the circular debt. The Fund would do well to make part of its loans strictly conditional to the government replacing these old transmission lines with new ones.

Published in The Express Tribune, July 1st,  2015.

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COMMENTS (3)

lashkari | 5 years ago | Reply @Gp65: almost certainly. Politicians get into Politics because that's where the money is, and that money is no longer "industrial profits", it is 'international borrowing' that the tax-base will pay for. Where has all this 'circular debt' gone? -is it in the water system, the electrics, the roads, education? -it's not really an opinion whether we've a corrupt administration, so for the IMF chief to lend money and then say he hopes for the tax-base to be subsequently broadened, well, it's perhaps a trifle disingenuous. And 'commercial interest rate'...for Pakistan's Sovereign Debt...why is it terrible, why do we even need to borrow money if the i% is so terrible? -to pay for old debt? -because if the country is in a debt-trap then that's Crisis management - and there was nothing in the budget to suggest anything but business-as-usual.
Gp65 | 5 years ago | Reply The author blames IMF instead of the priorities of Pakistani establishment for rich becoming richer and poor poorer. The question to be asked is would this situation be better or worse if IMF had not stepped in with their loan which was substantially below commercial interest rates? IMF asks Pakistan to broaden its tax base and increase the tax to GDP ratio. Pakistan fails to do so. Is IMF to be blamed?
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