Risks to IMF programme

June 18,2019

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In our last article (‘A budget for stabilisation’, June 13), while terming the budget as helpful to stabilize the economy, we had concluded as follows: “The budget is a good statement of economic policy government plans to adopt to steer the economy from stormy waters to the placid shores. However, this is only a statement at the moment. Putting it into action would be a formidable task. We see a few risks that needed to be mitigated.

“First, there may be slippages if the tax collection is not tightly supervised. In case there are revenue slippages, expenditures have to be further curtailed otherwise we may face the possibility of derailment of the programme. Second, committed policy actions at the specified dates often become victim of adverse political calculus. The resolve to implement the programme has to be preserved, for in such an eventuality programmes are usually aborted. Finally, as we have been stressing all along, the success of this programme depends crucially on continued ownership and communication with concerned stakeholders. They have been weak and need considerable strengthening”.It is time we explained in some more details the immediate risks that the new economic policy will face when trying to achieve its objectives. The most urgent risk is the decision of businesses affected from the withdrawal of zero-rating facility for the five exports sectors to give a strike call and threaten a lock-down of factories. Another potential hotspot is the near elimination of the final tax regimes (FTR) and its conversion into minimum tax and regular assessment. Then there is a host of special tax regimes in the sales tax for several sectors such as steel and vegetable oil and ghee manufacturing units.

Irrespective of the merit of these measures, they will entail a major adjustment for the businesses which will be petitioning the concerned authorities and threatening disruptive actions. The government would have some room to make adjustments as happens normally, but reversing any major action would risk the programme approval by the IMF Board. The way to approach such issues would be to hold a serious dialogue with the affected parties with a view to solve their problems while preserving the revenue impact of the adopted measures and holding on to those measures that constitute structural reforms.

In a meeting with his economic managers this previous Saturday, it is reported that the prime minister expressed concern on the recent volatility in the exchange rate, saying it was politically untenable for his government. He was informed that, if he wanted, the State Bank would use its reserves to support the rupee but the available reserves would not last for long. He refrained from issuing such order. In fact, the prime minister must have been informed that under the programme, far from using the reserves for supporting the rupee, the State Bank would be required to actively make purchases to build its reserves. While he has made the right decision, his resolve will be frequently tested during the programme’s period. Furthermore, it is imperative that the SBP and other agencies keep a vigilant eye on the market to prevent hoarding and manipulation.

To avoid having to build reserves through purchases from the inter-bank market, the government has to find new avenues of foreign exchange mobilization. Two areas that offer attractive opportunities are the sale of public-sector assets (privatization) and auction and renewal of 3G-4G mobile phone licences. While the government has provided for both these items in the budget, their realization would be a major challenge.

There is, in particular, a great deal of ambiguity in the mind of the PTI leadership regarding the privatization programme. They still feel that these entities should first be reformed before they would fetch reasonable values. This is flawed thinking which has not yielded any positive results in the last ten months. It is high time an unambiguous stance is adopted for the divestment of public ownership from such units. There are many strategies that can be employed (strategic sale, divestment through capital market, combined ownership of provincial/local governments together with businesses or management contracts with leading businesses houses) to make this process smooth and address whatever apprehensions one may have with respect to the strategic nature of such assets.

The political atmosphere in the country will have a decisive impact on the success of the programme. Even though the political configuration today in the National Assembly is significantly different than the one in 2008, yet the then IMF programme failed when the MQM withdrew its support of the PPP government – stopping it to pass the GST law, which was a make or break condition for the continuation of the programme. Such fears may not be present at this stage, but the PTI is facing a stronger opposition than that faced by the PPP. That the political confrontation between the government and opposition is rising is clearly visible.

Neutral observers would advise the government to act to lower the temperature and find ways to strike a modus vivendi which would prevent this charged situation from boomeranging. For it is the government which will be the biggest beneficiary of a calm domestic scene that allows it to implement a difficult Fund programme.

During a meeting in Karachi, a young and dynamic businessman suggested to the prime minister to help build a congenial political environment so that investors can make their plans without apprehending political turmoil and consequent policy uncertainty. The response of the prime minister was not very encouraging.

The confidence of business owners is at the lowest ebb. They find the government approach to solving their problems extremely slow – if not outright indifferent. Several leading investments with foreign collaboration, planned in the national industrial park (NIP), Karachi, which was set up in 2005 and later declared as a special economic zone (SEZ), are stuck for lack of basic infrastructure like electricity, water and gas. These investors are quite vocal that they would not think of investing in Pakistan in future. The most sincere of PTI supporters among investors and senior business professionals are finding it increasingly difficult to defend its actions. Such sentiments will be unhelpful in creating an atmosphere where a painful adjustment programme can be implemented successfully.

The writer is a former finance secretary.

Email: waqarmkngmail.com


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