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April 13, 2017

Dissecting IMF press release


April 13, 2017

After concluding discussion with the delegation of Pakistan, International Monetary Fund issued a press release which merits analysis. It credited the government for putting economy on track. “It means that either the IMF program has fixed economic fault-lines or it is a routine patting,” wondered a leading economist. Generally speaking, the job of such missions is to keep a track whether the grant-recipient country is following the IMF conditions or not. Intended objective of this exercise is to determine whether the country under question will be able to pay back loans or not. 

To judge that, one has to analyze whether the inflation is under control or not, interest rates are high or low and the status of revenue growth targets. A thorough reading of the press release exposes the fragility of Pakistan’s economy. Slower-than-expected growth of large scale manufacturing and stagnant exports have been pointed out. Challenges in the fiscal, external, and energy sectors to safeguard the hard-won stability gains have also been highlighted. Last but not least, the issue of structural reforms which the government has been unable to carry out. 

The IMF’s press release is also important in a sense that the government always takes credit of Pakistan being an emerging economy in Asia as noted by Bloomberg. One of the leading manufacturers has declared the claims of economy-on-track as a joke when industry growth is less than 4%, exports are stagnant and economy is confronted with internal and external challenges. Explaining such challenges, a senior analyst pointed out that on the internal front, no worthwhile domestic investment is taking place. Exports are not only on decline, they lack any diversification. How exports will register growth when the government has rejected all their sales tax claims, he wondered.

The chairman of the textile value sector explained it further. He said that refund is actually a tax they have already paid. Its value is roughly 20% of exports. Exports are made at 5% profit at maximum whereas 20% of capital is held up with the Federal Board of Revenue, he said. Another body of textile manufacturers said that the government was not interested in increasing exports. The export support package of Rs180b announced simply proved to be a political statement as no payment has been made even at the close of the financial year. 

The IMF should have incorporated a column in agreement with Pakistan asking as to how much refund is pending, demanded an exporter. The IMF noted less than required revenue growth and FBR obliged by blocking all refunds.

That a large scale industry can grow when its production engine is taxed in the form of increasing the tariff on fuel is not a realistic expectation. Strangely, surge in the POL import prices was considered as a tool to boast about the revenue growth instead of cutting taxes on diesel at least for running the industry and energy generation. The finance minister has attributed the dip in revenue to the slump in the fuel prices. Why the cheap diesel was not allowed to the industry as well as transportation sectors, which would have fueled the production cycle and economy engine merits a question. 

The IMF has also expressed concern over overvalued Pakistani rupee without taking into account the trade deficit depth that it has reported in the press release. Can someone suggest to the fiscal manager of the country to devalue its currency when its imports are much larger than the exports? Imports are financed through dollars. If dollar appreciates the prices of machinery, raw material, in particular of medicines, will increase.

On external fronts, it is a fact that no worthwhile foreign direct investment has taken place except CPEC and that too on high interest rates. Also the fact remains that foreign buyers prefer countries like Vietnam and Bangladesh due to poor image resulting from the export of inferior quality. 

The IMF press release is continuation of its earlier releases citing stability of macro-economic indicators and then boiling down to the structural imbalances. In fact, countries which were developed and lifted millions of people from poverty invested in human resource, imparted technical education and integrated rural areas with market are showing 7/8 GDP growth for last around 20 years. Without fixing problem at gross roots level, how the health of the economy of the country can improve is a question often raised by the business community as well as academia. 

The FBR that is supposed to earn bread and butter for the nation is in tatters. It is evident from the fact that it gives least importance to the statistics and figures reported in the press. On 1st April, it proudly claimed that as against the target of Rs340 billion for the month of March, its collection went up to Rs344 billion whereas the official documents show that the target was Rs355 billion. No wonder, at the end of the year, it reported target as Rs 3500 billion and collection as Rs3500 billion and earn reward for its tax collecting machinery. 

This is also the reason that the effect of macro stability does not trickle down to gross roots level. It has repeatedly led to inequality as well as lack of equity in the economic spectrum. A leading expert has rightly pointed out the IMF has itself identified as to how things will unfold slower than expected growth of large-scale manufacturing and stagnant export will be stumbling blocks in way of growth prospects. The current account deficit may exceed 3% of GDP implying only that Pakistan will again be caught in vicious circle further swelling the poverty pool. 

The IMF has rightly pointed out that there has been lower-than expected revenue of the 1st half of the year. This exposes the effectiveness of the tax machinery. It has been harvesting from the increasing prices of petroleum products and further defying it with increasing the tariff. The finance minister and the adviser has strangely attributed this failure to the zero rating of export-oriented sectors. A leading manufacturer questions that once the tax is collected from export-oriented sector, the same is to be refunded but denied. Cannot FBR fix its capacity by plugging tax-gap instead of taking anti-growth measure like blocking of the refunds and taxing of the fuel? 

The writer is a retired FBR officer. 

Email: [email protected]

Twitter: @Chafqat

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