Growing questions

The PTI government has submitted a Memorandum of Economic and Financial Policies (MEFP) to the IMF. According to the document, the government is planning a 2.5 percent fiscal adjustment in the GDP in three years. While the adjustment aims to bring down the fiscal deficit to around four percent at the end of the three-year programme, this would mean that the slowdown in economic growth under the PTI’s tutelage is set to continue for at least another three years. The government claims that it is choosing ‘stability’ over ‘growth,’ but it should be clear that it would not have been elected on the slogans of ‘stability’ and ‘austerity.’ Instead, the PTI was elected on the promise of investment, growth and social welfare. How quickly that promise has been abandoned is part of the reason the party is being criticised for flip-flopping on economic policy in a time when stability is essential. The government believes that macroeconomic stability will set the base for a growth strategy but there is legitimate scepticism over the plan.

It is expected that this time the IMF plan will need to be implemented immediately. This should mean that the public should prepare for the IMF’s infamous bitter pill. It is also now known that the IMF is now looking into Pakistan debt sustainability before approving the loan – although one would have thought this is standard practice. The worry is that the current government may be unprepared for what is coming. Government officials are already briefing the media that we should expect ‘pain’ in the form of revenue measures and high energy pricing. Both are perfect recipes to slowdown economic growth – and neither offers a solution for the current account deficit, which is what brought us here in the first place.

The government is planning a Rs1 trillion adjustment from the GDP through increased revenue and reduced expenditure. Ostensibly, the government believes that the single solution of increasing electricity pricing will bring power-sector circular debt to zero within two years. The IMF is also interested in adding new areas to the tax bracket, such as agriculture and real estate. This challenge has been attempted before – and one wonders what the PTI will do differently.What has been amusing to watch is the IMF ostensibly asking various governments to improve direct taxation, with the governments responding with more indirect taxation. However, this seems more of a matter of principle, rather than the effectiveness of indirect taxation. The FBR’s performance has been rather dismal in this regard with a Rs110 billion deficit in the revenue collection target. The trouble is that not only are there questions about the current approach, there are also serious questions over whether it can actually deliver on what it is promising. We will have to wait and see.