IMF conditions: compliance issues

According to media reports, the visiting International Monetary Fund (IMF) team has criticised the government’s slow progress in complying with two conditions of the November 2008 Stand-By Arrangement (SBA): implementation of the value added tax (reworded as the Reformed General Sales Tax by incumbent Finance Minister Dr Hafeez Sheikh) and power sector reforms that include the ending of all subsidies in an effort to move towards full cost recovery.
Prior to denigrating the IMF for interfering in our macroeconomic policy decision-making, three factors need to be acknowledged. First and foremost, it was the federal government that approached the IMF seeking the SBA; and if reports are accurate, it was the federal government that sought US mediation to convince the IMF to support Pakistan through the 7.3 billion dollar assistance in the first place. Second and related fact is that the economic havoc created by the PML (Q) government and the caretakers in 2007, in a blatant attempt to win over voters for the scheduled February 2008 elections, led them into taking decisions that were untenable from an economic perspective.These decisions included extending a hefty and unsustainable subsidy for petroleum products that seriously compromised the budget deficit, propelling inflation on the one hand and inter-circular debt on the other. Such unsavoury decisions compelled the PPP-led government to seek the SBA in the first place. And third, the IMF conditions that the government has yet to comply with are economically sound given certain assumptions.

These include: (i) the refusal of the government to impose a tax on the elite that includes a tax on the income of rich landlords; (ii) the need to improve governance, which must include appointing heads of state-owned entities (SOEs) on merit rather than on the basis of nepotism. The fact that the ruling party has selected heads of SOEs on the basis of nepotism became evident in the National Insurance Company Limited, the Pakistan Steel Mills, OGDCL and the Pakistan International Airlines. Thus significant economies could have been affected if these companies had been headed by competent people who would have ended their heavy reliance on budgetary support; and (iii) reduce non-development expenditure.In other words, while there was much the present government inherited, for which, it cannot be faulted, yet after two and a half years in power it is guilty of not improving matters and, instead, further fuelling the poor indicators that they inherited. This includes the rising inter-circular debt, loadshedding that has reached mammoth proportions, and a failure to meet the budget deficit targets precisely because of the failure of the government to begin to tax the elite.

The RGST will be tabled in the parliament as per the agenda of the ongoing National Assembly session, yet power sector reforms, as identified by the IMF under the SBA, as well as by the World Bank in meetings with staff of the Ministry of Water and Power, have not moved as quickly as first envisaged by the government. The obvious reason for this lack of performance is the political cost of raising tariffs to meet the objective of full cost recovery. The latest reports reveal that the federal government would have to raise power tariffs by about 2 percent per month to be able to meet this target, an amount that is expected to have a very high political cost, especially with all the political parties, including those which are in coalition with the government, lamenting the fact that the PPP-led government did not take them into confidence while raising the price of petroleum products by about 9 percent this week.The irony about the current state of affairs is that there are obvious solutions to our economic problems. As is evident, the government needs to convince parliament that a tax on the elite is no longer an option but a necessity. Neither the donors, nor indeed the public is in any mood to keep on footing the bill, which our profligate executive continues to mount. With respect to power sector reforms, the government has to focus on developing a mix of energy sources for power generation that are not going to break the backbone of the economy – both of ordinary households and the productive sector. Thus relying on expensive thermal power to meet 70 percent of the country’s energy needs is simply not economically viable.

World coal consumption was about 6,743,786,000 short tons in 2006 and is expected to increase by 48% to 9.98 billion short tons by 2030. China produced 2.38 billion tons in 2006. India produced about 447.3 million tons in 2006. 68.7% of China’s electricity comes from coal. The USA consumes about 14% of the world total, using 90% of it for generation of electricity. And those who express concern over the environmental aspects of coal must be aware that there is technology available that makes coal no longer a heavy pollutant. Thus it is imperative that the government supports the private sector currently engaged in developing Thar coal for that way lies our future – Brecorder