Saturday, 18 May 2019

Pakistan, IMF and the Small Print










Najam Sethi in The Friday Times



Finally, after flip-flopping for nine months, the PTI government has signed on the dotted line with the IMF. It has also revived the PMLN’s tax amnesty scheme that it once lambasted as “a national security threat”. In the bargain, it has ditched the finance minister, Asad Umar, and the Governor of the State Bank of Pakistan, Tariq Bajwa. Both gentlemen seemed to be overly concerned about protecting Pakistan’s interests, while their boss, Prime Minister Imran Khan, was ready to throw in the towel. Peeved, Mr Umar is threatening to reveal details of his disenchantment with the IMF.

To be honest, though, there’s no point in haggling when you don’t have a leg to stand on. Without the IMF’s financial assistance, we will default on our external payments and be declared bankrupt. Without an extra injection of funds from the Tax Amnesty Scheme, we will have to cut back on defense or development expenditures, which we can ill-afford.

The “deal” with the IMF is subject to certain tough conditions. First, we must get the green light from FATF. As we speak, Pakistani officials are negotiating compliance before the Asia Pacific Group of FATF chaired by India. A lot of homework has been done. But this will be an on-going review process. If there are terrorist attacks in India whose footprints can be traced to Pakistan, the FATF file on Pakistan will be opened again.

Second, the IMF wants Pakistan to roll over its debts to China, Saudi Arabia and the UAE so that the burden of debt payments can be staggered over time. So Prime Minister Khan will have to pick up the begging bowl and grovel in faraway capitals all over again.

Third, the provinces will have to be pressured to accept a cut in their constitutional share of federal revenues so that IMF targets of the primary deficit can be met. While PTI governments in three provinces may be expected to roll over and play dead, Sindh will scream. But NAB can be leveraged to silence it.

Fourth, the IMF wants to “facilitate trade”. This will mean an end to export subsidies and restraint on increasing import duties. In other words, trading volumes will be determined exclusively by the exchange rate.

Fifth, the exchange rate will float freely so that the SBP doesn’t deplete its reserves by selling forex in the market in order to prop up the rupee. In other words, there will be continuing devaluation and rising inflation.

Sixth, the IMF wants to encourage spending on development and poverty alleviation. With given debt payments, that will lead to pressure on defense expenditures. Can we expect the brass to receive this with equanimity?


Last, but most important, it is an established fact that Washington leverages the IMF, World Back, Asian Development Bank and other international financial institutions through the US Treasury to achieve its foreign policy goals. Should Pakistan fail to deliver on US objectives in Afghanistan and India – a difficult task – we may expect these institutions to get tougher on future installments of funds.

The PTI Tax Amnesty Scheme is not dissimilar to the PMLN scheme that fetched less than Rs 100 Billion. But with the economy headed into a deeper trough, even that amount seems far-fetched. Some wisdom has therefore prevailed in allowing tax payable to be determined in the next six weeks but payment made over the course of the next twelve months, albeit with some surcharge.

But, like the PMLN scheme, the PTI scheme suffers from one major defect. It excludes “holders of public office” in the last twenty years. Why twenty years? Why not the last five or last thirty? What is the objective criterion for this cut-off date? Then there’s the definition of public office. It is all encompassing, spanning full three pages of an Ordinance. It includes everyone from the President of Pakistan at the top to Tehsil Nazims at the bottom, including paid private sector executives, advisors, consultants, etc., of statutory organisations or institutions or organisations in the control of the government of Pakistan. In other words, it excludes tens of thousands of officials and “public” representatives who are amongst the most corrupt in the country. This is the cream of the elite that has captured the state. This is the elite against whom we all love to rail. But what is good for the goose is not good for the gander. It seems that the bowels of the state of Pakistan are not to be cleansed after all.

The Tax Amnesty Scheme was nine months in the making. If the PMLN scheme had been extended when the PTI government took over, there would have been a lot of money in the coffers today. In the event, it took half a day to be promulgated via a Presidential Ordinance after proroguing the National Assembly so that it couldn’t be debated.

The small print in the IMF Agreement and Tax Amnesty Scheme testifies to the incompetence of the PTI regime in the face of rising national security challenges to the state of Pakistan. The forecast is grim.

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