May 30, 2020
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A Temporary Reprieve

The IMF decision to release funds to the nation gives Benazir breathing space. But for how long?

A Temporary Reprieve

PAKISTAN is faced with a serious economic crisis. As in the past, this bout of fiscal gloom too is a symptom of a deeper political malaise stemming from poor financial and political management. Consequently, while Prime Minister Benazir Bhutto has been facing irate demonstrations demanding her resignation and the Supreme Court has taken her head-on, on the other front she is faced with an economy in steep decline.

However, though the present economic crisis is far from over, the Bhutto government has received some relief from Pakistan’s October 31 agreement with the International Monetary Fund (IMF). The release of the third and fourth tranche of at least $160 million out of the $600-million IMF stand-by loan may help restore the nation’s declining credibility. "This agreement would do good to Pakistan especially in reversing chances for downgrading of credit rating by New York-based agencies like Moody’s and Standard and Poor," said an official of the finance ministry.

It will also shore up depleting forex reserves, now standing at about US $700 million (excluding its gold reserves of $800 million). The reserves stood at $831 million on October 3, according to State Bank of Pakistan (SBP) figures.

The unexpected decision by the IMF was based on the measures that the government had announced on October 22. "Pakistan has taken new measures which actually convinced the IMF review mission to recommend early resumption of assistance," said IMF’s local representative, Shams-uddin Tareq.

Informed sources in the ministry of finance said that Paul Cha-brier, Regional Director of the IMF, is expected to sign the agreement soon. In the meantime, the two sides will be engaged in working out documents and various teams which had talks on issues like fiscal deficit, balance of payments, inflation and monetary development will finalise their reports.

The economic programme aimed at reducing the budget deficit has been described by the government as a "second wholesome budget". The package included devaluation of the Pakistani rupee by 8.5 per cent. This puts the cumulative decline of the rupee since July ’95 at 29 per cent.

The new measures are expected to raise additional revenue of Rs 13 billion (Pakistani) through new taxes and increases in the rates of the existing ones. A cut in development programmes is to generate Rs 20 billion and the slash in administrative expenditures may make for another Rs 7 billion. This does not include defence spending and debt servicing. The IMF has asked Pakistan to cut its defence budget by 30 per cent, but because of the sensitive nature of this issue no decision has been taken yet.

The most prominent aspect of the package is the levy of tax on agricultural income. But instead of imposing a direct income tax at source, the government has told the four provinces to generate Rs 2 billion. The largest share will come from the most populated province, Punjab. "It would be very difficult for the government to collect the tax this way. They have tried in the past and failed. The tax should have been imposed at source. Even a 5 per cent tax at source would give them at least seven to eight billion rupees," said Asia Ghaus, a senior economist and managing director of Social Policy Development Centre.

However, the agriculturists still oppose the tax, claiming that they are already heavily taxed. Qamar-uz-Zaman Shah, chairman of the Pakistan Chambers of Agriculture, said: "We are paying Abiana (water tax), tax on acreage and other taxes to district administrations. We are not going to pay any more taxes." Apart from the package, the change of financial managers also augurs well. The policy package was announced by the State Bank Governor, Muhammad Yaqub, instead of the prime minister’s economic adviser V.A. Jafarey. It was the first time that a governor of the State Bank announced the monetary and fiscal measures of the budget. Reportedly, the IMF was not happy with Jafarey and his team due to their doctoring of figures in the main budget a few months ago. The induction of Syed Naveed Qamar as finance minister was also seen as a welcome step. Earlier, Benazir had held the portfolio herself, leading to criticism that due to her holding the all-important ministry, work had been neglected.

At a meeting with IMF representatives on October 29, Qamar reportedly gave a commitment from his government that this time Pakistan would implement the Fund’s programme. However, observers believe that while the IMF agreement may help in the short term, will create problems for the government in a few months when its impact becomes clear.

THE measures taken are very inflationary. You would see inflation hitting the roof. Prices of basic commodities would increase by at least 6 to 8 per cent. Secondly, the Rs 20 billion cut in development expenditure would cause stagflation. Though the government says it has only cut the funds from non-core projects, the reason why they are not giving the details is that it is not true," said Akhtar Lodhi, Senior Research Economist at the Applied Economics Research Centre, Karachi. While announcing the package, Yaqub said that the increase in prices will only be for a short time. But the common people see things very differently. "Have you ever seen prices coming down? Never, never in my 47 years have I seen prices of essential items being reduced," said Mrs Kazmi, a housewife. "They always promise that their measures would have a short-term effect, but prices keep increasing and it is becoming difficult for a person like me to run a household," she added. Tariq Mahmood, a junior government clerk was more critical. "I ask these big economic planners to make my budget. I get Rs 4,000 a month. Now it’s nearly impossible for me to send my kids to school. To be honest, for the first time in my life I am thinking of ‘making money’, if you know what I mean." 

Nor is the macro-economic situation of the country any better. The State Bank, in its annual report for 1995-96, has suggested strict measures to the government to improve the performance of the economy.

The SBP report, which is an authentic document on the last year’s economic performance, highlighted that due to slippages in the demand management, the budget defi-cit could not be brought down and was 5.8 per cent of the GDP in 1995-96. The larger deficit led to government borrowing of Rs 54 billion. That’s double the set target of Rs 28 billion. Excessive borrowing resulted in higher domestic credit growth of 20 per cent against the revised target of 14.3.

The SBP has suggested that the government use privatisation proceeds to retire the most expensive debt. Pakistan’s foreign debt at present is US $28.60 billion and constitutes 46.2 per cent of the GDP. But the bigger problem is the local debt which is Rs 908.9 billion and constitutes 41.8 per cent of the GDP. Though the external debt is on easy terms of 3 per cent interest and up to 30 years repayment period, the local debt is on 17 to 18 per cent interest rates and can be cashed any time. Debt servicing accounted for 63.2 per cent of the total tax receipts and 46.3 per cent of current expenditures in 1995-96. This issue has been raised several times and even the government had promised to retire debts from privatisation receipts. But this has not been done due to bad management and corruption at top levels.

The inflation rate, as measured by the consumer price index, however, has declined from 13 to 10.8 per cent. A saving rate of 13.6 per cent led the State Bank to term it among the lowest even in the group of low-income developing countries.

A substantial increase in national savings was termed essential to reduce dependence on external resource inflows. This would also reduce vulnerability of the balance of payments and ensure non-inflationary financing of domestic investment.

To rectify Pakistan’s dismally low tax-GDP ratio, the bank has advised the government to improve tax elasticity and tax collection, rather than just imposing new taxes.

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