The Fund has not approved the next tranche, nor has the economic managers' team pushed it through as with a comfortable foreign reserves position, there seems to be no urgent need for further IMF money for the balance of payment support. Nonetheless, the letter of comfort from the IMF gives a green signal to other donor and lender agencies including the World Bank, Asian Development Bank and Islamic Development Bank.
This bodes well for the ailing economy amid support from the US in varying accounts is in doldrums as the Washington-Islamabad relations have come under some strains following a unilateral US raid on a compound in Abbottabad resulting in killing of Osama bin Laden.
For the first time, there is no insistence by the Fund on getting the RGST approved in the upcoming budget, rather it agreed upon the government's efforts for political reconciliation. The Fund coined two options to economic mangers, either to implement RGST or withdraw existing exemptions in the general sales tax system (GST).
Without a surprise, the government has agreed to embrace the latter till the centre and the federating units reached consensus on RGST and allow provinces to build the necessary capacity to collect sales tax on services. The Presidential order in March on exemption withdrawal is required to get approval from the parliament in the upcoming budget with an exception to plants and machinery. While, in line with the general practice across the globe, food, education and agriculture products will remain exempted. However, poultry items, processed food and packaged milk are likely to come under sales tax domain.
Most of these measures have already been incorporated in the government's model to set FBR target of Rs 1,952 billion for FY12. The intriguing point, however, is that what new measures would the government envisage to slash fiscal deficit target by 0.5 percent of GDP (or Rs 101 bn) to 4 percent of GDP. With sticky nature of current expenditures and low development expenditure, the onus is likely to fall on revenues.
The chances of legislative reforms by taxing the sectors in provinces' domain such as agriculture and real estate are dim. It's up to the FBR to pull up socks by expediting administrative reforms. The tax gap - difference between actual and potential collection - is enormous. According to FBR's own study, it was 79 percent (Rs 796 bn) in 2008 as compared to 9 and 22 percent in UK and US, respectively.
The potential gap in corporate tax collection is estimated at Rs 557 billion while Nadra has identified more than 700,000 potential taxpayers. However, collecting through evaders is a slow and painstaking process, as to date the information on only 54,798 has been disseminated with only 1,100 cases being assessed with a demand of less than a billion rupees. Then, there is an issue of under-invoicing and smuggling of imports through Afghan Transit Trade to be dealt with.
In the Budget Strategy Paper, government envisaged to raise Rs 125 billion through additional revenue measures and Rs 10 billion via administrative measures to reach the target of Rs 1,952 billion. Given the past record, even achieving this is an uphill task and enhancing tax revenues further by administrative reforms to curb fiscal deficit to 4 percent of GDP will require herculean efforts by the tax collecting agency.
POWER SECTOR AND CIRCULAR DEBT: The Fund appreciated the ongoing work and plans of Pakistan on resolving circular debt and power sector reforms. The structural reforms presented include dissolution of Pepco by June end. The premise of structural reforms are on better governance, supportive legislative measures, financial measures, supply side interventions, demand side management and recovery.
The boards of directors for seven Discos and NTDC have been reconstituted while those of Gencos and CCPA are being reconstituted which are expected to result in improved efficiencies of power generation and distribution companies. The tariff differential subsidy is expected to be reduced to Rs 50 billion in FY12 on the basis of tariff rationalisation and better technical and financial management with the help of development partners.
With tariff differential subsidy to be eliminated by FY12 end, the devil of circular debt may be partially addressed. However, its complete elimination is contingent upon better energy mix by bringing prices of CNG at par to alternatives and steps to reduce natural gas in domestic use. The government is yet to show the political will on this score which can substantially reduce the flow of energy circular debt.
BR staff reporter from Islamabad adds: The on-going talks between the International Monetary Fund (IMF) and Pakistan concluded on Tuesday without reaching a solid conclusion while the Fund has planned to visit Pakistan on July 2011.
The IMF mission, led by Adnan Mazarei, met with the Pakistan economic team in Dubai this week past. At the conclusion of its work today, the mission issued a statement that says, "Over the past few days, the Pakistani authorities and an IMF mission held constructive discussions on Pakistan's stabilisation program, focusing on macroeconomic policies for the rest of Fiscal Year 2010/111 and the 2011/12 budget. The authorities expressed their strong resolve to pursue prudent macroeconomic policies and enhance Pakistan's medium-term growth prospects".
According to the IMF statement, "Pakistan's economy faces important challenges. Economic growth has been negatively affected by the floods and the high price of oil, inflation remains persistently high, and budgetary problems are undermining macroeconomic stability. Measures to improve confidence in the context of the authorities' economic stabilisation and reform agenda, while protecting the poor, were discussed".
The statement reveals, "The IMF remains committed to the ongoing dialogue with Pakistan and discussions will continue in the weeks ahead and a mission is planned for July 2011." The mission showed satisfaction upon the recent strengthening of the external position and some of the tax measures announced in March, which represent an important milestone.
"Discussions centered on measures to reduce the budget deficit in 2011/12 as well as quasi-fiscal operations (for example, the procurement of agricultural commodities) to reduce inflation, assure fiscal sustainability, and protect the external position. Reducing the budget deficit will require higher revenue through tax reform to broaden the tax base, including steps to implement reforms in the general sales tax", the statement says.
The mission says that the measures to reduce spending on general subsidies in the energy sector have begun to be implemented. The quality of expenditure could be improved by increasing the share of spending on health, education, and infrastructure. Continued efforts are needed to reduce the budget deficit to take the pressure off monetary policy and create space for more credit to the private sector. In addition, as government debt has increased, debt management needs to be improved. Moreover, careful monitoring of the financial sector is needed to assure continuing financial stability.
Reuters adds: Pakistan will end exemptions to a retail sales tax, an official source involved in talks with the International Monetary Fund said on Tuesday, adding that the discussions in Dubai went smoothly. Officials from Pakistan, which has been under an IMF programme since 2008, began talks with the IMF last week over targets for the fiscal year that starts on July 1. The meetings were moved to Dubai after Osama bin Laden's death because of security fears.
"We plan to remove the existing exemptions," said the source, who requested anonymity. Those exemptions are mainly on certain foods, including as dairy products. In March, Pakistan removed exemptions on items used in agriculture, such as fertilisers and pesticides.
The measures are due to be announced on May 28 when the budget for 2011/12 is unveiled. Pakistan is due to meet IMF officials again in July, when the new measures' performance will be reviewed. Pakistan's tax-to-GDP ratio is around 10 percent - one of the lowest in the world - and the IMF has asked Pakistan to increase that, though no specific target has been set. The low ratio and slow implementation of fiscal reforms has stalled the bailout programme since last August.
Pakistan turned to IMF in November 2008 for an $11 billion bailout, which is due to end in September. The budget deficit for the first nine months of the current fiscal year was 4.5 percent of GDP. The government has said it aims to keep the deficit to less than 5.5 percent of GDP for the year, but analysts doubt that can be achieved.