ADB's con­cern

The Pak Banker - - FRONT PAGE -

The Asian De­vel­op­ment Bank in its lat­est re­port has un­der­lined the need for struc­tural re­forms in Pakistan. This is an ad­vice which the In­ter­na­tional Mone­tary Fund in its March 2018 first post-pro­gramme mon­i­tor­ing re­port and the World Bank in its Novem­ber 2017 Pakistan De­vel­op­ment Up­date have also given.

The fo­cus of all three mul­ti­lat­eral lend­ing agen­cies that Pakistan con­tin­ues to bor­row from - for pro­gramme (bud­get sup­port) and project spe­cific loans - has been to em­pha­size the need for struc­tural re­forms sub­se­quent to post-IMF Ex­tended Fund Fa­cil­ity (EFF) from Septem­ber 2013 to Septem­ber 2016. What is un­for­tu­nate is that the need for struc­tural changes par­tic­u­larly in the en­ergy sec­tor and our tax sys­tem have been iden­ti­fied by mul­ti­lat­er­als and bi­lat­er­als for decades now but have never been un­der­taken.

The Ishaq Dar-led Fi­nance Min­istry ful­filled the IMF con­di­tion to raise rev­enue by in­creas­ing taxes on ex­ist­ing tax­pay­ers. This im­plied rais­ing sales tax by one per­cent across the board and levy­ing a with­hold­ing tax in the sales tax mode though defin­ing it as in­come tax. Thus while the non-fil­ers were made to pay dou­ble the with­hold­ing tax rate that was ap­plied to fil­ers (with a steadily ris­ing dif­fer­en­tial over four years) yet this im­plied tax­ing the fil­ers twice, on their in­come at source and again on prod­ucts/ser­vices they pur­chased on which a with­hold­ing tax was levied; while the non-fil­ers paid the tax on their pur­chases but did not file their re­turns - the os­ten­si­ble rea­son for the dif­fer­en­tial in the rates. Each year there was a short­fall in the over­am­bi­tious bud­geted rev­enue tar­gets which were met by mini-bud­gets that en­vis­aged rais­ing ex­ist­ing rates rather than in widen­ing the tax net.

The en­ergy sec­tor too has been rid­dled with poor gov­er­nance for the past five years. Claims that gen­er­a­tion ca­pac­ity has been sig­nif­i­cantly added that would end load shed­ding for­ever are be­ing chal­lenged on three counts. The cir­cu­lar debt has risen to 1.1 tril­lion ru­pees, higher than what the PML-N ad­min­is­tra­tion in­her­ited from the PPP-led coali­tion gov­ern­ment. Se­condly, the trans­mis­sion net­work re­mains in­ad­e­quate with a ca­pac­ity to trans­mit no more than 16500MW, a gen­er­a­tion ca­pac­ity that was avail­able in 2013 but was not utilised be­cause of liq­uid­ity is­sues em­a­nat­ing from the cir­cu­lar debt. At the same time, heavy reliance on bor­row­ing by the en­ergy sec­tor has led to sur­charges on tar­iffs that make our elec­tric­ity more costly than avail­able to our com­peti­tors in other coun­tries.

Com­mit­ment to pri­va­tise dis­tri­bu­tion com­pa­nies was never met by Nawaz Sharif when he was prime min­is­ter. And the World Bank Up­date notes that "sig­nif­i­cant re­forms un­der­taken in the elec­tric­ity sec­tor have stalled since the gov­ern­ment stopped pri­vati­sa­tion a year ago. There have been ef­forts to re­duce the elec­tric­ity reg­u­la­tor's in­de­pen­dence. The Up­date fur­ther notes that "in­vest­ment lev­els re­main very low, at around 15 per­cent of GDP (both pub­lic and pri­vate). Main­tain­ing macroe­co­nomic sta­bil­ity and fur­ther progress in struc­tural re­forms will be nec­es­sary to ac­cel­er­ate growth and en­sure it is in­clu­sive and sus­tain­able... . Pakistan re­mains one of the low­est per­form­ers in the South Asia Re­gion on hu­man de­vel­op­ment in­di­ca­tors, es­pe­cially in ed­u­ca­tion and stunt­ing."

The is­sue of a widen­ing cur­rent ac­count deficit and de­plet­ing for­eign ex­change re­serves that were propped by Dar with ex­ter­nal bor­row­ing re­quire more im­me­di­ate re­me­dial mea­sures. The IMF re­port refers to "con­tin­ued struc­tural re­form chal­lenges" and fore­casts doom as "fiscal risks stem from con­tin­ued loss-mak­ing in pub­lic sec­tor en­ter­prises...the com­bined ac­cu­mu­lated losses by these PSEs now ex­ceed 1.2 tril­lion ru­pees (4 per­cent of GDP)... ex­ter­nal sec­tor im­bal­ances are ex­pected to rise fur­ther and fiscal deficit will likely re­main el­e­vated." The re­port projects un­der­ly­ing fiscal deficit at 5.9 per­cent and adds that on cur­rent poli­cies and based on the author­i­ties' am­bi­tious ex­ter­nal fi­nanc­ing plans, gross in­ter­na­tional re­serves are ex­pected to weaken fur­ther to 12.1 bil­lion dol­lars (2.2 months of im­ports). Need­less to say, in these cir­cum­stances, bud­get mak­ing will be a chal­leng­ing task.

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