IMF tranche and fiscal squeeze
By Khaleeq Kiani
Monday, 03 May, 2010 | 03:07 AM PST |
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After a lot of squabbling, Pakistan now hopes to get the much-delayed $1.2 billion tranche from the IMF after its approval by the Fund’s executive board on May 14 in Washington.
Before the expected approval of the funds, Pakistan authorities under the fourth review need to draw a roadmap with the World Bank and the Asian Development Bank to eliminate electricity subsidies by August 2010.
This instalment was to be released after the completion of Dubai talks on February 15 but was delayed due to disagreement between the IMF and authorities on the observance of performance criteria. As a result, the country’s foreign exchange reserves slipped below $15 billion after many months.
The $11.3 billion IMF programme under the Standby Arrangement (SBA) is fully financed but Pakistan also needs crucial disbursements of external assistance, largely from the ADB, the World Bank and Friends of Democratic Pakistan.
The authorities and the IMF agree that the stabilisation programme has progressed well, with economic recovery under way and external sector position improving despite challenging circumstances. However, the fiscal deficit targets remained out of control in each of the first three quarters ending March 31.
Pakistan has sought at least two waivers from the IMF for slippages in important macroeconomic targets and requested modifications in future programme milestones. “We request waivers for non-observance for the end-March quantitative performance criteria on the overall budget deficit (excluding grants) and net government borrowing from the State Bank,” according to letter of intent (LoI) sent to the IMF board.
The government missed the adjusted end-March quantitative performance criteria on the fiscal deficit by 0.4 per cent of GDP on account of lower revenue and security-related expenditure and shortfalls in disbursement of IDP grants and pledges made at Tokyo. The government also missed the end-March quantitative performance criteria on net government borrowing from the central bank by 0.2 per cent of GDP due to delay in the disbursement of external financing.
The LoI said: “We also request (i) a modification of the end-June 2010 performance criteria for the budget deficit to increase the cumulative end-quarter ceilings by Rs22 billion (0.15 per cent of GDP) in order to allow space for urgent security outlays and avoid undue cuts in other priority spending, and (ii) a modification of the end-June 2010 performance criterion (raising the floor) for net foreign assets of the SBP by $300 million, taking into account our strengthened external position.”
The two sides agreed that reaching agreement on the 2010-11 budget and further progress on the July 1 introduction of VAT would be key issues for the fifth review. So far, Pakistan has received $6.4 billion under the IMF programme.
Pakistan authorities and the IMF staff agree that the stabilisation programme faced challenges because of slower than planned electricity reforms, delays in disbursements of pledged lenders’ support, revenue shortfalls and military operations, complicating the fiscal management.
Inflation has also picked up beyond target. The upward revised fiscal gap from 4.9 per cent to 5.1 per cent is to be met through higher than projected privatisation inflows which would more than compensate for foreign inflows because tax and non-tax revenues might be lower than targeted. The growth rate is anticipated to remain at around three or 3.3 per cent because the large-scale manufacturing has started to pick up after a protracted decline. Agriculture performance is mixed, with lower rice and sugarcane output, offset by a stable outlook for wheat and higher cotton output. Private sector credit growth has improved somewhat as businesses rebuild their working capital and financial and capital markets remain positive.
However, the growth outlook is subject to risk due to domestic security situation, erratic power supply and the current pace of global economic recovery. These factors would push annual consumer index up at 12 per cent. The current account deficit is expected to improve further to 3.75 per cent of GDP supported by lower imports despite higher oil prices, lower profit outflows and strong remittance inflows.
The government has assured the IMF that the integrated value added tax acts as introduced in the federal and provincial assemblies will be maintained. The integrated VAT regime will be implemented to avoid the problem of cascading and tax competition. The review of VAT law by the provincial and federal legislative committees would be completed by mid-May and it would be passed assemblies by May 31.
As preparatory step towards full implementation of VAT Act by July 1, 2010, the VAT regulations and zero rating would be issued 2-3 weeks after its enactment. A review of business processes, record keeping and design of forms will be integral component of the VAT regulations.
The government has also given an undertaking to the IMF to complete the transition to a single treasury account by June 2010. The government said it was collecting information on commercial bank deposits of federal entities and would have all non-own sources, non-security related cash balances transferred to the federal consolidated fund by the end of June and associated accounts closed.
“We will ensure that these transfers do not affect liquidity of the banking system. We will ensure that a minimum interest rate is received on all federal government deposits,” the S-MEFP said.
Privately, the authorities agree that the FBR would not be able to collect more than Rs1,350 billion by end of this fiscal year. The current year’s revenue target has already been slashed to Rs1,380 billion from Rs1,396 billion after partially taking into account a shortfall of 0.2 per cent of GDP in the first half of the fiscal year. The collection in the third quarter was short of target by over Rs25 billion.
The government has committed to redoubling its efforts to reduce the number of non-filers and under-reporting taxpayers. The FBR has sent around 200,000 letters to non-filers and under-reporters, resulting in additional 121,000 taxpayers filing their returns before the extended deadline of January 25, 2010.
The FBR would also focus on collection of tax arrears stuck with oil and insurance sectors. Banking and insurance sectors are being forced to pay their outstanding withholding taxes which have not been deposited through reconciliation of accounts.
About 900 companies and associations of persons have been identified for audit and 468 of them have been outsourced to the Institute of Chartered Accountants of Pakistan, along with auditing framework. Most of the audits are expected to be completed by June this year. The remaining will be conducted by the FBR and completed by the end of May.
Likewise, a comprehensive plan for nationwide rollout of poverty-scoreboard based targeting for the Benazir Income Support Programme (BISP) has been prepared with the help of the World Bank and the process for contracting firms will be completed by end-May. Delays in the rollout of the poverty scorecard system will slow delivery of BISP assistance and result in disbursement of about Rs50 billion, providing a saving of about Rs20 billion during the current year.
Showing posts with label Pakistan. Show all posts
Showing posts with label Pakistan. Show all posts
Monday, May 3, 2010
Khaleeq Kiani
Will FBR chief follow his own advice?
A few months down the road, he found himself in the same imbroglio. He was junior to 14 grade-21 officers working already in the FBR when he took over the coveted post last year by superseding 25 officers of his own service cadre – District Management Group. He had very proudly told his colleagues that he had never challenged a government decision.
In the middle of budget preparations, Mr Ahmed has now sought four-month leave and indicated to leave the bureaucracy after being demoted to grade-21 following the implementation of the Supreme Court judgment. “He should respect the court decision and accept government orders to work in grade-21 as he had advised others to do a few months back,” a senior FBR official said.
But he is trying to pressure the government in the most crucial time of the fiscal year when the revenue collection machinery is going through reform process and the tax collection targets need to be met and future estimates to be finalised. It is not customary to have a change of guard at the FBR when budget exercise is in full swing but the government has been put in an awkward position through his smart move to get re-promoted before all others demoted, another officer said.
Addressing the officers of the income tax and customs and excise group recently, Mr Ahmad quoted the translation of a verse from the holy Quran that “Human beings have been allowed by God to become the best of best but they have also been allowed by God to become lower than the lowest.” And then he said the “low side is remaining focused on and getting too much into questions of your seniority and your career.”
Mr Ahmad had told the officers, including some of his seniors-in-the-past, that their concerns could be addressed by the anomalies committee or the service tribunal or even the courts: “But if you keep focused on this and start forgetting your main role for what the government has recruited you, you will not be doing the duty…it is not just rising in life, fine, in terms of status and grades but also, you know, serving the country, serving the government…even senior officers, some of you are doing this. So this is what I see as lower than the lowest,” transcripts of his speech available with Dawn reveal.
Speaking about the concerns shown by the disgruntled officers for losing seniority and career progression, the chairman FBR had advised them to speak their minds at different forums but once the decision has been taken, they have to comply and should not raise questions of national interest because that was the job of the government to determine.
Discouraging the officers to challenge government decisions about merger of various cadres of the FBR, he said the government has absolutely all the right to design in any way its functioning, reorder its functioning, within FBR and even outside FBR. “I do not think that any court of law can challenge this, right of the government to re-order the way it transacts its business. What you can probably challenge is my seniority, my promotion, my merit. Your merit finished once you enter the civil service.”
The FBR chief had also criticised the officers for being engaged in the questions of promotions and seniority and said: “I have not done that in all my life”.
It may just be a turn of destiny that he had to do all those things he had advised others not to do and that he had “not done in all his life.”
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