How Important Provinces Role Is In Seeking IMF Bailout Package

Posted on Posted inBE2C2

IRSHAD SALIM (Sep 16, 2018): Whether Pakistan borrows from the International Monetary Fund (IMF) or from Beijing and Riyadh, revenue generation and belt-tightening on federal as well as provincial level have become inevitable.

Narrowing the mounting gap between external liabilities and available foreign exchange by the federation by seeking bailouts while provinces continue to spend lavishly is no longer an option going forward — the chickens have come home to roost as a result of 10-year “Russian Roulette” albeit “Casino economy”.

Seeking to eliminate corruption and chasing hidden assets of Pakistanis abroad is only one side of the coin. Other being sustained programs to increase revenue and reduce expenditures on federal and provincial levels.

If not, “fire-fighting” measures will continue to add negative numbers to the federal balance sheet –unless provinces also reduce costs over revenue earned by them and turn in contributions collectively, proportionately in excess of their expenditures which have grown disproportionately.

So for the PTI-government the issue is three-folds: borrowing, increasing revenues, and reducing expenses on federal as well as each province’s level no matter who the lender is — the IMF leads in this matter with the US holding 50 percent voting sway in the lending institution’s decision regime.

PM Khan is expected to fly to the kingdom of Saudi Arabia this week — his first trip abroad after being sworn-in as the Prime Minister, and a substantive “bailout package” is said to be on the agenda including investments through the kingdom’s $224 billion sovereign wealth fund called the Public Investment Fund (PIF), according to reliable sources.

However, economists who have the ear of the prime minister and his finance team are of the view that “The IMF option is inevitable. No one else will give you better rates under these circumstances,” said Dr Ijaz Nabi, a World Bank veteran who now serves on the prime minister’s Economic Advisory Council (EAC).

Why the delay then? The federal government is engaged in “background discussions with provincial governments”, Dr Nabi said.

For the record, he stated his comments should not be taken as reflective of EAC discussions.

Belt-tightening is an essential feature of any IMF bailout program, notwithstanding Saudi and or China deal.

The Washington-based lender typically asks governments to quickly slash fiscal deficits. Governments usually respond by cutting back on expenditures because boosting revenues in the short run is more difficult.

But the post-18th Amendment governance structure has reduced the fiscal space for the federal government. This means Islamabad is fairly dependent on consent from the provincial governments if it wants to commit to an expenditure-cutting program with the IMF.

“The deficit is huge. It’s not easy to figure out which expenditures to cut back on. This discussion has to take place with the provinces. This is a complex discussion that we need to have before going to the IMF,” he said.

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According to the rules governing the federation, even one province can indirectly stall the federal government’s talks with the IMF by not agreeing to expenditure cuts. The PTI is in power in three provinces, but the Sindh government is led by the rival PPP.

“This is a difficult debate. But it’s underway. Some of it is taking place behind closed doors. Some of it will take place openly in the near future. That’s why it’s taking some time. I’m sure they will soon go to the sources that give them the best possible deal,” Dr Nabi said.

The Sindh government has so far vehemently refused to let go of any gains the province had in the aftermath of the seventh National Finance Commission award announced in 2010. The share of the provinces in the so-called divisible pool — income and corporate tax, sales tax on goods, and excise and import duties collected by the federal government — went up to 57.5 per cent from 47.5pc as a result of the last NFC award. Simultaneously, it reduced the share of the federal government by 10 percentage points to 42.5pc.

Although the revised formula for money distribution gave the provinces fiscal independence, the simultaneous devolution of critical subjects means the provinces have to bear the responsibility for basic services like education and health.

Dr Nabi shied away from extending outright support for a cut in the provincial share in the NFC. But he contended that the current NFC award does not incentivize the provinces to increase their revenue base “in any way”.

“If the provinces don’t mobilize their own resources in a time of hardship, then it will be a very tough discussion (about cutting expenditures). In provinces where the PTI is in power, this discussion will be relatively easy. In the other province, it’ll be very difficult,” he said.

It is true that the provinces have largely failed to grow property and agriculture income tax collection — both sectors remain relatively undertaxed and under-reported. The Sindh government however has been meeting its annual collection target for sales tax on services every year since 2011-12.

From Rs16 billion in 2010-11 when the federal government was responsible for its collection, the Sindh Revenue Board increased its mobilization to Rs100bn in 2017-18. This shows an annualized growth rate of almost 30pc. But expenditures of the province increased too over a decade rule by the PPP. A similar trend also developed in Punjab where the PML-N party ruled for a decade.

According to economist Dr Kaiser Bengali, the IMF recipe for bringing down the overall deficit by forcing the provinces to run a surplus is not logical though.

In his opinion, with the abolition of the concurrent list as part of the 18th Amendment, the federal ministries on that list were also supposed to be abolished, which would reduce federal expenditures. But that didn’t happen, he said.

“You know there are 42 (federal) divisions, including one on national harmony. The agriculture ministry has become the food security ministry. There are 23 education-related departments that are still in Islamabad… curriculum wing and what not,” he said, adding that the federal government failed to keep its end of the bargain and is now demanding unfairly that the provinces cut back on their spending.

So if the IMF bailout program conditioned on increasing revenues and slashing expenditures isn’t an option, will then Saudi and or China “non-conditional” deal be pursued at the expense of carpeting real fiscal issues?

The PIT-government led by Khan Sahib not only seeks fiscal injection now, but aims to set the economy on a sustainable path for the “future generation”.  For that to happen, the PPP-led Sindh government may also have to be partnered.

(The author is a business and construction consultant, analyst, and Editor-in-Chief of PKonweb, DesPardes and BE2C2 Report)

Based on original report in Dawn.

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