The IMF option By Nasir Jamal

THE calls for an early exit from the International Monetary Fund’s stand-by arrangement (SBA) have intensified in the recent weeks as public investments shrink, energy subsidies go and unemployment and poverty rise.

But can Pakistan afford to quit the fund at a time when inflation is resurging, external assistance and foreign investment dwindling, gap between public spending and income widening, public debt mounting and growth decelerating?

On top of that, the government’s tax revenues are stagnating, and its effort to mobilise more domestic resources and restructure tax regime by replacing the existing, distorted general sales tax (GST) with the future-looking value added tax (VAT) is being opposed both inside and outside of the parliament.

Such is the intensity of opposition to VAT that finance minister Hafeez Shaikh named it as “reformed GST” in his budget speech for the next fiscal year and delayed its enforcement till October 1 to gain time for building a bipartisan political consensus and take provinces on board on it.

Many analysts believe that it would be difficult, if not impossible, for the government to obtain a wider political support for VAT and develop a bipartisan agreement on the issue. Even those who want Islamabad to exit from the IMF programme are not prepared to support government on tax resource mobilisation to reduce reliance on external bilateral and multilateral financing. But political rhetoric apart, none of the economic experts or politicians has come forward with an alternative strategy in case the fund programme is terminated prematurely and VAT abandoned.

“What other options are you left with but to go to the IMF for money when you are not ready to enforce financial discipline and mobilise your domestic resources (to meet your needs)?,” wonders eminent economic expert Shahid Kardar.

“If we exit from the fund’s programme it’ll become difficult for other bilateral and multilateral lenders donors to support us financially,” he argues. At the same time, he says, “we will not learn to enforce strict financial discipline on ourselves unless the world abandons us, completely.”

Ali Cheema, another leading economist, cannot agree more with him. “When expenditure is rising and revenues falling, what alternative do you have?,” he asks.

But, he says, politicians could get out of the IMF programme if they decide to make hard choices – imposition of strict financial discipline through cuts in public spending and reorganisation and restructuring of taxes to increase domestic revenues.

Nonetheless, the government cannot make this trade-off on its own. Others will also have to support it. Yet the chances of politicians making this trade-off remain slim. “Even tax reforms are being carried out not because we want to do it but because the fund is pushing us for this,” laments Cheema, who is dismayed by politicisation of the debate on VAT for the benefit of the rich who do not want to pay taxes.

“Imposition of VAT has to be a political decision. But it should not be used for doing adversarial politics,” he contends.

He dismisses fears of hyper inflation as a result of imposition of VAT. “Consumers are paying value added tax for last 20 years in the form of GST. It is only that it is now being levied at the retail stage and is being freed from all distortions and exemptions to the rich.” He feels that VAT is being opposed because it would document the economy and reveal actual income of many who are not paying taxes commensurate to their financial position.

The opponents of the IMF programme, including former finance minister Salman Shah, criticise what they dub as harsh macroeconomic stabilisation conditions attached to it and hold them responsible for the slower growth, job losses, inflationary pressures, high domestic energy prices etc.

Others argue that the economic slide could have been steeper and uncontrollable if the fund had not stepped forward to help Islamabad in November 2008 in the absence of sufficient bilateral assistance specially when the war against militancy is claiming a huge portion of its limited fiscal resources.

The Institute of Public Policy’s annual report on the state of the economy during 2009/10 underlines that the return of “considerable” macroeconomic stability and reduction in financial imbalances are largely due to the financial assistance provided by the fund. Yet, at the same time, it concedes that the policies of fiscal tightening being pushed by the fund for macroeconomic stabilisation are responsible, albeit partially, for causing hardships to people and pushing poverty.

Whether one likes it or not, many believe that Islamabad may have to join yet another IMF programme once the ongoing facility expires in December to protect the “fragile economic recovery” and pay back the loan to the fund unless we get our economic and financial priorities and policies right. The government has to return $11 billion to the fund in three years to June 2015, according to the IPP report.

No matter what position one takes on the country’s relationship with the IMF, one thing is clear: we just don’t have alternative to the fund’s financial assistance for the moment. Not unless we decide to live within our means and pay taxes, honestly.

Source: http://www.dawn.com/wps/wcm/connect/dawn-content-library/dawn/in-paper-magazine/economic-and-business/the-imf-option-460