Reflection on Prior Actions By Dr. Ashfaque H.

Khan Pakistan and the IMF have reached a staff level agreement for a $5.3 billion bailout program, which . his program is likel! to be presented to the "e#ecutive $board of the IMF in earl! %eptember for its approval. &owever, before the program is presented to the $board, Pakistan will have to take several measures as prior actions. hese prior actions are meant to test the resolve of the government to undertakein undertaking critical reforms during the program period. $efore I delve into the details of the prior actions, a few words regarding possible augmentation of the IMF loan from $5.3 billion to either $'.' billion or $(.) billion are in order. *t the time of signing the staff level agreement, the Fifinance Mminister ine#plicabl! claimed that the new loan from the IMF would not increase the countr!+s indebtedness as this would be used for repa!ing the remaining loan of the IMF. %eeking augmentation of the loan is not desirable for several reasons. Firstl!, this would increase the countr!+s debt burden. %econdl!, it will hurt the reputation of the Ffinance Mminister as he will be seen as backing off from his claim. hirdl!, this government would be committing the same mistake as it wasthat committed b! %haukat arin during the previous government. Pakistan borrowed so heavil! from the IMF that it faced serious repa!ment difficulties and hence waswas eventuall! forced to go to the IMF for a new program. M! suggestion is that we should not seek augmentation. It will create complacenc! on our part towards building up foreign e#change reserves. he IMF on its part must evaluate Pakistan+s debt carr!ing capacit! before agreeing to augment the loan. he IMF staff had e#pressed their concern about Pakistan+s capacit! to repa! the loan when the previous regime under the leadership of %haukat arin sought augmentation. heir assessment proved to be correct as Pakistan failed to enhance its debt carr!ing capacit! and was forced to seek a new assistance to repa! the old loan. he IMF has asked the Pakistani authorities to implement five prior actions before the staff level agreement is presented to the board. hese prior actions include, i- fiscal package. ii- electricit! price ad/ustment. iiilaunchingng of a ta# reform initiative. iv- certain central bank initiatives. and v- commitments b! the 0ouncil of 0ommon Interest 100I- on fiscal reform package including generation ofing surpluses b! the provincial governments. hese prior actions sprung emerged as a direct result of from three disappointments pertaining to the previous program of e#perienced b! the IMF pertaining to the previous program. hese disappointments included, the lack of progress in raising ta# revenues,. in addressing the power sector losses . and the in governance problems especiall! in these two polic! areas 1ta#ation and power sector-. Fiscal indiscipline has been the root cause of Pakistan+s macroeconomic instabilit!. Failure to mobili2e ade3uate resources on the one hand and senseless spending on the other hand have led to the persistence of a large fiscal deficit in Pakistan. *n! program with the IMF is, therefore, bound to focus on resource mobili2ation and e#penditure rationali2ation. 4nder fiscal package as a prior action, Pakistan will have to take measures amounting to 5.5 percentage point of the 67P, with 8.9 percentage point on revenue side and 8.( percentage point on e#penditure side. he purpose is to bring the fiscal deficit down from (.5: of 67P 1e#cluding one;off e#penditure- last !ear to '.8: this !ear. he government has alread! taken measures on the ta# side in the budget and has taken additional measures recentl! to increase revenue such as increasing 6% rate on 0<6 b! ':. Furthermore, the government has also raised electricit! tariff, which will generate additional revenue from sales ta# and withholding ta#. =n the e#penditure side, the government has taken measures to reduce power sector subsid! as well as reduced to reduce other current e#penditure. he government has kept >s5)8 billion under special initiative in the development program. Ma/or savings can be accrued to government as ver! little amount is e#pected to be utili2ed this !ear. hus, the government appears to have implemented the first prior action.

hus. The writer is Principal at NUST Business School (NBS !sla"a#a$. the minutes of the meeting state that Dprovinces will strive to generate surplusesE. 0onse3uentl!. hus. pursue a fle#ible e#change rate polic! and tighten monetar! polic! b! raising the discount rate. *s regards the third prior action 1launching of ta# reform initiative-. but no firm decision was taken. the! were latter are alwa!s striving to generate surpluses. that is to. the (th <F0 *ward has increasingl! complicated the implementation of fiscal polic! in Pakistan. From the IMF perspective. It allowed successive governments to maintain the status 3uo and !et provided resources to them. it is not clear whether it has been implemented or not. %"ail& ah'han(n#s. his issue was discussed in athe recentl! held meeting of the 00I. he last prior action re3uires approval of the 00I on thegovernment+s commitment to fiscal measures including fiscal reforms. his is the largest increase in power tariff in the countr!+s histor!. *ccording to the sources. his measure will fetch >s5(8 billion for distribution companies and is e#pected to contribute to the reduction in tariff differential subsid!.e$u. he %$P has alread! implemented the first measure b! withdrawing itself from intervening intervention in the foreign e#change market. If the! have failed..558 bps will be taken in the coming monetar! polic! announcement. If not properl! managed. From the perspective of the provincial governmentsgovernments+ perspective. Pakistan+s e#change rate depreciated from >s@9.? per dollar in e#change re3uired to take at least two measures. I am confident that the IMF staff will present the agreement to its $board. It is unfortunate that the IMF has failed miserabl! in the last )5 !ears to increase Pakistan+s ta#. the $board is likel! to approve the new program b! earl! %eptember. *s of toda!. the fourth prior action will have beenbe completed b! end of *ugust as well. he second measure of raising the discount rate in the regionange of 588.@ per dollar on *ugust 5'Ca loss of >s?. that is.5 per dollar from Bune 5 to >s58). Is there an! accountabilit! in the IMFA Perhaps not. create risks of e#penditure slippages and ma! compromise incentive to raise ta# collection at all levels. the government has increased electricit! tariff for industrial. commercial and bulk consumes in the range of )): to '?.67P ratio under its program. the government appears to have taken measures to compl! with ma/orit! of prior actions. the second prior action has also been implemented b! the government. Most probabl!. he global leaders do not want to create economic instabilit! in Pakistan either at this critical /uncture of inthe histor!. =n the whole.p' .': with effect from *ugust 5. it iswas not their fault as the federal government never provided them the budgeted resources. this *ward will complicate macroeconomic stabili2ation. his prior action is highl! critical for the success of the IMF program. 7omestic resource mobili2ation has alwa!s been athe critical element of the IMF program since 5@99.*s regards the electricit! price ad/ustment 1second prior action-. =n central bank initiatives 1fourth prior action-. the government has relied heavil! on the e#isting ta#pa!ers as well as e#isting ta# base. <o credible measures appear to have been taken in broadening the ta# bases. no new areas of economic activit! hasareas of economic activit! have been brought under the %tate $ank of Pakistan 1%$P.

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