Significant risks remain
The Fund seemed fine with the government’s ‘fiscal consolidation’ over the last year, but its fears regarding reserves and revenue show it is still worried about medium and long term risks. The economy has suffered some setbacks recently; some related to political agitation, but once the market factored it in the government was no longer in a position to use it as an excuse. Not with the IMF at least. Their thinking seems pretty straight forward. The revenue shortfall needs to be overcome, and for that the government will simply need to improve its earning ability.
The government’s foremost concern, therefore, should be expanding the tax net. It would be hard to find an election manifesto that does not mention this as a priority, yet whichever party takes power just tires of the exercise after a few initial failures. The N-league, just like its predecessors, promised to catch, squeeze and punish tax evaders. Once the net is expanded, pressure on the reserves will ease, and budget will be less strained than it has been in decades. There is also an urgent need, of course, of checking unnecessary leakages. The sums that the government haemorrhage through PSEs, official corruption, nepotism, etc, are huge, and the government understands it well. Yet there’s been little advance in correcting the administrative machinery that checks such abuses and excesses.
The Fund has also expressed concern about foreign exchange reserves. Finance Minister Ishaq Dar’s novelty, of parking Saudi funds in the State Bank, might now require a replay. However, it would be more prudent to divert funds and attention to the trade mix. There is still no value-add in our export basket. Until such basic macroeconomic wisdom is missing, the IMF will remain concerned. Now, with political agitation gone, the government cannot blame its problems on others. However, as terrorism intensifies, we should be prepared to lose ground on the foreign investment front. That means the government will have to be far more proactive than it has been. Overall, therefore, the Fund is right in appreciating that things have more or less remained as they were. But its fears are just as understandable, that there might be little to look forward to in terms of ingenuity on part of the government.