Asrar Raouf describes the multiple financial & IMF review aspects of the country
There are apparently many tricky issues between Pakistan and the IMF review as both sides are parleying for completion of the 7th Review under the Extended Fund Facility (EFF) as the PM’s relief package and granting another tax amnesty for the industrial sector will be major thorny issues between the two sides. In this situation the Pakistani finance managers would present the recent reduction in fuel and electricity prices announced by PM as a means to bring down the rising inflationary pressures directly by 0.6 per cent on a monthly basis. Moreover, they will argue that these measures may have some indirect impact on the CPI-based inflation in the coming months. These explanations may however not be tenable keeping in view the constant pressure exerted by the IMF to increase revenue.
In objecting to the recent reduction the IMF would raise potent questions about the sustainability of the fiscal deficit because there might be pressures on the expenditures side and its negative impact on the rising current account deficit. It is therefore tacitly conceded by the Pakistani side that the negative impact of these measures on current account deficit would need to be absorbed in the shorter run but where could it be done remains a question mark that may provide the IMF with enough tools to pin the country down. It is already noted that Pakistan’s current account deficit has widened to $11.6 billion in the first seven months of the current fiscal year and it is widely estimated that it may cross $20 billion mark for the first time in the country’s history. Though the speed of imports has been restrained but how much will it ultimately impact the current account deficit is yet to be seen.
The tempo of parleys with IMF is slow as was borne out by the fact that the last review (6th) took almost nine months to conclude and this reduces the time frame for current round sharply as both two sides are required to complete the remaining three reviews by September 2022 that is the date when EFF concludes. The PTI government appears to be re-introducing previous programmes known as Price Differential Claims (PDCs) for reducing the prices of POL products in the domestic market but these PDCs were never reimbursed to Pakistan State Oil (PSO) and other OMCs and its amount remains outstanding even after almost 12 years. It is in this context that the IMF would not be convinced about price reduction measures as they are clearly designed as populist measures governments usually adopt when caught in a financial bind.
IMF review obvious that the government will be compelled to provide Rs.350 billion for these relief measures and that in turn would go directly against the IMF perceptions and practices. It is reported that IMF is also uneasy about the recent announced tax amnesty scheme that goes against the grain of its economic thinking and may not be acceptable to the international money lender. Both these measures taken by the government may create tremendous problems with the IMF that may not kindly take to the exigencies of PTI government goading it to go against the conditions agreed on with the IMF. The point to ponder here is that how the IMF would react to such unilateral actions taken by the incumbent government with many analysts already predicting that it will be extremely difficult to convince the IMF about the rationale of these measures.
Under intense pressure from the IMF to raise revenue collection and meet demands, the FBR has increased property valuation rates ranging from 25 per cent to 250 per cent. This increase is in continuation of the previously increased rates of valuation of commercial, residential, apartments, flats and other areas of 40 major cities of the country in December 2021 but they have now been announced with alterations. It may be appropriate to recollect that in the last valuation of property rates, the FBR had increased valuation by 600 to 700 per cent depending on areas of respective cities but it could not implement the new rates due to protestation about them.
IMF review must be noted in this context that under the World Bank (WB) loan condition for securing $400mn for Pakistan Raises Revenues (PRR), the FBR increased valuation rates to bring them in line with the market rates. It is reported that the existing rates of properties pertain to three different types of properties including DC notified rates, FBR’s valuation rate and market rates. Keeping in view the protests against the rates announced in December 2021, the government has revised the rates downwards. Accordingly, the FBR has notified valuation tables for all major cities, towns and urban areas where the rush of investing in real estate has become feverish in recent times.
It is pointed out in this context that many economists find it difficult to appreciate the drastic reduction in the property valuation rates that the FBR had notified back in December under the pressure of powerful land developers and influential real estate agencies. Though it is acknowledged that the previous valuation was on the higher side in some areas and it was essential to rationalise it but the way FBR has doubled down is pathetic. It confirms the impression that wealthy real estate market players have more than realistic clout in the official circles and are able to manipulate this crucial field of generating revenue. It is very obvious that the revised valuation rates again betray gaps between the actual market prices of real estate and the rates at which the FBR collects withholding tax and capital gains tax on property transactions and it is predicted that this gap will correspondingly increase with the passage of time.
The more worrying aspect of the entire exercise is that the alteration now announced will encourage parking of illegal money in the real estate sector thereby nullifying the primary rationale of bringing in appropriate valuation. It will also hinder the main purpose of documenting the economy and will also reduce the ability of the FBR to increase revenue generation. Moreover the FBR has mentioned that it will not gradually raise the rates to narrow the gap between the market prices of property and the rates at which it taxes real estate transactions but this certainly is not an appropriate solution as by doing so it will disregard the speed with which prices in real estate market increase. If FBR does not bring in the practice of periodic assessment of property valuation then it will never be able to catch up with the real estate market spiral and end up being a loser. It must be kept in view that the prices of land in Pakistan have gone up astronomically high particularly after the government initiated a spate of tax amnesty schemes creating a wide gap between valuation rates and if this situation is allowed to persist then the government will be the loser in the end. TW
Asrar Raouf is a former civil servant