Deadline nears, but govt undecided on reformed GST

ISLAMABAD: With just 15 days to go before the deadline, the authorities are still unclear if the reformed general sales tax on services can be introduced on Oct 1, as proclaimed in the federal budget and promised to the International Monetary Fund (IMF).

According to an official, this is one of the many key policy initiatives on which the bureaucracy has been seen slow-pedalling in recent weeks as the economy suffers amid indecisiveness of the political leadership and economic managers.

A clear roadmap to keep fiscal deficit within permissible limits, stop continuous haemorrhage caused by public sector organisations and speeding up energy sector reforms was also missing, he said.

As a result, IMF authorities had declined to present Pakistan’s case before its executive board for the release of a $1.7 billion instalment under the $11.3 billion standby arrangement, he said.

“Practically, Pakistan is not under the IMF programme at present, although the $11.3 billion programme has neither been completed nor terminated,” another official said.

The only thing that the IMF authorities have been insisting for Pakistan to do is the imposition of reformed GST and that too was included in the programme on the request of the finance ministry.

An official who was part of the recent negotiations with the IMF in Washington said the agency was ready to raise the fiscal deficit limit in view of devastation caused by floods and to show flexibility on some other fronts as well, but it was sceptical about Islamabad’s intentions on deliverables it had planned, including introduction of reformed GST on Oct 1, power sector reforms (not tariff increase) and improvements in public sector corporations.

He said the economic team had made it clear to the political leadership how important the reformed GST and other economic measures were for long-term economic interests and smooth relations with the IMF in the short term. “I am at a loss what is hindering the introduction of reformed GST but something is fishy,” said the official.

He said a follow-up mission of the IMF would visit Pakistan in the first week of October to see progress on reformed GST, power sector reforms, including circular debt, resolution of about Rs400 billion stuck up in commodity operations and reduction in public sector losses.

On conclusion of the visit, the mission will recommend to the executive board whether to terminate the programme or release the remaining two instalments and on what conditions.

He said the IMF decision to delay payments to Pakistan from July and then to November-December would create more challenges and perhaps the political clout of the United States would be the crucial factor in keeping the economic lifeline to Islamabad alive.

The financial flows from other multilaterals like the World Bank, Asian Development Bank, Japan, Kerry Lugar payments, other bilateral lenders and international financial market are contingent upon IMF’s support.

Sources said senior finance ministry officials — Secretary Salman Siddique and Special Secretary Asif Bajwa — and economic managers like Finance Minister Dr Abdul Hafeez Shaikh and Planning Commission’s Deputy Chairman Dr Nadeemul Haq (the shadow deputy finance minister) were not on the same wavelength on key policy decisions.

They said a mistrust that had arisen between the finance ministry and the Sindh government over non-incorporation of the National Finance Commission award in the federal budget documents, as signed by the NFC members, had become a main stumbling block in the introduction of reformed GST on services. The Sindh government had made a strong case for changes in the finance ministry’s senior bureaucracy, but the prime minister came to their rescue at the last moment when even the president was convinced how the entire NFC had been made part of the federal budget through explanatory memorandums.

Of late, the sources said, the finance minister had lost the drive which was required to steer the economy out of difficult times, mainly due to “political obscurity and bureaucratic intricacies”.

The situation was such that the Federal Board of Revenue’s Chairman Sohail Ahmad had openly started questioning the revenue target he himself had agreed to deliver before the budget announcement, the sources said.

Mr Haq, too, has so far not acted on his promises to convert the Planning Commission into a vibrant and innovative organisation.

On top of that, unauthenticated political statements by the prime minister and foreign minister about flood-related losses have compounded the credibility gap at the international level.

Finance ministry officials said they were caught off guard on $43 billion losses reported by Foreign Minister Shah Mehmood Qureshi and the prime minister when the damage and need assessment had just been launched by the World Bank and ADB.

The officials said the finance ministry, economic affairs division or the Planning Commission did not provide the estimates to the prime minister and perhaps they had wrongly been mixed up with the $43 billion loss the country had suffered over eight years as a result of the war on terror.

They said the prime minister’s estimates about six to seven per cent fiscal deficit during the current year had also not been provided by the finance ministry.