The IMF has, in its programs with Pakistan, traditionally restricted itself to the domain of economic reforms that

are within the constitutional and legal framework of the country. The new programme, however, is different. Not only does it make comments on the adverse security situation in the country which has severely impacted on private investment and economic activity but it also tends to encroach on constitutional boundaries and make comments which may perhaps be considered objectionable in character. Paragraph 71 of the staff report on the risks in programme implementation states: The recent record of interventions by (the) Supreme Court in economic and administrative issues may be another source of uncertainty. This tends to have a negative connotation, as if the Supreme Court may affect adversely the implementation of reforms in the programme. On the contrary, there is a general recognition, both domestically and internationally, that the Supreme Court of Pakistan has made a stellar contribution to curbing corruption and nepotism and thereby limiting the degree of failure of governance in the country. Surely, the IMF wants and realises that improved governance is central to the successful implementation of reforms. The same paragraph also makes a comment on the political dynamics in the country: The governing party may lack political support in provinces outside of Punjab, complicating provincial-federal relations. This is factually incorrect, as in the case of Balochistan, the PML-N has the single largest number of seats in the provincial assembly. More importantly, it fails to recognise the gracious and sagacious behaviour of Prime Minister Nawaz Sharif, who has preferred not to form his own government in Balochistan and instead build a coalition with other parties. The spirit of accommodation and consultation is also visible in the agreement among the federating units at the Council of Common Interests on the new energy policy and the unanimous passage of the resolution on terrorism in the recent All-Parties Conference. There are other intrusions by the IMF, perhaps motivated more by a desire to achieve results. One such example relates to the commitment apparently made by Pakistan to the IMF in paragraph 37 of the Memorandum on Economic and Financial Policies on normalising trade relations by eliminating the negative list on trade and extending MFN status to India. This was probably not the time to make such an explicit statement given the somewhat strained relations with India. Various senior government functionaries have said that there is no immediate plan to grant MFN status to India. As such, any commitment in this regard ought to have been excluded from the memorandum. Down the road, it weakens Pakistans negotiating position in obtaining a

relaxation of non-tariff barriers by India in return for MFN status. Another unusual stipulation, which has been upgraded to the status of a structural benchmark, is the agreement to enact amendments to the Pakistan Penal Code, 1860 and the Code of Criminal Procedure, 1898. The objective is to strengthen the legal framework in cases of electricity theft by enhancing investigation, prosecution and penalties. The problem is that while this is desirable, the federal government is not in a position to make such a commitment. The CrPC was originally in the concurrent legislative list of the constitution. Following the abolition of this list in the 18th Amendment, the responsibility for any changes in the CrPC has passed on to the provincial governments. It is not clear if they were consulted on the nature of changes in the laws prior to the making of this commitment. The staff report also highlights on page 65 in Table 15 that a prior action implemented by the authorities before the IMF board consideration of the programme was as follows: Impose a balanced budget requirement on provinces and agree with the provinces to save additional revenues generated by the programme The provinces have budgeted for a combined deficit of Rs52 billion in 2013-14. Now as per the agreement they will not only have to eliminate this deficit but will also have to generate a cash surplus of Rs116 billion, equivalent to 57.5 percent of the revenues generated from taxation proposals by the federal government in the budget of 2013-14. This will require a cut of five percent in current expenditure and a 39 percent scaling down of the provincial PSDPs in relation to the budgeted levels. In effect the already low expenditure on health and education will have to be sacrificed. The question is whether there was, in fact, an explicit commitment by the four provincial governments to implement these cuts in expenditure. The large reduction in the consolidated fiscal deficit from eight percent of the GDP in 2012-13 to 5.8 percent of the GDP in 2013-14 agreed with the IMF would be difficult to achieve otherwise. The IMF also makes some not so veiled comments on problems with the on-going 7th NFC Award in Box 2 on page 30 of the staff report. It suggests a revamp of the revenuesharing formula in the next NFC Award whereby a better match is obtained between revenue and expenditure responsibilities which would not leave the federal government with chronic deficit, while the provinces run surpluses. The IMF needs to be informed about two relevant clauses in the post-18th Amendment constitution. The first is Article 160 sub-section 3A, which states the following: The share of the provinces in each award of National Finance Commission shall not be

less than the share given to the provinces in the previous award Therefore, the floor to the revenue-share of the provinces in the next award is 57.5 percent. In addition, Articles 166 and 167 enable borrowing by the federal government more in the event of a deficit than the provincial governments. Therefore, the IMF is apparently intruding into constitutional provisions in the context of federal-provincial fiscal relations, as manifest in the NFC awards. Instead, the objective of more balanced relations can be achieved by ensuring that in the next award, the provincial governments fully take on the expenditure responsibilities associated with the functions transferred to them by the 18th Amendment. Currently, the expenditures on higher education and vertical programmes have been assumed by the federal government. Also, subject to agreement, a part of the revenuesharing formula may be linked to the variation in the level of tax effort and fiscal discipline among provinces, as has been case since the 11th Finance Commission Award of India. In conclusion, as indicated above, the IMF has strayed into territories it has not tread before. The sensitivity of some of the observations made and suggested reforms ought to have been highlighted to the Fund. The writer is a former finance minister of Pakistan.