With Pakistan embroiled in an acute burden of debt, to the extent that 70 percent of its revenue is diverted to pay off debt, there is no way but the IMF (International Monetary Fund) way to stay afloat and avoid default.
The difference is that just a three years ago our finance managers had a plenty of elbow room to discuss could still discuss IMF or no IMF. Moreover, they still had good space to move around in while negotiating with the Fund. Now we are on our knees as things are getting worse and not better, to say the least.
Finance Minister Muhammad Aurangzeb is currently in Washington to attend the spring meetings organised by the IMF and the World Bank (WB). According to him, Pakistan has initiated discussions with the Fund over a new multi-billion dollar loan agreement to support its economic reform programme. He has also stated that the country will at least be requesting a three-year programme.
He further said that Pakistan expected an IMF mission to visit in May and would like to reach a staff-level agreement on the next loan by the end of June or early July, without specifying how much the country was seeking.
Pakistan, in pursuit of another long-term package — its 24th thus far — from the IMF, has formulated a comprehensive economic recovery plan. This plan encompasses three primary components: taxation, energy, and privatisation of state-owned enterprises (SOEs), including PIA.
The IMF board is scheduled to convene on April 29 to deliberate on releasing the final tranche of its current programme. Subsequently, discussions between IMF staff and Islamabad regarding the new package are anticipated to commence.
Paving the way for soft corner with the IMF and the country image building, the Finance Minister had sideline sessions with the officials of State Department who matters in easing the way with the Fund. Also, the minister spoke at a JP Morgan seminar ‘Pakistan’s Economic Policy Outlook’ and a round-table meeting with Bloomberg. Both these entities matter in country’s fiscal rating with considerable influence on lenders.
In an interview with Bloomberg, the minister said there would be no reason for the rupee to depreciate more than the range of about 6 per cent to 8 percent seen in a typical year.
“Pakistan last devalued its currency in January 2023,” the report noted.
The finance minister came out clear on country’s economic and fiscal plans. The minister outlined three important reform areas—taxation, energy and privatization.
“Pakistan needs two to three years to implement some of the structural changes the International Monetary Fund has prescribed to break the South Asian country’s chain of financial struggles and bailouts,” according to the finance minister.
The finance minister’s commitment of two to three years for breaking the chain of financial struggles and bailouts appears well meaning but extremely challenging, if not unrealistic.
The country has long known what is needed in order to steady its economy and there is no shortage of novel ideas emerging out from the economists of the country. The issue is of placing the agenda on the ground. On all the three important reform areas identified by the minister—taxation, energy and privatisation - the country is presently at ground one.
On the subject of taxation - the digitalisation, processes and systems for tax payer’s identification, collection, monitoring and keeping the taxman at bay from the tax payer and building a trust between the tax collector and tax payer lack application on ground. In the absence of the same, expansion in tax base in areas like traders, professionals and other points of sale may not achieve the desired results.
With large scale manufacturing (LSM) slowdown, hibernating real estate sector, sluggish on-shore and off-shore investments and lacklustre exports, meeting the tax collection targets is challenging. The deterrents for the industry are non-workable energy cost and high lending rates by the banks. These deterrents are not likely to be addressed anytime soon.
The deterrent for the real estate sector is the fear of tax-man and the challenged multiple new tax measures like deemed tax payment on vacant plots of land under Section 7E.
On the energy landscape, the prime issue is the circular debt and the loss- making power generation and distribution enterprises in the public sector and the capacity payments to idle power plants in the private sector. The government could not come up with any realistic and sustainable way out on any of them.
On the subject of privatisation, only PIA is notified to be on the list of privatization. The fate of Pakistan Steel Mills, other loss-making SOEs and power distribution companies in the public sector is not in public knowledge. The process of privatization takes two to three years to materialize. There is no sign of anything beginning soon on privatisation or their meaningful restructuring.
It is unlikely that the state institutions in their present state can deliver on the ambitious targets of the finance minister to break the chain of financial struggles and bailouts in the next two to three years.
Copyright Business Recorder, 2024
The writer is a former President, Overseas Investors Chamber of Commerce and Industry
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