New Extended Fund Facility: Reforms may push country away from ‘boom and bust’ cycles: IMF

ISLAMABAD: The International Monetary Fund (IMF) Resident Representative in Pakistan, Esther Perez Ruiz, said latest reforms under the new Extended Fund Facility (EFF) are likely to push Pakistan away from “boom and bust” cycles and put in place a macroeconomic model of sustainable growth.

“One thing that will put the country on a sustainable path this time is the sense of ownership, which was missing in the 2013 and 2019 programmes,” said the IMF official, while addressing at a panel discussion titled, “Economic Resilience in Challenging Times,” on the inaugural day of the 27th Sustainable Development Conference (SDC) and Second Sustainability Investment Expo (SIE) organised by the Sustainable Development Policy Institute (SDPI).

Ruiz said over the last year, a remarkable return to macroeconomic stability was witnessed. “We have seen growth has resumed, inflation has declined dramatically, while Pakistan has recorded its first surplus primary balance in 20 years.” She said reserves have increased, placing Pakistan in a more comfortable position to honour its external liabilities.

This improvement shows that there is growing confidence in Pakistan’s policy directions which has been more consistent and consistency is critical and it is a remarkable turnaround, she added.

The IMF official further said the transition from renewed stability to a stronger more resilient growth which can benefit more segments of population. This requires commitment to maintaining these macroeconomic policies but also to breakaway from the boom and bust cycle and shifting towards a growth and development model that promote efficient public sector and help market competition, she added.

There are several goals under this EFF programme, one is revenue mobilisation, it has to be more efficient; the sectors which were not contributing, should now contribute. Another is formal inclusion of provinces through national pact which will operationalise the 18th constitutional amendment to raise revenue by provinces

The national financial pact also enables the devolution of critical social spending.

As per the reform agenda under the EFF, the aim was to reduce the distortion and state intervention in the economy to realise and enhance jobs and growth.

She said the energy sector reforms aimed at making the energy sector sustainable by making energy more affordable, as well as collecting taxes from sectors that previously did not pay taxes were the focus of the current EFF programme.

Najy Benhassine, country director World Bank, Pakistan, and Ruiz, the resident representative, IMF, emphasised the importance of implementing reforms across various sectors to achieve sustainable development in Pakistan.

They highlighted the necessity of incorporating agriculture, retail, real estate, and other key industries into the tax system. “Recent data indicates that Pakistan’s economic indicators have improved significantly following the previous IMF programme, with the inflation rate dropping from 38 percent in May 2023 to a current rate of 7.2 percent,” Ruiz noted.

Dr Najy Benhassine from the World Bank said that Pakistan was not a country in denial. “This is a country that keeps going through ‘boom and bust’ cycles. We already know the causes behind those cycles for Pakistan but we cannot seem to get out of them,” he said, adding that, “the problem for me is that Pakistan keeps going back to the same thing”.

“I have no hesitation to say that yes the current government is on the right track. There are energy and fiscal reforms in place. But will the recovery stay in track once these reforms end is the big question,” he added.

Dr Samuel Rizk, the resident representative, UNDP-Pakistan, noted that Pakistan was fortunate not to experience any major disasters during 2023-24. He appreciated the positive role of the private sector in fostering sustainable development within Pakistan.

He said, in 2022, Pakistan experienced devastating floods that resulted in an estimated $30billion in damages. “Unfortunately, the nation may struggle to recover if it encounters similar disasters, including those linked to climate change, in the future. This is primarily due to the lack of financial support, as the country has yet to receive any aid despite the commitments made at the Geneva conference last year,” he concluded.

Speakers in the panel discussion emphasised the critical need for Pakistan to prioritise comprehensive economic reforms. They argued that every sector must be incorporated into the tax system, with no subsidies provided to any particular industry. There is also an urgent requirement to boost both investment and exports.

To capitalise on the potential of the youth demographic and enhance rural human resources, they said, a more effective strategy must be implemented on health, education, and climate change initiatives to achieve the Sustainable Development Goals (SDGs) and ensure long-term sustainability.

Professor Dr Shantayanan Devarajan from Georgetown University, USA, presented an insightful critique of the crises affecting both Sri Lanka and Bangladesh, highlighting that both nations are suffering from the repercussions of misguided policies that have exacerbated their economic challenges.

Professor Dr Devarajan, who participated virtually, juxtaposed economic and political turmoil in Sri Lanka and Bangladesh as a case study for the South Asian countries that had a perplexing situation amid spiking up growth rate since their progress in 1990s.

Dr Dushni Weerakoon added that Sri Lanka’s decision to pursue an International Monetary Fund (IMF) programme significantly worsened its economic difficulties, alongside other contributing factors. She emphasised that the political economy was overlooked; resulting in increased taxes and a depletion of foreign reserves, and argued that accepting the IMF program at that juncture was a mistake.

Dr Shanta underlined that despite per capita income had doubled along with rapidly increasing secondary education enrolment and child mortality rate plummeting, countries like Bangladesh and Sri Lanka faced widespread public protests against the democratically-elected governments and ousted the popular leaders.

He added that the Sri Lankan crisis was primarily due to denial of economic crises brewing out of sitting government’s short-run growth-focused decision and reluctance to restructure its debts with the IMF increased pressure on all sectors feeding into the economic outlook.

The protests, Dr Shanta said only focused on the administration and governance in those countries whereas Bangladesh was consistently a strong performer in terms of growth and manufacturing, poverty, reduction, education and health. However, persistent high levels of corruption, bad governance and cost of denial in Bangladesh downgraded its growth rate, he added.

Institute of Policy Studies of Sri Lanka (IPS) Executive Director Dr Dushni Weerakoon said the political capital in Sri Lanka could not be ignored while dealing with its economic crises.

She said the then prime minister of Sri Lanka despite the fact that the country was coming from an IMF programme that led to the increase in taxes, the Sri Lankan premier decided to lower the taxes to embrace increased economic outlook.

Copyright Business Recorder, 2024