The IMF and Pakistan

The Resident Representative of the International Monetary Fund (IMF) in Pakistan Teresa Daban Sanchez stated during an online policy dialogue organised by the SDPI that the Fund will remain engaged with the Pakistani authorities 'advising on a good budget'. The budget expected to be announced after Ramazan, in the last week of May or early June, is in all probability already under preparation in the Ministry of Finance though the suggestions/recommendations of stakeholders in the private sector have so far not been sought. There is ample evidence that as government expenditure has risen due to coronavirus relief measures (of around 1.2 trillion rupees) yet its revenue base due to the lockdown has shriveled to about 3.9 trillion rupees or in other words, the budget deficit would rise to a more unsustainable than last year's 8.9 percent. The government has succeeded in getting around 2 billion dollar Covid-19 relief assistance from multilaterals at low rate of interest (1.4 billion dollars from the IMF and the rest from World Bank and Asian Development Bank); however, this amount would add to the total loans of the country. In this context, the government must seek a loan deferment from not only the IMF but also the G20 countries - a deferment that requires a request which, Sanchez stated, has not yet been made by the authorities. One would hope that Dr Hafeez Sheikh, Advisor to the Prime Minister on Finance, would be just as quick in seeking a deferment as he was in seeking the 1.4 billion dollar assistance under the Fund's Rapid Financing Instrument because without that all the claims by PTI leaders, particularly foreign minister Shah Mehmud Qureshi, of a 12 billion dollar deferment would remain spurious.

The budget exercise in Pakistan, as in other democratic countries, requires a majority vote in parliament and while parliaments in other countries are engaged on critical matters through a virtual linkup, the ruling PTI has so far refused to similarly engage with parliamentarians. An option may well be to pass the budget through an ordinance, an exercise that took place during military dictatorships, however the shelf-life of an ordinance is 90 days that can be extended by another 90 days. Thus it would be more appropriate for the government to consider setting up a virtual parliamentary meeting and begin to seek and discuss the options available. In any case, if the virtual proceedings are to be conducted then it would require framing of new rules on which the opposition would have to be taken onboard.

The range of commitments made by the Pakistani authorities to the IMF was ambitious and consisted of unrealistic measures, a 5.5 trillion rupee revenue for the year, which as per Sanchez, must include widening the tax base and raising taxes (unfortunately in the current year raising existing taxes was the major source of raised revenue) while expenditure (current and development) was allowed to rise by more than 30 percent each. Suggestions on how to raise revenue through widening the tax net have been forthcoming as in the past with a suggestion being to reduce the income tax ceiling to 10 percent for individuals and 20 percent for companies while at the same time replacing the existing sales tax regimen (including the income tax withholding in the sales tax mode on goods which is becoming a major source of government revenue) by announcing a single stage single digit sales tax. It is unlikely that the government would be able to enforce this and still raise revenue generation as, no doubt, required under the IMF's Extended Fund Facility that remains in abeyance. Sanchez suggested bringing taxes in line with other regional countries to equalize the input costs and subsequent sales price. This is indeed good advice as the inability of the private sector to compete internationally is sourced to the higher input costs in this country (including the levy of high taxes on petroleum and products) and a high discount rate designed to attract hot money which Sanchez was quick to say was not a part of the Fund's policy. This has to be the way forward as it has the potential of ensuring that our products not only are competitive within the country but also within the region.

And finally, Sanchez stated that inflation is likely to remain in double digits during the current year, adding that while IMF supports opening labour-intensive sectors yet hoped that the no source of money asked incentive given to the construction sector (which she added may create problems in future) is a short temporary measure - no doubt a reference to Pakistan's commitments to the Financial Action Task Force. The projected inflationary pressure of course includes the recent monetary measures taken by the State Bank (reducing the discount rate to 9 percent) and releasing the 144 billion rupees to the poor and vulnerable as part of the relief measures.

Undoubtedly, these are extremely trying times for governments in general, and the PTI government is no exception; however, Pakistan already on strict IMF conditions under the EFF before the coronavirus rampage, will no doubt be steered back to implementing the challenging structural reforms and time-bound action plans, albeit recalibrated, and one can only hope that this time around Pakistan's economic team leaders are more aware of what is doable or realistic before agreeing to the proposed conditions.