IMF, floods & economy

“Pakistan’s economy has been buffeted by adverse external conditions, due to spillovers from the war in Ukraine, and domestic challenges, including from accommodative policies that resulted in uneven and unbalanced growth. Steadfast implementation of corrective policies and reforms remain essential to regain macroeconomic stability, address imbalances, and lay the foundation for inclusive and sustainable growth”—Statement of Ms. Antoinette Sayeh, Deputy Managing Director and Acting Chair of IMF, August 29, 2022

The economic problems of Pakistan are increasing with every passing day. The incumbent government of the Pakistan Democratic Movement (PDM) since assuming power in April 2022 has been struggling to address the balance of payment issue and trying to avert default by taking aggressive measures. Now, the recent wave of floods has added further grief to the lives of the people.

Rainfall recorded so far is 287% higher than the 30-year national average of 130.8 millimeters causing damage to dams, infrastructure, crops, and livestock. According to a media report, Pakistan has so far suffered a loss of over US$5 billion. Our major exports depend on the textile sector where cotton is the backbone. However, due to flash floods, the cotton crop alone suffered a loss of over US$ 2.5 billion. The flood impact on sugarcane and cotton can drop our exports to the extent of US$ one billion while damage to agriculture would negatively affect supply to industries besides creating an acute food shortage in Pakistan.

Though the government is working on alternatives considering the large-scale destruction and obviously rehabilitation will take time, the overall situation will create demand and supply issues, impacting the buying power of the ordinary citizens, who are already facing 46% inflation due to aggressive measures of the government to comply with the conditions of International Monetary Fund (IMF) for the revival of its Extended Fund Facility (EFF) program for Pakistan. In response to these measures agreed upon and violated by the previous government of Pakistan Tehreek-e-Insaf (PTI) and implemented by the incumbent government to put the economy on track, the IMF Executive Board completed its seventh and eighth reviews for EFF for Pakistan on August 29, 2022, allowing authorities to draw the equivalent of SDR 894 million (about US$1.1 billion).

As per IMF press release No. 22/293, the EFF was approved by the Executive Board on July 3, 2019 (see Press Release No. 19/264) for SDR 4,268 million (about US$6 billion at the time of approval, or 210% of the quota). In order to support the programme’s implementation and meet higher financing needs in Fiscal Year (FY) 23, as well as catalyze additional financing, the IMF Board approved an extension of the EFF until June 30, 2023, re-phasing and augmenting access by SDR 720 million bringing total access to about US$6.5 billion.

Though the IMF Board has approved extension of the programme, everyone expects continuation of aggressive measures that inter alia include strict implementation of recently approved budget that imposes heavy taxation on businesses and individuals, a market-determined exchange rate, proactive and prudent monetary policy as well as expansion in social safety measures to protect the most vulnerable segments of society. The IMF further expects structural reforms for improving the governance and performance of state-owned enterprises (SOEs).

In the present scenario when aggressive measures are taken to slow down the overheated economy during the last year of PTI’s rule and due to huge losses by floods, the question arises: how is the present PDM government going to offer relief to already struggling families? Economic indicators, released by the IMF in its press release No. 22/293, are not impressive. Accordingly, our per capita GDP was US$1555.4 in the financial year 2020-21, whereas our textile exports were US$15.4 billion in the same year. Although the Federal Finance Minister projected GDP growth for the current financial year at around 5%, the IMF’s estimate is 3.5%. These estimates show that the economy will shrink further during the current year. The policy rate already highest at 15% in the region, is badly impacting businesses at large. Additionally, the constant devaluation of the Pak rupee has been adversely affecting our foreign exchange reserves—causing concern for an import-based country.

The IMF wants us to adhere to a market-determined exchange rate and pursue a proactive and prudent monetary policy. Under the circumstances, the government needs to consider the relationship between the policy rate and foreign exchange. However, this aspect seems missing in the minds of the PDM government’s economic team and policymakers therefore we require an impact assessment to save the economy from heating up further and offering relief to economically struggling families.

The IMF also stresses structural reforms by strengthening the regulatory sector and restructuring SOEs to improve governance and functioning of SOEs and boosting business climate as emphasised in Country Report No. 22/27. It further expects Pakistan to improve its anti-corruption framework to support the private sector and job creation. It rightly points out that failure to introduce structural reforms obstructs foreign direct investment.

The report raises serious concerns about the performance of SOEs and highlights that despite having a 14% share in the GDP, the financial performance of many SOEs is weak with one-third consistently generating losses. The World Bank’s report, Hidden Debt Solutions to Avert the Next Financial Crisis in South Asia, also discusses in detail the impact of these loss-making state-owned entities on our economy and that of South Asia as a whole. It states that in every country studied, the top 10 loss-making SOEs account for more than 80% of total losses in the SOE sector.

The report highlights that in Sri Lanka liabilities of loss-making SOEs have been around 4% to 5% of GDP. It mentions that SOEs sector of India and Pakistan is more than twice larger than the international benchmark. Both countries have substantial stakes in SOEs, Public-Private Partnerships (PPPs) and State-Owned Commercial Banks (SCOBs). As per the report, the systematic losses for the PPPs can cost South Asian countries around 4% of their revenues.

In Pakistan, total liabilities of chronic loss-making SOEs have been 8% to 12% of GDP in recent years, several times more than the country’s public spending on education in FY19-20. Similarly in India, local investments fell notably in the year of contingent liability shock, continue to decline in the year after, and remain significantly below the trend for three years after the event. Similarly, on the account of governance, the IMF has repeatedly asked to streamline our anti-corruption framework. However, we cannot improve governance system unless a uniform and effective accountability system for judges and high-level civil and military officials is introduced.

The so-called system of self-accountability in the military and judiciary has miserably failed. Undue interference in affairs of the Executive and controversial judgments have not only obstructed governance system but also influenced the existing democratic system and the economy. Distrust shown by international investors is visible and now they prefer arbitration clauses in their agreement rather than relying on our judiciary.

Though Pakistan has introduced the electronic assets declaration in compliance with IMF’s programme, it will not serve the purpose unless we introduce structural reforms comprising strict penalties and punishment for law enforcement officials, judges, and generals for violation of their assigned duties.

The structural reforms in our governance system will automatically revamp SOEs’ functioning. We have already commenced the process in 2020 and identified entities for restructuring, privatizing and retaining under government ownership. We have already prepared an SOE law to govern and ensure transparency in their functioning. The only way forward in the prevailing scenario is implementation of comprehensive structural reforms in all sectors. Our citizens have no more capacity to pay the price of inefficiency of politicians and bureaucracy and misdirected adventures of the establishment.

Although Federal Finance Minister Miftah Ismail deserves appreciation for the revival of IMF’s programme, yet the most daunting challenge for him is to find new avenues for revenue generation and fill the gaps to stop wastage. The nation wants relief and cannot afford any more aggressive measures in complying with IMF’s EFF program extended till the end of June 2023.

(Huzaima Bukhari & Dr. Ikramul Haq, lawyers, and partners of Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS), members Advisory Board and Visiting Senior Fellows of Pakistan Institute of Development Economics (PIDE). Abdul Rauf Shakoori is a corporate lawyer based in the USA and an expert in ‘White Collar Crimes and Sanctions Compliance’)

Copyright Business Recorder, 2022