Sinking revenues and IMF conditionalities

The International Monetary Fund (IMF) and Pakistani authorities have been unable to reach a staff-level agreement after a week-long discussions on 9th Review.

Reportedly, Pakistan having broadly agreed to all IMF conditionalities, the agreement is expected to come into effect as soon as the gaps are closed, prior actions agreed are put into place and the IMF board approves it, which is more of a formality.

The deal with the IMF would avert the threat of default, lift the foreign reserves and open the door to seek funds from China, UAE, Saudi Arabia and other lenders. This all may sustain the country’s foreign reserves and fiscal position for the next few months.

However, the programme would usher in more economic challenges. The situation, in turn, would certainly hurt government revenue generation capacity.

Revenue generation from industry and trade is already downhill on account of unsustainable costs of utilities, high lending rates, sinking rupee value, inordinate delay in opening of letters of credit and clearance of goods and raw material already at the port.

For the same reasons exports are down. With further increase in energy tariffs and fuel prices the downward trend in revenue shall escalate and FBR’s (Federal Board of Revenue’s) other initiatives through direct taxation are facing resistance.

The federal Secretary Finance told media persons that an agreement on actions and prior actions was reached during the technical and policy-level talks with the IMF and staff-level agreement would be reached after the approval from the IMF headquarters in Washington.

The official also acknowledged that there are some differences between the two sides and the solution does not fall within the mandate of the Fund’s mission and the staff team has to explain to their seniors with regard to internal processing of these differences.

At the domestic level, the state economy is drifting out of control. According to media reports, Pak Suzuki Motor Company this week announced it would temporarily shut down its assembly plant due to continued shortage of inventory.

Industries in general are facing hindrances in operations as the country’s reserves have depleted to a critical level. Automobile industry is one which generates major revenue for the government at multiple levels - imports, manufacturing and at customer end. The country’s economic crisis has also tarnished its overseas credentials with impact on exports and foreign investments.

“My Karachi — Oasis of Harmony Exhibition” is scheduled to be held from March 3 to 5 at the Expo Centre Karachi. Due to persistent economic and political instability only four countries — Indonesia, Thailand, Sri Lanka and the Philippines — are expected to participate in the expo.

Last year’s expo was attended by businessmen from 12 countries. Here also, there is uncertainty and difficulties as 5,630 containers are stuck at ports and efforts are being made for their release.

The foreign direct investment (FDI), which is the prime mover for any economy, is under shadow of uncertainty. The German government has voiced concern about the ‘worst-ever economic crisis in Pakistan’ since its creation as at least one German company has currently stopped its production in Pakistan, another went for downsizing while others are mulling leaving Pakistan due to the prevailing economic and foreign exchange crisis, as reported in the print media.

An agreement with the IMF is the right step forward, though a timely approach to the IMF would have limited the damage. What lies ahead is even more complex and far more difficult to navigate for the nation and its people to sustain. The incumbent government, for once, needs to put its act together.

Copyright Business Recorder, 2023