Issues multiply on stalled IMF bailout

The stand-off between the federal government and the Supreme Court of Pakistan is not going unnoticed in international circles and its timing could not have been worse. Not many have fathomed the likely consequences of its impact on our lenders, investors, businesses and economy.

Insofar as country’s foreign lenders and investors are concerned, the nation has for a long time been suffering from a trust deficit and credibility of its governance systems and processes. Growing instability in the country has further added to that.

At a recent in-person and online conversation titled ‘Pakistan: Is there a way forward?’ at Princeton University, USA, Dr Reza Baqir, a former governor of the State Bank of Pakistan (SBP), expressed his concern about the IMF’s struggle to trust Pakistan’s leaders. He said, “Whatever has been said (committed with the IMF) has not been delivered,” highlighting the need for reliable partners to implement necessary economic reforms.

The International Monetary Fund (IMF) is facing a challenging question regarding whom to trust in Pakistan to revive its $7 billion loan programme for the nation. Most likely, for the same reason, Saudi Arabia and Dubai are finding it hard to commit $ 2 billion and $ 1 billion, respectively, for Pakistan to meet IMF conditions.

Atif Mian, an economist and author of ‘House of Debt’, has said that the government has lost credibility due to poor decisions taken by different institutions. Pakistan is facing a perception that it is no longer a desirable place to go, as evidenced by the high number of people searching for visas to leave the country.

Mian underscored the need for valuing people who are putting Pakistan in the right direction. He also emphasised the need for giving respect to apolitical officials.

The domestic situation is no better. While briefing the National Assembly committee, Secretary Petroleum is reported to have stated last week that only three foreign companies are currently working in the oil and gas sector in the country, as international companies are leaving Pakistan and selling their assets. Due to continuous depletion of gas reservoirs, installation of new gas connections would not be possible.

The Secretary is further reported to have stated that Pakistan is considered a high risk country for investors, and there is fear of default which is discouraging foreign investment in the country. A woefully uncertain political situation and inconsistencies in policies are major hurdles to efforts aimed at bringing international companies for investment in the country, he added.

The other key issue of concern is the significant fall in revenue which will not go unnoticed by the lenders. This is not surprising as the implementation of IMF conditions of phenomenal increase in electricity tariffs and oil prices, high lending rates and loss of rupee value against dollar, meant a cooling-off of economic growth with exports, large scale manufacturing (LSM), SMEs and businesses sized down, resulting in cuts in development and non-development expenditures, and new challenges to government’s ability to retire mounting debt. These are basic hard facts, so to speak. We all know that a ‘basic fact’ in math is defined as any mathematical number, fact or idea instantly recalled without resorting to strategies.

Ironically, the financial team of the incumbent government is focused on the single track of securing a tranche from the IMF and backup loans from other lenders to overcome the threatening challenge of depleting foreign exchange reserves. Other equally pressing issues are, therefore, put on the back burner.

The basic rule of business is that when the revenues are down then cost cuts become inevitable to achieve a healthy bottom line. The government does not appear sensitive to this fundamental principle of business. It continues to dole out good money to support the non-performing public sector enterprises, prefer financial engineering to contain the ever-rising circular debt rather than working on the root cause of circular debt shrouded in corruption, incompetence and political expediency. There are many similar examples of money wastage.

But not all stakeholders are oblivious to the fiscal and political crisis brewing in Pakistan. The lenders, as principal stakeholders, are most concerned about the situation.

The World Bank in its report describes the rise in Pakistan’s fiscal deficit and debt as “dangerous” for its economy and has volunteered several suggestions to the country to counter the problems, starting with an end to subsidies, which also happens to be the non- negotiable demand of the IMF. The World Bank has recommended a number of options to cut down costs to somewhat reduce the impact of revenue loss; some of the key ones are tabled as follows:

(1) Rs 2.72 trillion could be saved through debt management and establishing a single treasury account and by eliminating unnecessary expenses and subsidies as they suck out around 70 percent of the national budget.

Apart from increasing revenue, savings equivalent to 4 percent of the GDP were possible through these administrative measures.

(2) Rs 315 billion could be saved by limiting the development budget.

(3) Rs217 billion could be saved if the provinces covered 90 percent of the BISP (Benazir Income Support Programme) cost. It was suggested to entrust various matters, including 90 percent of the BISP expenses to the provinces.

The tax revenue share of the federal government was only 46 percent while the expenditure stood at 67 percent.

(4) Rs 328 billion could be saved by the federal government on health and education by fully devolving these subjects to provinces as they were provincial matters.

The World Bank in its report has maintained that expenditures and deficits increased after the passage of the 18th Constitutional Amendment.

The world media appears to be gloating over the current financial and political crisis in Pakistan. One such sardonic media observation is:” After crisis-wracked Lebanon, is Pakistan set to become the world’s next ‘zombie’? Pakistan, too, has been hollowed out by multiple crises while its self-serving elite look away”. Therefore, there is no room for complacency on the current situation.

Copyright Business Recorder, 2023