Kicking the can

An IMF (International Monetary Fund) deal is finally done. This is good news as it has averted the growing concerns of economic default. However, the imperative of debt restructuring, including domestic debt, in the medium term, is still looming.

In other words, while the default sentence might have been given a reprieve, it has not been eliminated.

The less positive news is that there is no resolve on structural reforms (on taxation and energy) either by the government or the IMF. Essentially, the can has been kicked further down the road.

Nonetheless, one must appreciate the efforts of the PM to make sure that the country remains under IMF’s umbrella. The government wanted the Extended Finance Facility (EFF) to conclude successfully with the government to fetch the remaining $2.6 billion. However, the IMF wanted some kind of monitoring mechanism in the transition period. Stand-By Arrangement (SBA) is a midway option.

It is good to have an IMF monitoring mechanism, especially when the country is in an election year. The key is about easing import restrictions and letting the pending payments (profit repatriation of foreign investors, airline payments and others) flow seamlessly. That is why IMF is keen on monitoring to ensure maintenance of foreign exchange framework free of restrictions.

Now with the IMF on board, the markets will jubilate. Pakistan’s international bond markets have already rallied. Expect the same in the stock market this week.

The currency is expected to appreciate initially, as exporters and remitters hurry in bringing foreign currency and speculators to sell foreign currency in the open market. However, with the opening of imports and other payments, there could be pressure on the currency, after the initial euphoria is over.

Having said that, the country is not out of the woods yet. The debt levels have grown to an extent which are not going to be serviced without instilling structural reforms in the real sense of the word. There is nothing on it, and even IMF is silent on it.

The focus of the IMF is on the ‘end’, but not on the ‘means’. The Fund wants macro numbers to be right such as maintaining a certain level of fiscal primary surplus and stoppage of growing energy sector circular debt. However, it’s not giving too much heed to the question how to get those numbers, and on the implication of further burdening the existing taxpayers and energy (full) bill paying consumers.

What hurts the proponent of reforms is that the IMF is endorsing the steps taken by the government to meet the macro targets. The statement of Nathan Porter that the government has taken decisive steps towards broadening the tax base is not taken well by formal sector players – both businesspersons and salaried class.

“We know that Q Block was lying to us but when IMF supports such lies it insults the intelligence of honest taxpayers who are burdened with the follies of their government,” said a businessman who is engaged in broadening the tax base, using digital means.

The higher taxation on salaried class is incentivizing the employees to push employers to pay portion of the salary informally. Then the imposition of super tax on the corporate sector is incentivizing companies to strip the formal footprint.

The paradox of the energy sector is similar. Here, reportedly, one of the conditions of the IMF is to increase the electricity base tariff by Rs8.25/unit. Last year a similar increase took place where the government didn’t end the cross subsidy and continued with the burden of subsidized lot on full paying consumers.

Then there is nothing concrete being done to lower the inefficiencies (including theft) of distribution companies. The math is simple – either the circular debt growth is covered by allocated fiscal subsidy or being passed on to the consumers.

This has resulted in a decline in the consumption of power and an increase in theft (reduction in recoveries of discos). That is compounding the problem, as after the induction of new power plants in the last few years, the marginal cost (in USD at a given commodity prices) of power production is declining, but the capacity charge (project return including equity and debt) is growing.

The capacity charge is fixed and is lower per unit if higher units are being generated. With decline in the consumption, the capacity charge per unit is growing.

The situation is exacerbated by sharp currency depreciation. Now with a further increase in power tariffs, consumption is likely to decline further from the grid. Good paying residential and commercial players are moving towards solar power and industrial power towards captive or bulk buying option.

Thus, the problem of ending the circular debt structurally remains. Same is the case of expanding the tax base. And mere shifting the burden of inefficiencies and shirkers to honest paying is opposite to instilling structural reforms. One can only hope the next government and the next IMF programme learn from these mistakes, and work in letter and spirit with a view to bringing in structural changes – especially in taxation and energy.

Copyright Business Recorder, 2023