The debate and anxiety throughout Pakistan in the aftermath of the stalled Extended Fund Facility (EFF) programme signed with the International Monetary Fund (IMF) in July 2019, ended unsuccessfully on June 30, 2023, has somewhat assuaged with the announcement of a new staff-level agreement on June 29, 2023 for 9-month US$ 3 billion Standby Arrangements (SBA).
Following completion of the seventh and eighth reviews of the expired EFF programme in September 2022, the government’s top priority was to finalise the ongoing IMF programme in order to secure additional foreign funding to improve foreign exchange reserves for avoiding any default on foreign debt obligations.
Miftah Ismail’s departure as an unelected finance minister, immediately after meeting in London the supreme leader of Pakistan Muslim League (Nawaz) — PML-N — and subsequent announcement of Ishaq Dar, known as economic wizard of PML-N, to assume the role of Federal Finance Minister for the fourth time, could not help in convincing the IMF team to conclude the Ninth Review despite agreeing with all conditions.
Though Ishaq Dar claimed having over 25 years of experience in dealing with lender of the last resort, yet till the expiry of the EFF programme, the IMF team was not convinced to sign the staff level agreement. Resultantly, like all previous programmes except one, the 39-month US$ 6 billion EFF signed during the government of Pakistan Tehreek-e-Insaf (PTI) met the same fate of expiring without completion.
The new SBA is being considered as an initial step towards stabilising the economy and strengthening foreign exchange reserves. Contributions made by Prime Minister Shehbaz Sharif in finalizing the new staff level agreement deserve recognition. While he acknowledged it as an outcome of collective teamwork, his proactive engagement with key figures such as the Managing Director of IMF and head of the Islamic Development Bank, as well as his ability to persuade his own team, led to this accomplishment.
After signing SBA, the government and some experts are claiming that it would give breathing space to the economy. Similarly, release of Pakistan’s Consumer Price Index (CPI)-based inflation by Pakistan Bureau of Statistics (PBS) has shown a visible decline from 38% to 29.4% on year-on-year basis. This is a major decline as compared to the previous month’s increase of 38%.
According to data released by PBS on July 3, 2023, there was also a 0.3% decrease in inflation on a month-on-month basis. There is also a visible decline in the rural and urban inflation — urban inflation dropped to 27.3% compared to 35.1% in the last month. Similarly, in rural areas increase was noticed at 32.4% in June 2023 compared to 42.2% in May 2023.
Persistence of high inflation is undoubtedly causing hardships for ordinary citizens and businesses alike. The ever-increasing cost of conducting business in Pakistan is affecting both large-scale and small-scale enterprises. Frequent upward revisions in policy rate and continuous fluctuations in Pak rupee are posing further challenges.
However, the fourth-time Finance Minister, Ishaq Dar, has expressed optimism about Pakistan’s foreign reserves reaching over US$14 billion by the end of the government’s term in August 2023.
Meantime, Governor State Bank of Pakistan (SBP), Jameel Ahmad, has outlined the central bank’s vision for the future, with a strong focus on price stability.
According to him, SBP has set a medium-term inflation target of 5% to 7% and is determined to achieve this goal within the next two years. In addition, efforts are being made to enhance efficiency, effectiveness, and stability in the financial sector. To this end, ‘Strategic Plan SBP Vision 2028’ has been developed, aiming to improve centre bank’s credibility, independence, and inclusiveness.
The Governor SBP further emphasised the need to expand access to financial services for a larger segment of population and revealed that under Vision 2028, efforts would be made to bring more people into formal financial system. Furthermore, SBP is planning to connect Pakistan’s remittance system with Arab Monetary Funds (AMF) Buna, a cross-border payment system. This integration is expected to significantly improve speed and reduce cost of remittance transactions.
Although above measures would improve our financial system, yet presently, the real threat to our economy is the ever-increasing burden of debt servicing, which on the external front alone is now close to US$25 billion annually. Similarly, Pakistan needs an additional US$ 12 billion to meet other external liabilities. Unfortunately, our economic managers do not have any pragmatic plan to address this liability, apart from asking for more loans to repay existing debt.
Likewise, the target for current financial year’s exports is too low to meet the country’s revenue. Aggressive economic measures, high borrowing rates, inflation, oppressive taxation and unstable currency have been negatively affecting running businesses, many of which have closed their operations, while the remaining are struggling for survival.
The conventional approach of focusing solely on improving exports while pursuing a passive and imprudent foreign policy towards neighboring countries, poses a significant challenge in meeting export targets. Despite strained relations, the United States remains the largest importer of Pakistani products. Still, there are no efforts to tap into the vast markets of neighboring countries or negotiate trade agreements with them. Even though Pakistan and China enjoy close relations yet the volume of exports to China is significantly lower compared to USA.
Furthermore, the existing Pakistan China Free Trade Agreement (PCFTA) tends to benefit Chinese-origin corporations more than Pakistani businesses, giving them greater market access at the expense of Pakistani products.
Our rulers and policymakers are neglecting two important factors, namely, Information Technology (IT) and export of human capital that together can contribute towards generating foreign exchange and mobilizing revenue. It is essential to concentrate on nurturing a skilled workforce and assisting them in securing international employment opportunities.
This approach would have a positive impact on our foreign policy and help in building foreign exchange reserves. Given the era of the fourth industrial revolution, Pakistan should prioritize facilitating IT businesses, enabling their access to international markets. By doing so, we can assert our fair share in the international market for IT-related exports.
The government should reconsider its approach to expanding the tax base, as it currently burdens existing taxpayers instead of including new sectors. The recent decision to collect Rs. 215 billion by taxing salaried individuals is a regressive approach. It would adversely affect middle-income earners.
However, no initiatives are being taken to bring traders into the tax net, nor is the government showing interest in establishing a system that can accurately track their actual incomes and combat the problem of fake invoicing.
The government’s passive approach in addressing these significant issues not only encourages trade-based money laundering (TBML) but also weakens border controls, enabling criminal syndicates to smuggle various products, including currency, without any fear of being arrested. This rampant smuggling is depleting our resources, and the burden of this incompetence falls solely on the shoulders of diligent taxpayers.
The way forward to deal with fiscal challenges is that the government should work on the three-way strategy by implementing short-term goals that will help to keep generating resources for smooth fiscal operations, medium-term goals where the government should focus on financial inclusion, documenting the economy by designing a system where all businesses can be registered and properly document their income/expenses including collection of sales tax, initiating the process of privatization as well as improving governance by introducing reforms in each sector.
As a long-term goal, the country must focus on improving its human capital, and revamping IT sectors by extending facilitations and providing all the requisite supports.
Simultaneously, we also need to work on designing a comprehensive and proactive strategy to tackle challenges related to strengthening border security and implementing effective and comprehensive Anti-Money Laundering and Terrorist Financing (AML/CFT) measures holding accountable and taking to task all those who are involved in illegitimate activities, undermining both our economy and national interests.
(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, 2023
The writer is a lawyer and author of many books, and Adjunct Faculty at Lahore University of management Sciences (LUMS), member of Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE). She can be reached at [email protected]
The writer is a lawyer and author of many books, and Adjunct Faculty at Lahore University of management Sciences (LUMS) as well as member of Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE). He can be reached at [email protected]
The writer is a US-based corporate lawyer, and specialises in white collar crimes and sanctions compliance. He has written several books on corporate and taxation laws of Pakistan. He can be reached at [email protected]
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