Fair elections and economic stability

“Gross financing needs are very large, mostly due to large debt service payments, while external market financing has dried up. Confidence is weak, and credit rating agencies have downgraded Pakistan to just above default rating. Multilateral and official bilateral support has been critical to enable Pakistan to meet its debt obligations”—IMF Country Report No. 23/260 - July 18, 2023.

Pakistan’s market confidence stands restored to some extent after approval of the 9-month US$ 3 billion standby arrangement (SBA) by International Monetary Fund’s (IMF) executive board on July 12, 2023. This development has led to a resurgence of economic activities within the country.

Since approval of SBA, a positive trend has emerged in the stock exchange, with KSE-100 index surpassing a significant level, witnessing a positive trend with investors reaping substantial profits. Additionally, the government has lifted import restrictions to stimulate economic activities.

The fourth-time federal finance minister, Muhammad Ishaq Dar, while claiming that Pakistan has now entered into a “secure zone”, attributed this “achievement to the government’s diligent efforts. He highlighted substantial reduction in current account deficit, which dropped to US$ 2.56 billion during the fiscal year (FY) 2022-23, in stark contrast to US$ 17.48 billion in FY 2021-22.

Moreover, the finance minister pointed out that the country witnessed a consecutive four-month surplus in current account, with June 2023 closing at US$334 million, as opposed to a US$ 2.321 billion deficit in June 2022.

These are positive indicators for the economy. It is, however, crucial for Pakistan to maintain fiscal discipline to achieve political stability. The just released IMF’s Country Report (No. 2033/260 published on July 18, 2023) expresses high expectations from Pakistan regarding the latest SBA.

Although IMF’s executive board has approved release of SDR 894 million (approximately US$1.2 billion), the remaining funds are contingent upon quarterly reviews and meeting the agreed-upon conditions.

Allocated amount under SBA will assist in addressing both domestic and external imbalances, as well as facilitate support from multilateral and bilateral partners. However, it is essential to note that the programme’s successful implementation necessitates adhering to terms agreed upon in the federal budget 2023-24. It is of utmost importance that there are no interruptions in implementation of the current plan.

The budget 2023-24 approved by the National Assembly on June 25, 2023, targets a primary surplus of Rs 401 billion, that is 0.4% of the GDP.

The programme further requires adopting a market-driven exchange rate, implementing a tightened monetary policy to control inflation, and introducing structural reforms for the energy sector, including enhancing governance of state-owned enterprises and ensuring climate resilience. Pakistan needs to ensure compliance with agreed terms for smooth transfer of the remaining tranches of agreed programme.

As per IMF’s Report, key policy measures include prioritizing revenue-generating strategies, with particular emphasis on tax revenues. As per conditions mentioned in the Report, Pakistan must enhance tax revenue to 10.3% of GDP. To achieve this goal, it is imperative to execute measures totaling more than Rs 254 billion.

Through this implementation, Pakistan can acquire the necessary financial means to sustain its social and developmental sectors. The Report additionally proposes augmenting the maximum petroleum levy by Rs 79 billion, with the highest increase set at Rs 60 per liter. This adjustment aims to reach an average petroleum levy rate of Rs 55 per liter by end of FY2024. Moreover, it includes an increase in personal income tax (PIT) of Rs. 30 billion.

Although IMF has praised Pakistan for enacting State-Owned Enterprises (Governance and Operations) Act, 2023 and developing an ownership policy to improve the governance of state-owned enterprises (SOEs), the Report highlights certain areas requiring attention.

Pakistan needs to make amendments in dedicated laws concerning SOEs to ensure their effective functioning. Additionally, the full operationalization of Central Monitoring Unit (CMU) for SOEs within the Ministry of Finance, which has been delayed, is to be achieved by November 2023.

Pakistan is also to address the outstanding conditions outlined by IMF, such as reducing state’s involvement in SOEs as suggested in the March 2021 triage report. This includes divesting two LNG-based power plants, one development financial institution, and one small public bank as well as regular and timely audits of SOEs.

The IMF emphasizes the importance of promoting business opportunities and job creation and to achieve this, Pakistan has to simplify the procedures for starting a business, streamline foreign direct investment processes, eliminate unnecessary regulations, reduce customs-related requirements to save time, and simplify and harmonize tax payment procedures.

We must recognize that corruption has been playing havoc in depleting our national resources. Although the Federal Board of Revenue (FBR) has implemented regulations granting access of banks to asset declarations of high-ranking federal civil servants to enhance anti-money laundering efforts and combat financing of terrorism.

However, a thorough evaluation of our overall anti-corruption institutional framework is still pending. This evaluation will logically lead to proper and effective legislative amendments aimed at improving the entire governance system by ensuring inclusion of all within the effective and transparent accountability process/framework.

Implementing these measures is crucial for Pakistan’s economic stability, strength and progress. While the 9-month SBA is fully financed, concerns still exist regarding Pakistan’s repayment capacity, making the programme high risk. To address this, Pakistan needs to prioritize structural reforms and consider privatizing sick industrial units.

Additionally, the government should take steps to reduce circular debt in line with the agreed conditions set by global lenders. The government should also focus on timely adjustment of power tariffs, targeted subsidies, and renegotiating remaining power purchase agreements (CPPAs) while clearing unguaranteed arrears relating to it.

Pakistan needs to reduce its expenditure, improve social indicators, create a level playing field for SOEs and the private sector, eliminate corruption, and remove unnecessary regulations for businesses but these measures and structural reforms agenda can only be effectively implemented with a strong elected government empowered by public support.

Political instability has plagued Pakistan for several years, highlighting the need to recognize that economic progress cannot be achieved without political stability.

As the incumbent government’s term will end in the next few weeks, it becomes the responsibility of all stakeholders to ensure timely elections in accordance with the provisions of 1973 Constitution of Islamic Republic of Pakistan.

Any delay in holding general elections by the Election Commission of Pakistan (ECP) on schedule and failure in fulfilling its statutory duties under Article 218(3) and 219 of the Constitution will erode the trust of global partners and further destabilize the country, which is not an option for Pakistan at this critical juncture of its history.

(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) and 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