‘Difficult, but necessary’: analysts weigh in on future with IMF

In a key development on Wednesday, the International Monetary Fund (IMF) reached a staff-level agreement with the Pakistani authorities for the final review of the $3 billion Stand-By Arrangement (SBA).

The agreement, contingent upon the IMF’s Executive Board approval, will make the remaining $1.1 billion available for Pakistan, the lender said in a statement.

The development, although important for the cash-strapped country, was largely expected by the market and analysts. However, the part of the IMF statement that grabbed attention was the lender’s mention of a “successor medium-term Fund-supported programme”.

The IMF said the upcoming programme, discussions on which are expected to start in the coming months, aims to “permanently resolving Pakistan’s fiscal and external sustainability weaknesses, strengthening its economic recovery, and laying the foundations for strong, sustainable, and inclusive growth”.

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Talking to Business Recorder, market experts noted the measures assigned by the lender programme are likely to “have a positive impact on the country’s economy”.

“Broadening of the tax base is essential, as highlighted by the IMF,” an analyst told Business Recorder.

“The government would focus on increasing indirect taxation, by imposing higher taxes on PDL and cess collection to meet its revenue target, which would fuel inflation.

“However, what we need to understand is that there was not much economic activity in Pakistan last year, especially in the manufacturing sector owing to high-interest rate. With the interest rate expected to decline in coming months, this would improve economic activity in the country, helping the government achieve its collection targets in form of taxes on profitability and imports,” the analyst said.

Economic agenda: Pakistan will continue walking on a tightrope

The analyst was of the view that the measures assigned by the IMF “are expected to be implemented in the upcoming fiscal budget as there is no time for a mini-budget”.

Meanwhile, Sana Tawfik, an analyst at Arif Habib Limited (AHL), shared that the measures assigned by the international lender are essential to give “direction to the economy.”

“For example, the IMF measure to increase the tax-to-GDP ratio is only possibly by taxing the untaxed sectors i.e. agri, retail and real estate,” she told Business Recorder.

The analyst noted the measures are “inflationary in nature”. “For example, reducing circular debt is key, thus increasing the base tariff just to stop the accumulation of circular debt is necessary, but the measure would add to inflationary pressure of the common man,” she said.

The analyst noted that despite this, inflation would remain between 15-19%.

“It is going to be a challenging year, as with a bigger programme, more stringent measures are expected. All measures taken by the interim government would be carried out, but we will need to see what new benchmarks the IMF has assigned us,” she added.

Similar sentiments were expressed by Dr Abid Qaiyum Suleri, who heads the Sustainable Development Policy Institute (SPDI).

Speaking to Aaj News, he said the government would need to introduce some of the measures assigned by the IMF for the new programme in the upcoming budget. “Some measures would be added later when the budget for the next fiscal year is implemented,” he said.

“This means that in 2024, the masses will face high energy tariffs i.e. electricity and gas bills. Similarly, taxes can be imposed on the retail and real estate sectors. Overall the year 2024 will be a difficult one for the public and the government, but the reforms are necessary,” he added.

What the IMF said in its press release

In its statement, the Washington-based lender highlighted the expected key objectives of the programme including: “(i) strengthening public finances, including through gradual fiscal consolidation and broadening the tax base (especially in undertaxed sectors) and improving tax administration to improve debt sustainability and create space for higher priority development and social assistance spending to protect the vulnerable.

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“(ii) Restoring the energy sector’s viability by accelerating cost reducing reforms including through improving electricity transmission and distribution, moving captive power demand to the electricity grid, strengthening distribution company governance and management, and undertaking effective anti-theft efforts.

“(iii) Returning inflation to target, with a deeper and more transparent flexible FX market supporting external rebalancing and the rebuilding of foreign reserves; and (v) promoting private-led activity through the above-mentioned actions as well as the removal of distortionary protection, advancement of SOE reforms to improve the sector’s performance, and the scaling-up of investment in human capital, to make growth more resilient and inclusive and enable Pakistan to reach its economic potential.”