‘Do more’, IMF asks Pakistan

The Pakistan budget 2024-25 appears to have largely satisfied the IMF (International Monetary Fund), prompting it to move on with the 25th IMF programme, to once again bail the country out for its fiscal and economic sustainability. But, this is not where IMF stops.

The budget satisfied the IMF to the extent of its conditionalities on enhancement of taxation and tax base and curtailment of subsidies, the brunt of which is felt by the people at large and the industry in particular.

What follows now is IMF tightening the noose on the government on the many shortcomings in its state governance and structural changes needed at many ends - the brunt of which will be experienced by the incumbent government with political and socioeconomic consequences. However, most of these conditions could turn out to be in greater public interest and somewhat in bringing around better state governance.

The IMF has placed a significant condition to abolish the Pakistan Sovereign Wealth Fund (PSWF) as a prerequisite for qualifying for a new bailout package, aiming to ensure transparency and accountability in the financial affairs of the country’s seven profitable state-owned firms. The Fund is adamant on it, setting September 30th as a deadline to repeal the Pakistan Sovereign Wealth Fund Act 2023, which governs the operations of the PSWF.

The Pakistan Sovereign Wealth Fund (PSWF) is a state-owned investment fund established by the Government of Pakistan to manage and invest the country’s surplus funds for the benefit of future generations. The International Monetary Fund (IMF) may have some concerns about the PSWF due to transparency, accountability, or governance issues. The IMF may want to abolish or reform the PSWF to improve transparency, ensure proper governance, and enhance accountability to prevent misuse of funds or corruption.

Pakistani authorities are reported to have sought more time to provide a final response, but it appears the government may have no choice but to agree to the IMF’s demand to inject transparency and accountability into the affairs of the seven companies.

The previous government had enacted the Pakistan Sovereign Wealth Fund Act to transfer the shares of seven profitable entities and then sell them overseas to raise money. The law states that the assets and profits of the Oil and Gas Development Company Limited (OGDCL), Pakistan Petroleum Limited, Mari Petroleum, National Bank of Pakistan, Pakistan Development Fund, Government Holdings (Private) Limited, and Neelum-Jhelum Hydropower Company will be shifted to the Sovereign Wealth Fund.

Imposition of equitable tax rate on agriculture income was suspiciously excluded from the budget - to the disappointment and chagrin of many taxpayers who believe that they are not being fairly treated on taxation. This discrimination did not go unnoticed by the IMF who has brought this onto its ‘must do’ list.

The IMF wants the imposition of a standard individual income tax rate of up to 45% on agriculture income – something that may end the disparity in income tax regime without the need to amend the Constitution. The condition is part of the structural benchmarks the IMF has defined for the next bailout programme. October 2024 is the deadline set by the IMF to amend the existing provincial laws to bring them at par with the federal income tax law. The IMF has also asked for rescinding any income tax exemption for the livestock sector by October this year.

Under the Constitution, the federal government cannot impose taxes on agricultural income. The provinces are authorised to collect taxes from the agriculture sector that contributes 24 percent to the economy but does not contribute even 0.1% of the total taxes collected from across the country.

The IMF has not touched the constitutional arrangement, but instead has asked the provinces to simply adopt the income tax rates of non-salaried business individuals that are as high as 45 percent of net income.

The World Bank in its report has estimated that Pakistan can raise farm income tax equal to 1 percent of the Gross Domestic Product. This is equal to Rs1.22 trillion considering today’s projected size of the economy.

The sources told a newspaper that provincial governments have, by and large, given consent to the IMF’s demand, although they view that 45 % tax compared to the existing 15 percent maximum rate is too high. In case of the corporate farming, the rate of corporate income tax rate is understood to be applicable.

Many of the federal ministries are superfluous in terms of duplication of work and having no role after the 18th amendment, when many federal subjects were transferred to provinces. Such ministries should have long time back restructured or declared redundant. Here again, IMF takes the lead to set things right.

Five federal ministries have been identified as the initial focus of a comprehensive right-sizing initiative launched by the federal government under the directives of the IMF. These ministries have been given a deadline of July 12, 2024, to submit their responses, highlighting the urgency of the matter.

The Prime Minister has constituted a Committee on right-sizing of the federal government, tasked with the job of proposing a new architecture for federal functions.

The five key ministries are: Ministry of Information Technology and Telecommunication, Ministry of Kashmir Affairs & Gilgit-Baltistan, Ministry of States and Frontier Regions (SAFRON), Ministry of Industries and Production (MoI&P) and Ministry of National Health Services Regulations & Coordination.

More of such IMF conditions, primarily related to state governance gaps and deficiencies, would be brought on the table for implementation with defined timelines, as negotiations with IMF proceeds.

Years of mis-governance in state affairs on account of lack of competence and political and vested interests interventions has rendered the state machinery ineffective to do the basics to bring around a change for the better in state affairs. The “basics” such as transparency in Pakistan Sovereign Wealth Fund, imposition of agriculture tax at the right rate and rationalization of federal ministries that the IMF has been vigorously advocating constitute the basic requirements and public demands of the day, which any responsible government would have done on its own initiative and in good time.

For internal security we move when China points at our gaps and deficiencies in our system; for fiscal and economic sustainability we need the IMF and World Bank to guide us, on diplomacy we oscillate between the demands of the US and China. All these are doable and well under our own reach to manage and manage well. The nation no doubt has tremendous competence and knowledge embedded in its genes, which has time and again proved its worth. It only needs to be polished and showcased once again.

Copyright Business Recorder, 2024