Old wine in new bottles

The incumbent government, as all earlier ones, is jubilant over securing a staff-level agreement with International Monetary Fund (IMF) on July 12, 2024—once approved by Executive Board of IMF, it will be Pakistan’s 24th programme, pushing the country further into a deadly debt trap.

In response to a request by the Pakistani authorities, an IMF team led by Nathan Porter, IMF’s Mission Chief to Pakistan, held discussions during a staff visit to Islamabad from May 13-23, 2024.

Subsequently virtual meetings were held on IMF’s support for Pakistan’s medium-term policy and reform plans. Following these discussions, Mr. Porter has announced a staff-level agreement on a 37-month Extended Fund Arrangement (EFF) worth approximately US$7 billion.

The staff-level agreement, pending IMF’s Executive Board approval, confirms beyond doubt a growing dependency on IMF that continues to burden Pakistan with escalating debt burden, becoming unsustainable, courtesy perpetual failure of successive government—civil and military alike—in undertaking fundamental structural institutional reforms and unabated fiscal mismanagement, coupled with political uncertainty since April 2022. Although intended to support medium-term policy and reform plans, reliance on external financial aid is bound to aggravate the country’s financial instability and increases its debt obligations.

The perpetual cycle of borrowing restricts Pakistan’s economic sovereignty and imposes stringent conditions that often hinders sustainable development. This dependency is driven by a lack of robust economic reforms, poor fiscal management, and an inability to mobilize domestic resources effectively and equitably, further entrenching the nation in a cycle of debt and dependency as well widening the rich-poor divide and income inequalities.

The new IMF programme ostensibly aims at strengthening Pakistan’s macroeconomic stability and promoting robust, inclusive growth. However, it focuses on strengthening fiscal and monetary policies to maintain economic stability, which requires broadening the tax base to boost government revenue. The budget for fiscal year 2024-25 through Finance Act, 2024 has instead increased the burden on the middle-class salaried persons and the poorest of the poor.

The programme also prioritizes improving management of State-Owned Enterprises (SOEs) to ensure greater efficiency and accountability. The government’s focus on ensuring a fair investment environment and enhancing competition are essential components to attract and retain investments.

Additionally, the programme emphasizes enhancing human capital through education and skill development. Scaling up social protection is also a major goal, with plans to expand the coverage of Benazir Income Support Programme (BISP). These combined efforts are designed to address structural challenges and foster sustainable economic growth.

The state of Pakistan is currently at a very critical juncture of its history. It needs to ensure political stability, rather than further polarize the society and disrespect the mandate of people.

It is strange that in the prevailing testing time, the government of the day is openly vowing to disobey the judgement of the highest court and banning a popular political party that was deprived of its election symbol.

It is time for political rapprochement and national consensus to introduce comprehensive measures spanning fiscal reforms, monetary policy adjustments, and structural changes, across various sectors to address longstanding economic challenges keeping in view their potential impact on the country’s debt burden, inflation rates, and overall economic policy framework.

The IMF programme focuses on achieving a fairer fiscal balance between the federal and provincial governments. This involves implementing the Constitution (Eighteenth Amendment) Act, 2010 [18th Amendment] in its true spirit to decentralize spending responsibilities and signing a ‘National Fiscal Pact’ to empower provincial governments with higher spending capacities.

The goal is to boost investment in critical sectors like education, health, social protection, and regional infrastructure, aiming to improve public service delivery and foster economic inclusivity. However, while devolving spending could enhance local development it could also pose risks of widening fiscal deficits and escalating overall debt obligations.

Another important component of the IMF programme is harmonization of provincial tax systems, especially levying of agricultural income tax, in accordance with federal standards by January 1, 2025. The emphasis is on streamlining tax collection, especially in sales tax on services and agricultural income tax.

While intended to strengthen government revenues and address fiscal imbalances, these changes could have significant repercussions for the majority of farmers, as well as small and medium enterprises (SMEs) in service sector.

Increasing sales tax both on goods and services is going to disproportionately affect the common people, further escalating living costs and contributing to inflationary pressures. Moreover, the adjustment period and legislative reforms pose implementation challenges, potentially leading to shortfalls in revenue and administrative complexities.

For farmers, with economically unsustainable holdings, already facing higher costs of inputs, especially the rising prices of energy and POL products, agricultural income tax harmonization vis-à-vis prevailing personal income tax rates, accentuated harshly in the Budget 2024-25, presents an additional, rather unbearable burden, impacting their livelihoods amidst existing challenges in agricultural productivity and market access.

Addressing inflation and ensuring financial stability are core objectives of 24th IMF programme. However, the strategy includes tightening monetary policy to combat inflationary pressures and safeguard real incomes, especially for vulnerable groups.

The commitment to maintaining a flexible exchange rate aims to enhance resilience against external economic shocks and improve transparency in foreign exchange operations. However, a flexible exchange rate regime could expose the economy to volatility and speculative pressures, potentially destabilizing financial markets and hindering long-term economic planning.

The IMF in its Press release [24/273 of 12 July 2024] has highlighted the urgency of restoring viability of energy sector through tariff adjustments and cost-reducing reforms. By curbing unnecessary expansion of generation capacity and rationalizing energy subsidies, the government aims to mitigate fiscal risks and improve sectoral efficiency.

However, these measures could lead to unprecedented increased energy costs for consumers, exacerbating inflationary pressures and socio-economic hardships, particularly for low-income households reliant on subsidized utilities.

Pakistan’s economic revival under the IMF programme highlights revitalizing the private sector and fostering conducive business environment. This includes enhancing SOEs’ management and prioritizing privatization of profitable entities.

The reform agenda of IMF also seeks to phase out incentives for Special Economic Zones (SEZs) and agricultural subsidies “to promote fair market conditions”.

However, these measures can cause challenges for industries dependent on government support, potentially affecting short-term employment and industrial growth. Delaying privatization could further strain revenues necessary for sustainable economic development and hinder progress toward a competitive market environment.

The implementation of anti-corruption, governance, and transparency reforms is made imperative under the new IMF’s EEF programme. Given the country’s established record of bad governance and its poor ranking in the ‘Corruption Perception Index’, indicating significant corruption risks that hinder effective resource allocation and socio-economic progress, these goals pose a daunting challenge.

In the name of accountability, the apex anti-corruption body has notorious reputation for political victimization. We have serious institutional and other impediments in the implementation of existing anti-corruption laws. We also lack capacity for investigating and executing financial crimes. Even the courts dealing with such cases have serious issues of competent judges to ensure fair and prompt justice.

Weak governance has led to widespread mismanagement and the misallocation of resources intended for critical social sectors like health and education. Therefore, strengthening anti-corruption measures is essential for curbing systemic inefficiencies and restoring public trust. Enhanced transparency and governance reforms are necessary not only for attracting investments but also for fostering sustainable development and ensuring equitable distribution of resources.

The long-term sustainability of economic stability and societal well-being hinges on building a more accountable and resilient governance framework, particularly under the new programme, which emphasizes advancing anti-corruption, governance, and transparency reforms.

Moody’s has shown concern in their statement, reported in the media, stating that the new programme will secure reliable financing from the IMF and mobilize support from other bilateral and multilateral partners to address Pakistan’s external financing requirements.

It adds that policy uncertainties pose risks, with governance challenges and social unrest potentially hindering reform progress. This could impact the government’s ability to fulfill IMF programme requirements and access crucial external funding.

Pakistan’s engagement with the IMF presents both opportunities and challenges in country’s quest for economic stability and growth. While the outlined reforms aim at addressing systemic weaknesses and stimulate sustainable development, the path forward is fraught with risks. Balancing the imperative for fiscal discipline with the need for inclusive growth remains a delicate and daunting task.

As the government moves forward with implementing these reforms, careful monitoring, adaptive policymaking, and robust institutional capacity will be a prerequisite to mitigate adverse impacts, and ultimately reaping the long-term benefits of a revitalized economy—this is, however, not possible without first achieving political stability and national consensus on a common and cherished goal of self-reliance.

Copyright Business Recorder, 2024