IMF is here to stay

The IMF and Pakistani authorities have reached a staff-level agreement on a 37-month Extended Fund Facility (EFF) Arrangement of about dollar 7 billion. The agreement, inked on July 12, is destined to be approved by the IMF Executive Board.

Many people hail the agreement as a remarkable achievement while some question it: at what cost and of what benefit is it to the people of Pakistan? While the loan beneficiaries feel secured to survive yet another day on borrowed money, the loan is to be repaid by the future generations - a truth more close to reality.

It increasingly becomes clear that the IMF’s EFF of dollar 7 billion is nothing more than a loan like any other loan from the lender - based on interest and certain conditions. The difference is that the IMF loan and conditions influence the lives of the whole nation. From whatever angle you may look, a loan is an undesirable yet an inevitable option for Pakistan considering its unsustainable debt obligations and the state’s addiction of squandering the loan to cover up governance deficiencies and its unproductive spending.

Pakistan will soon face the crucial task of rescheduling its foreign debt payments amidst failing export earnings. With its current outstanding foreign debt estimated at US dollar 124.5 billion or 42 per cent of GDP, it will need to negotiate with numerous stakeholders, including multilateral institutions, banks and foreign financial organisations. Pakistan could potentially look to China for concessions, if not already done so, in light of their contribution to the debt through their Belt and Road Initiative.

According to data shared by State Bank of Pakistan, as of January 2024, Pakistan’s external debt servicing burden for the next 12 months equals almost dollar 29 billion. That is almost 45 percent of the country’s expected dollar income - hinging on income from exports and remittances. IMF’s new loan of dollar 7 billion is an add-on to this exposure, which will put an additional strain on country’s finances, leaving less room for essential public services and investments and relief to the people.

While on the subject, the observations of the international credit rating agencies cannot be ignored.

Moody’s in its latest report stated that the Programme would provide credible sources of financing from the IMF and catalyse funding from other bilateral and multilateral partners to meet Pakistan’s external financing needs.

“However, the government’s ability to sustain reform implementation will be key to allowing Pakistan to continually unlock financing over the duration of the IMF programme, leading to a durable easing of government liquidity risks,” Moody’s report stated

The rating company warned that a resurgence of social tensions on the back of high cost of living - which may increase because of higher taxes and future adjustments to energy tariffs - could weigh on reform implementation.

The new IMF EFF comes with conditions of far-reaching reforms, such as measures to broaden the tax base and removing exemptions and making timely adjustments of energy tariffs to restore the energy sector viability, the financial services company said.

“Other measures include improving state-owned enterprises’ management and privatisation, phasing out agricultural support prices and associated subsidies, advancing anti-corruption, governance and transparency reforms, and gradually liberalising trade policy.”

Moreover, risks that the coalition government may not have a sufficiently strong electoral mandate to continually implement difficult reforms remain, it added.

Whereas, the international credit rating agency Fitch has warned that Pakistan’s ongoing political turmoil could derail the country’s economic recovery.

The latest Pakistan Country Risk Report highlights the precarious state of the economy, noting that urban protests have significantly hampered economic activities.

Fitch Ratings has termed Pakistan’s FY25 budget draft an ‘ambitious’ plan, projecting that the politically weak government will miss several set targets, including economic growth, tax collections, non-tax revenue, fiscal deficit, primary deficit, and expenditure in the year starting July 1, 2024.

Both Moody’s and Fitch underline political and social uncertainty and tension as a threat to the precarious state of economy and the implementation of difficult reforms.

These observations by the rating companies do not appear to have caught the eyes and ears of the state functionaries as at the implementation level there is a lack of clarity and direction to set things right.

IMF conditions are all about reforms and taxation. This puts under focus the conduct of the power sector and FBR (Federal Board of Revenue), among many other sectors and fault lines.

Power sector of the country is most worrying for the country’s fiscal sustainability and needs reforms the most, of which the resolution of Independent Power Producers’ (IPPs’) capacity payment issue is urgent. Federal Minister for Energy Awais Leghari this week asserted that the government was not in a position to act unilaterally against IPPs regarding power purchase agreements (PPAs), which are draining billions of rupees of taxpayers’ money. “The government has guaranteed the IPP contracts. We are moving towards privatising loss-making power companies and institutions,” the minister stated, responding to a barrage of messages on X from former caretaker minister Dr Gohar Ejaz, who blamed the incumbent government for the ongoing power crisis.

No doubt IPP capacity payment is a carry forward from the past, but it brings to surface the fact that the government of the day is at ground zero to address this complex issue. The solution has to be an out of the box solution but someone has to figure out how to go about it.

Taxation is all about the conduct of Federal Bureau of Revenue (FBR). During the visit of Prime Minister Shehbaz Sharif to the FBR House last week, the prime minister expressed serious displeasure that there are some ongoing hidden issues and the FBR has not apprised the prime minister about them and directed FBR to immediately bring all hidden issues before him and he would not take any punitive action against the tax authorities.

Referring to digitization, the prime minister said, “FBR chairman has given me a surprise and I was not expecting this from him that things are hidden from me”. This has not only surprised the prime minister but also the nation as, time and again, it had been stated that the key reforms being implemented at FBR are its digitization and automation aimed at achieving greater transparency and development of trust between FBR and taxpayers - leading to an enhanced tax base and tax recovery. Prima facie, here too we appear to be at ground zero. Hopefully, the said visit of the prime minister to FBR head-office would expedite the process of digitization and automation.

Likewise, there could be many other fault lines where truth needs to be exposed and issues brought forward leading to meaningful reforms and restructuring.

If the government of the day means business then a lot of meaningful hard work has to be put in and truth brought forward. Pending that, the IMF is here to stay.

Copyright Business Recorder, 2024