IMF programme & challenges

Pakistan’s economic journey took a momentous turn after it bid farewell to the International Monetary Fund (IMF) in August 2016, after successfully completing twelfth and final review of Extended Fund Facility (EFF) programme, for the first time in its history, with many waivers.

However, the subsequent years were marked by political instability, continuous protests allegedly backed by the establishment, and judicial activism that saw the removal of three-time elected prime minister.

The aggressive actions of the National Accountability Bureau (NAB) against businesses and dissenting voices on corruption charges, along with a deteriorating law and order situation, severely undermined the country’s economic progress. These challenges culminated in a dire economic scenario by the time the new government was formed following the 2018 general elections.

Confronted with a precarious economic situation, the new alliance government had no choice but to seek assistance from the lender of last resort once again. Unfortunately, prior to approaching IMF, the government introduced a mini-budget in September 2018, imposing taxes amounting to approximately Rs 730 billion rupees. This move adversely affected the business environment and triggered a surge in inflation, further complicating the country’s economic challenges.

As Pakistan sought assistance from IMF in 2018, it faced an institution that was especially more stringent and less responsive than before.

Despite Pakistan’s urgent need and the alignment with its quota, IMF was initially reluctant to provide support. For securing the necessary financial aid, the then Prime Minister of Pakistan, Imran Khan, traveled to the United Arab Emirates(UAE) to meet with IMF’s Managing Director, offering assurances of commitment to the IMF’s reform agenda. This effort culminated in the approval of the EFF programme in July 2019, with the first tranche disbursed shortly thereafter.

However, the government struggled to implement the agreed-upon reforms throughout its tenure. This failure led IMF to impose harsh conditions, including additional taxes and hikes in electricity and energy prices.

In a significant move, on the dictates of IMF, the State Bank of Pakistan Act, 1956 was amended in the name of granting it more autonomy. The alliance government of Pakistan Tehreek-e-Insaf (PTI) agreed to impose a petroleum levy of Rs 50 per liter on petroleum products.

Despite these severe measures, the PTI government failed to undertake the necessary structural reforms to achieve fiscal stability. On the contrary, just before facing a vote of no-confidence, it violated the IMF agreement by reducing petroleum prices. It was ultimately fixed in June 2022, a decision that heavily burdened the national exchequer.

These missteps and policy reversals underlined the broader challenges Pakistan faced in stabilizing its economy and meeting stringent demands of the global lender. IMF’s strict conditions and the successive governments’ inconsistent policy measures further exacerbated the economic turmoil, highlighting the critical need for consistent and robust economic governance in Pakistan.

Following the successful motion of no-confidence against premier Imran Khan on April 9, 2022, Miftah Ismail became a non-elected Finance Minister for the second time and mirrored the approach of his predecessor. He, instead of implementing structural reforms, adopted the similar approach of enhancing tax and non-tax revenues, and raising energy and electricity prices.

One of his actions was imposing Rs 3,000 tax on retailers, for which he claimed credit while attributing challenges to interference in his work by Maryman Nawaz Sharif. However, this measure amounted to a preferential tax scheme that risked creating a parallel taxation system rather than adding meaningful value to the national treasury.

After his unceremonious departure from Q-Block, the Pakistan Muslim League’s self-acclaimed “economic wizard”, Ishaq Dar, took oath as Finance Minister for the fourth time.

Although he had previously been praised for completing the IMF programme, stabilizing the currency, and setting the country on an economic trajectory, his fourth term was marked by significant failures. He oversaw a historic devaluation of the Pakistani Rupee against the dollar in a single day and failed to secure any tranche from IMF, leading to the premature expiration of the EFF programme.

Subsequently, due to the personal efforts of Prime Minister Shehbaz Sharif, Pakistan successfully secured a 9-month US$ 3 billion Standby Arrangement, which was completed in April 2024. However, IMF’s behaviour appears more stringent. With each review, IMF imposed more stern conditions, including financial guarantees from friendly countries, involving political parties and seeking their approval for the programme, rescheduling loans, and presenting exaggerated estimates of loan payments and the current account deficit.

Despite the successful completion of staff-level agreements, IMF delayed tranche disbursements and introduced additional conditions before releasing funds. These stringent requirements have negatively impacted the country’s overall growth, significantly increasing cost of doing business and squeezing the space for small businesses. Additionally, these measures have triggered inflation, exacerbating difficulties faced by the common people.

IMF’s current dealings show its rigorous approach towards Pakistan. Despite reaching a staff-level agreement on a 37-month EFF arrangement worth approximately US$7 billion, confirmed by an IMF press release on July 12, 2024, the lender of last resort has introduced a new condition of rescheduling of a US$12 billion loan.

According to media report and as quoted by the Finance Minister Senator Muhammad Aurangzeb, Pakistan is negotiating with China, Saudi Arabia, and the UAE to reschedule this debt for up to five years to satisfy IMF’s final condition. After debt rollover discussions in Beijing, the minister reported that China acknowledged the issue and described the talks as constructive.

Pakistan, having previously secured one-year extensions on US$5 billion from Saudi Arabia, US$4 billion from China, and US$3 billion from the UAE, now seeks three to five-year extensions. This rescheduling is essential to meeting IMF’s requirements and maintaining financial stability.

Beyond IMF’s behavior toward Pakistan, it is important to analyze our own efforts to improve political and economic conditions.

The top leadership, vying for the position of prime minister, are all around or over the age of 70, many grappling with health issues. Despite this, none seems genuinely committed to the future of the over 240 million citizens. Major political parties have repeatedly held power, yet none has successfully delivered significant progress.

The question arises, how many tenures do they need to make a meaningful impact and put the economy on the right path? This issue extends beyond politicians to the judiciary.

Pakistan must enhance its revenue collection and stimulate growth through bold structural reforms. Key to this transformation are improvements in governance, fiscal balance, and accountability, alongside rigorous performance evaluations and adherence to separation of powers.

To move beyond IMF’s dependency, Pakistan must embrace modern approaches such as digitalization, fostering a fintech ecosystem, and integrating innovative technologies into trade and financial services. Strengthening financial inclusion, offering targeted tax incentives for businesses, and overhauling Federal Board of Revenue are essential steps.

By committing to these advanced strategies, Pakistan can achieve sustainable economic growth and a stable financial future.

Copyright Business Recorder, 2024