All eyes on IMF’s $7bn EFF

The grant of subsidies and tax incentives by the government are two measures that never escape a reprimand by the International Monetary Fund (IMF). It abhors both. In this week alone there have been two casualties on this account.

While the approval of ‘IMF’s $7 billion Extended Fund Facility (EFF)’ is still in the air, the Fund has instructed the government not to establish any new special economic or export processing zones enjoying tax incentives and the incentives already availed by the existing zones will not be extended after expiry. The government has accepted these conditions without any reservations.

Also, in the same breath, the Fund instructed the government to immediately withdraw the Rs14 per unit electricity subsidy for the consumers of the Islamabad Capital Territory (ICT) and in the province of Punjab.

Accordingly, “the Rs14 per unit for domestic single-phase consumers having a consumption range from 201 to 500 units is being discontinued for Islamabad Capital Territory for the billing month of September 2024,” reads a notification. The subsidy will continue for the consumers of Punjab till September 30.

Furthermore, the IMF has stopped all the provinces from extending any subsidy during the 37-month period of the programme. The ad-hoc grant of subsidies on electric bills was a political ploy. Both federal and Punjab governments knew full well that it would not be permitted and would have to be called off as this is something most disliked by the Fund. The consequences being - a political mileage denied.

The suspension of new SEZs and EPZs would not have any near-term negative impact on the prevailing economic landscape of Pakistan except for the special zone planned for Gwadar under the China Pakistan Economic Corridor (CPEC) umbrella. The existing SEZs are struggling to be fully populated while some of the new ones are in the planning stage while the others appear superfluous at this juncture of the economic downturn.

Pakistan had planned to set up nine SEZs under the CPEC. So far, it has begun work on two zones – the Rashakai Special Economic Zone in KP and the Allama Iqbal Industrial City in Faisalabad.

The Dhabeji Special Economic Zone, Sindh, and the Bostan Special Economic Zone, Balochistan, are at various stages of planning.

The planners argue that the IMF condition will specially hit the ICT Model Industrial Zone, Islamabad, Industrial Park on Pakistan Steel Mills land, Mirpur Industrial Zone, Mohmand Marble City and Moqpondass Special Economic Zone.

SEZs and EPZs are entitled to special facilities and tax incentives aimed at encouraging businesses to establish clusters of commercial activities to mitigate Pakistan’s unemployment rate hovering over 11% and poverty at over 40%.

Under the SEZ Act, investors are entitled to exemption from income tax for 10 years for zone developers, co-developers and zone enterprises.

There is also a one-off exemption from all customs duties and taxes on the import of capital goods for zone developers, co-developers and zone enterprises.

During the last fiscal year, the government gave Rs7 billion worth of exemptions to the zone developers.

Pakistan since long has been unsuccessfully trying to attract Chinese industries to these zones as part of the second-phase of the CPEC. It is unlikely that this will happen anytime soon. The industry needs a market and competitiveness, which presently are challenging.

Many of the SEZs are in planning stage while others require adequate infrastructures to be operational. This requires funds and clients’ commitments to populate the zones - both are scarce in these times.

As usual, there are many conspiracy theories behind IMF’s condition to halt SEZs and EPZs. The foremost is that it targets China-Pakistan business cooperation. In question by IMF is only the grant of tax holidays and tax exemptions. Minus this, the government can have on its own or under the CPEC as many industrial zones as it can lay its hands on. At this point in time China itself is not inclined to populate SEZs.

The next foreseeable reprimand from the IMF could be in relation to the privatization process and ministries’ downsizing and rationalization. There are conflicting reports on it, which may not go down well with the IMF.

Reportedly, there is criticism that the dominance of finance ministry in its negotiations with the IMF at the expense of planning ministry’s role has led to the acceptance of such conditions that may appear fiscally prudent but carry huge socio-economic costs. It is reported that in the past, the Planning Commission used to play an important role in the IMF talks but the Ministry of Finance has now sidelined the commission, which is resulting in acceptance of conditions having serious socio-economic implications.

It must be understood that the IMF’s $7 billion Extended Fund Facility (EFF) is not an IMF standard programme which is open to negotiations. It is a bailout programme, leaving virtually no room for negotiations.

The times when planning ministry had a role were the times when Pakistan had much in its pockets to negotiate. The present relationship between the IMF and the government is limited to Pakistan availing the loan from the IMF to stay afloat and the Fund ensuring that the country remains liquid enough to pay back the loan.

The socio-economic factor is of little concern to the IMF; and the government in turn ignores its consequences on the socio-economic dynamics of the country and its people. The urgency now is to avail the IMF programme and limit the irritants that keep on cropping up - only to be set aside.

Copyright Business Recorder, 2024