Pakistan has received the most International Monetary Fund (IMF) programmes (23 to date) than any other country in the world, not including the imminent approval of the 7 billion-dollar Extended Fund Facility (EFF) programme by the IMF Board on 25 September (Wednesday).
The Fund’s programmes are on average of three years’ duration, which implies we have been on a Fund programme for most of our existence.
This in itself proves that, irrespective of claims to the contrary no administration, military or civilian, has been able to detach this country from reliance on a Fund programme – a reliance that reflects a steady rise in external indebtedness on the back of ever rising trade deficits, necessitating policies to curtail imports (including raw material imports that, in turn, negatively impact on the country’s productivity and exports), dwindling foreign exchange reserves and a budget that continues to raise current expenditure by more than inflation – 21 percent in the current year. While development expenditure, touted as a commitment to public uplift by the administration, is often slashed by the end of the year as per the deficit reduction condition agreed with the IMF and other donors.
The approach by all administrations, barring none, has been to secure a loan from the IMF to deal with the crises and accept all conditions, which over time, but specially post 2018, have become upfront and extremely harsh.
The reason: a view that is by now firmly entrenched within multilaterals and bilaterals that none of our administrations has ever followed through the commitments/pledges for reforms.
It is relevant to note that donors, including friendly countries, began to insist on harsh politically challenging up-front conditions since the 2019 EFF was agreed with the Fund, accompanied by the stipulation that external funding must be secured before a loan and/or tranche release is approved.
The reason for the deepening economic impasse is the sustained failure of our successive economic team leaders to propose in-house out-of- the-box solutions that are backed by empirical data backed research, and instead to persist in policy follies of the past stemming from a mistaken sense of their correctness; in instances where they come into conflict with the Fund’s policies to quickly agree to Fund conditions, without first assessing their design flaws and to reinstate their own flawed policies as and when they can.
This has led to a steady decline in the quality of life of the general public accounting for 41 percent poverty levels in Pakistan as reported by the World Bank last year.
All Pakistani administrations, barring none, have tried to deal with the downswings in economic activity that compelled them to seek IMF loans. These consist of mainly four flawed policies.
First, Pakistani administrations typically extended fiscal and monetary incentives, at the taxpayers’ expense, to productive sectors composed of the relatively wealthy, many of whom have significant assets held abroad.
These included export subsidies on farm products (sugar in particular), tax relief on imports (with anomalies created between commercial and productive sectors and between manufacturers depending on who had ownership), and perhaps the most costly of all to the exchequer, the poorly performing power sector under the head of tariff equalization subsidy – a subsidy extended to the privatised K-Electric that, unless revisited, would simply negate the projected benefits of privatisation that the incumbent government seems to be focused on.
The Fund supports efforts of the government to privatise, based on a strategy harmonized with other multilaterals, and in the event that there is no improvement in sectoral efficiencies (which is the case in our power sector reflected by the current circular debt of 2.5 trillion rupees) to insist that the inefficiencies be passed onto the hapless consumers through higher tariffs – a condition that all previous governments, including the incumbent, have accepted and are currently being implemented.
Second, in their overarching drive to raise revenue to meet the ever rising current expenditure all administrations, again barring none including the incumbent, have upped the tax rates applicable to existing taxpayers, which implies raising and/or widening indirect taxes (comprising of around 75 to 80 percent of all revenue collected) while direct taxes were raised in the current year’s budget on the salaried, already burdened with deductions at source as well as on most purchases given the applicable withholding rates imposed in the sales tax mode and credited inaccurately under direct taxes.
Today, the government is engaged in talks with traders, projected to generate 50 billion rupees by the end of this year if the talks are successful. This emphasis is inexplicable, as the amount is less than 0.4 percent of the total budgeted collections by the Federal Board of Revenue (FBR) in the current year.
The shortfall for the first two months of the current year is already 98 billion rupees and, based on post-2019 Fund programmes, a contingency plan envisaging higher revenue from some other source will have to come into force. This too is a design flaw.
Third is the rise in current expenditure that was budgeted at 21 percent in the current year, and this in spite of the heavy reliance on external borrowing and domestic debt. This needs to be slashed by at least 2 trillion rupees by the major recipients of current expenditure, which in turn will reduce the pressure to raise indirect taxes further that would ease the simmering public discontent.
Neither the Fund nor the government that claims to undertake unpopular measures that will turn the economy around has placed any time bar on reducing expenditure.
There is much talk of austerity measures, and a fast-track privatisation plan (in spite of the country presenting a poor investment climate) but with the first quarter of the current fiscal year nearly over there is no data to back claims of a reduction in expenditure.
And finally, upping the discount rate as per Fund conditions that (i) acts as a dampener on private sector credit with negative repercussions on large scale manufacturing output (which remained in the negative territory in July this year) and on the GDP; and (ii) upped the debt servicing component of the budget fuelling rather than containing inflation.
To conclude, there is an urgent need to seek in-house out of the box solutions and while details of what was agreed by the incumbent economic team leaders will be released after IMF Board approval, yet the upfront conditions lead one to conclude that it is really the same old flawed policies that have failed the past.
One can only hope that the economic team leaders begin to seriously consider in-house out of the box solutions based on empirical data.
Copyright Business Recorder, 2024
Comments