IMF lending: tougher tasks lie ahead

The International Monetary Fund (IMF), upon securing all pre-conditions, announced this week the approval of the 37-month Extended Fund Facility (EFF) valued at USD 7 billion. This IMF programme is significantly different from the previous ones.

Its engagement this time extends far beyond its mandate as a loan provider to the governments under fiscal stress. This programme has an over-bearing impact on matters of state policy and different segments of society.

For the incumbent government, it means a timely relief and moving forward the threat of default for some more time while providing the government yet another chance to set its house in order. For the venerable segments of society, however, it means continuation of hardships.

For the elite segments of society it means there are no sacred cows. On certain issues, it is tantamount to infringement on sovereignty of the state and micro-management of state affairs. This IMF programme also provides a silver lining, embedded in its conditions of strategic and long-term public interest, which successive governments have been avoiding to enforce on account of political expediency, vote politics and appeasement of the elite segments of society, notably, breaking the taboo of taxing income from agriculture, shifting the financial responsibilities to the provinces after the 18th amendment and more of the same.

All this could only be made possible under the IMF dictates and at this stage of the state’s fiscal health when the IMF is the only messiah to successfully bail it out.

Securing the IMF loan and for that matter any loan, by definition and consequence, cannot be celebrated as a legitimate source of jubilation nor can it be described as a favour by the lender as wrongly perceived and propagated.

Nor is this loan alone a saviour insofar as our predicament is concerned. It is at best a catalyst for the hard work ahead to move the country out of its economic-fiscal crisis. It is a huge liability with severe consequences if its timely settlement is not honoured. Pakistan will pay around a 5 per cent interest rate on the IMF loan. Furthermore, the IMF prevailed upon Pakistan to first bridge a USD 2 billion additional financing gap for qualifying for the board approval, which was mainly managed through friendly countries. To meet the shortfall of USD 600 million, Pakistan was compelled to secure the most expensive loan in its history--at 11 percent--from a commercial bank in order to secure a board meeting date from the IMF.

Additionally, the government had to raise Rs 1.8 trillion, increase the electricity tariff by up to 51 per cent and comply with many more pre-conditions to qualify for the loan.

Under the approved loan, the IMF shall immediately release the first tranche of about USD 1billion to reinforce a cash-strapped country’s efforts to address the ongoing economic crisis.

Release of further loan tranches is linked to the government meeting the conditions set by the IMF - as specified in its report. The power sector fiscal viability, privatization of loss-making public-sector entities and enhancing tax revenues are part of the core conditions of the IMF programme.

Unlike in the past, when the provincial budgets were out of the purview of the IMF, the new programme encompasses the provincial budgets and their revenues as well. Nearly one dozen IMF conditions directly impact the provinces under the new programme.

Reportedly, the federal and provincial governments will be signing a new ‘National Fiscal Pact’ by next week to transfer the responsibilities of health, education, social safety net and road infrastructure projects to provinces, according to the conditions agreed with the IMF.

All the four provincial governments will align their agriculture income tax rates with the federal personal and corporate income tax rates by amending their laws by end-October 2024. As a consequence thereof, the agricultural income tax rate would increase from 12-15 per cent to 45 per cent in January next year.

All the provincial governments will be required to refrain from giving further subsidies on electricity and gas.

The federal and provincial governments shall not establish any new Special Economic Zones or Export Processing Zones for the purpose of providing tax and duties concessions and other incentives. The tax incentives already provided to the existing zones shall not be extended further.

Under censure is also the fiscal indiscipline of the country. Pakistan needs to show a primary budget surplus of 4.2 per cent of the Gross Domestic Product (GDP) during the three-year programme period.

The primary budget surplus is calculated after excluding interest payments. The economists fear that the said 4.2 per cent GDP deficit would significantly squeeze non-interest expenses and put an additional tax burden of 3 per cent on the existing taxpayers.

Under the IMF programme, a primary surplus equaling 1 per cent of GDP will have to be shown in this fiscal year and about 3.2 per cent over the next two years to put the debt-to-GDP ratio on a sustainable declining path.

In case of tax revenue shortfall, the government has committed to bringing a mini-budget to increase tax rates on imports, contractors, professional service providers as well as fertilizers. The FBR is facing the possibility of over Rs 200 billion tax shortfall for the first quarter.

For this fiscal year, Pakistan will be bound to keep the spending on defense and subsidies at the previous fiscal year’s level in terms of the size of the economy.

Pakistan is reported to have committed to refrain from repaying the USD 12.7 billion debt to Saudi Arabia, China, the UAE, and Kuwait during the programme period.

The IMF programme has underlined the importance of political stability to achieve fiscal discipline and stability. The Asian Development Bank warned this week that the rising political and institutional tensions may make it difficult to implement the reforms that Pakistan has committed to deliver to the IMF. The ADB said these reforms were crucial to ensure that external lenders keep lending to Pakistan.

In summary, the 25th IMF programme is a kick-start for the formidable task that lies ahead for the government to accomplish. Some of the formidable tasks need to be worked upon right away. Pakistan’s external debt repayments obligations for the next four years are $ 100 billion.

The Federal Board of revenue (FBR) acknowledged a shortfall of Rs 98 billion rupees during the first two months of the current fiscal year. The process of privatisation of loss-making public sector enterprises, downsizing and doing away with redundant ministries and government entities, curtailment in government expenditure and more of the same are being slow-pedaled to the dismay and distress of independent observers.

Copyright Business Recorder, 2024