IMF programme & reform priorities

The long-awaited US$ 7 billion 37-month Extended Fund Facility (EFF), finally approved by the Executive Board of the International Monetary Fund (IMF) on September 27, 2024, marks Pakistan’s 25th programme with the institution, aimed at restoring economic stability.

The programme focuses on key objectives, including rebuilding policy-making credibility and entrenching macroeconomic sustainability. The new programme also seeks to advance reforms that enhance productivity and competitiveness by fostering a more conducive business environment for the private sector.

Reforming state-owned enterprises (SOEs) and improving public service delivery are also central components of the programme. Furthermore, the EFF emphasizes strengthening climate resilience, aligning Pakistan’s economic recovery with sustainable development goals.

Macroeconomic stability is a complex goal that requires a broad and multi-faceted approach, involving equitable taxation, efficient public spending, and fostering an environment that promotes economic growth. Over time, Pakistan’s tax system has become increasingly regressive, placing undue pressure on those already contributing within the tax net. Rather than generating revenue through expanding economic activity, the system tends to extract more from existing taxpayers, particularly businesses and individuals.

Heavy tax burden stifles growth, limiting businesses’ ability to expand, innovate, and create jobs. Imposition of multiple layers of taxation only exacerbates these issues, reducing competitiveness and discouraging investment. As businesses struggle under these fiscal constraints, the risk of economic contraction and rising unemployment grows, leading to diminished government revenues. Such a tax framework, focused on immediate extraction rather than long-term growth, undermines efforts to achieve sustained economic progress and fiscal stability.

The delineated programmes highlight the critical need for enhanced revenue mobilization through broadening the tax base, eliminating special sectoral regimes, and ensuring a more equitable distribution of the tax burden on historically under-taxed sectors, such as industrialists, developers, and large-scale agriculturists. However, while pursuing these goals, it is essential for the government to remain mindful of the potential adverse effects on these sectors.

A persistent issue is the tendency on the part of Federal Board of Revenue (FBR) to devise hasty, ill-conceived and irrational policies, completely disconnected from sector-specific realities, opting for “one-size-fits-all” solutions that often fall short of expectations. The recent ‘Tajir Dost Scheme’, which imposes a uniform advance tax based solely on the business location, disregarding the nature of the business or its income, best exemplifies this faulty approach.

This scheme, like others before it, reveals the bureaucratic tendency of Revenuecracy to prioritize legal drafting over practical, data-driven decision-making, resulting in policies that are poorly suited to the complexities of the economy. Such misaligned policies not onaly fail to achieve the desired results but also further alienate key economic sectors, undermining trust and cooperation between businesses and the government.

This disconnection between policy formulation and on-ground realities continues to hinder progress in revenue generation and economic growth. It necessitates taking away policy from FBR and giving it to an independent, professional Board.

The government must intensify efforts to strengthen federal-provincial institutional arrangements, especially to enhance tax administration and compliance. This becomes particularly important as the government moves forward with implementing the agricultural income tax, which requires coordinated efforts across various levels of governance. Federal-provincial collaboration will be essential to ensure a consistent and fair tax framework, minimizing the risk of evasion while promoting accountability and transparency.

In terms of reforming SOEs and improving public service provision, a multifaceted approach is crucially essential. This should include restructuring, privatization, governance improvements, and enhanced transparency. SOEs that have persistently drained government revenues due to their financial and operational inefficiencies must either be optimized or offloaded.

These entities often require continuous subsidies or financial bailouts, which put an undue strain on the national budget. Therefore, the government should either restructure all such organizations to make them financially viable or consider privatization for those that are non-essential or underperforming.

The government’s involvement in SOEs should be limited to a regulatory and oversight capacity, rather than direct operational control. Operations must be managed by professionals with the necessary technical and managerial expertise, ensuring that these enterprises are run efficiently and transparently.

Civil servants, unless specifically qualified, should not be involved in the management of specialized sectors, as their lack of industry-specific expertise that often leads to mismanagement and inefficiencies. By reducing government interference and ensuring a professional management structure, SOEs can better serve public interest and contribute to the overall economic health of the country.

One of the key issues, which has aggravated to a monstrous level, is the energy sector’s unsustainability. The governance related issues and inefficient structure have reached such a point where its adverse impacts are directly affecting fiscal management at national level.

Previously, the government had found an easy solution to pass on adjustments to the public and consumer through tariff adjustments. However, it might have helped to maintain their financial soundness and managing accumulation of circular debt, but the cost has increased so much that businesses are losing their competitiveness, and households are finding it difficult to afford this basic necessity of life. The current IMF programme calls for “Deep Cost side” reforms where government needs to increase its efforts in renegotiating the contracts in an amicable way without hampering investor confidence and affecting non-performance liability.

The continuous rise in energy prices has severely affected businesses, leading to higher production costs, and has reduced global competitiveness. For households, the rising tariffs have made it increasingly difficult to afford this necessity, further straining household budgets and contributing to a growing sense of economic instability. This situation highlights the need for comprehensive reforms, especially those targeting the root causes of inefficiency and unsustainability within the sector.

The current economic programme emphasizes “deep cost-side” reforms. The government must prioritize renegotiating existing contracts with energy producers and suppliers to reduce costs, doing so in a way that does not erode investor confidence or trigger non-performance liabilities. This delicate balance is critical, as it will help stabilize the energy sector without alienating key stakeholders. At the same time, addressing governance-related issues, improving transparency, and implementing structural reforms will be essential in restoring long-term sustainability in Pakistan’s energy sector and alleviating its detrimental effects on both businesses and households.

Copyright Business Recorder, 2024