The ‘last’ IMF programme?

Nathan Porter, director of the International Monetary Fund’s (IMF’s) mission for Pakistan, in a recent interview with the Voice of America, while commenting on Prime Minister Shehbaz Sharif’s statement that this would be the last IMF programme of Pakistan, is reported to have stated that this could be possible if Pakistan sincerely acted on economic reforms.

The crux of Porter’s statement is “if Pakistan sincerely acted on economic reform”.

Implementation of economic reforms has always been the weak link in the IMF programmes - often condoned by the IMF itself. Reforms which truly matter like power sector fiscal viability, privatization of loss-making entities and enhancing the tax revenues through widening of the tax net and efficient implementation remain un-accomplished while moving from one IMF programme to another.

Added now to these long pending requirements are the economic reforms laid out in the current (25th) IMF programme. They are far more extensive, complex and challenging and are required to be accomplished in the next 37 months when this programme will run out. So far it is not in public knowledge if the government has prepared a road map with defined milestones to achieve this ambitious target of “no further IMF debt programme”.

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

Reportedly, the federal and provincial governments will sign 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 to the federal personal and corporate income tax rates by amending their laws by end October 2024.

As a result of which, the agricultural income tax rate is to increase from 12-15 per cent to 45 per cent in January next year. There will be no support price system for food and subsidies on agriculture. All the provincial governments will refrain from giving further subsidies on electricity and gas.

Under censorship is also the fiscal discipline of the country. One of such conditions is that 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 economists fear that this would significantly squeeze non-interest expenses and put an additional tax burden of 3 per cent on the existing taxpayers. Critical is Pakistan’s external debt repayments obligations for the next four years of $ 100 billion.

Pakistan is reported to have committed to the IMF that it would refrain from repaying the USD 12.7 billion debt to Saudi Arabia, China, the UAE, and Kuwait during the programme period. This may exhaust Pakistan’s chance of further bailouts from these sources.

While the government’s thumbs-up on the rising stock market, falling inflation and significant increase in taxpayers’ base can be celebrated for a while, but this alone will not move the country out of the IMF programme. The government needs massive revenues to retire loans, meet the expenditure to run the government and sustain loss-making public sector enterprises and the ailing power sector. With much of the industry, real estate and investors out of the revenue chain, the massive revenue generation is unlikely.

Foreign Direct Investment is drying out in the country. Discussing the steep fall of foreign investment in Pakistan, the IMF Mission Chief to Pakistan, Nathan Porter, said unnecessary government intervention in businesses had been hampering foreign investment.

He was of the view that some basic steps were required to improve investment in the country such as minimal involvement of the government in the businesses and reviewing the government’s powers on implementing tariffs and prices. In addition to that, he called for reforms in government institutions, privatisation of some of them and taking steps to decrease the cost of power generation to boost investments.

Critical for Foreign Direct Investment (FDI) is the country perception. The prevailing political and institutional tensions within the country are undermining the country’s perception as an attractive destination for investment.

The IMF report has underlined the importance of political stability to achieve fiscal discipline and stability. The Asian Development Bank warned 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 ensuring that external lenders keep lending to Pakistan.

The cherished goal to make the current 25th IMF debt programme as the last one sounds great. The least make-believe assurance the nation needs in this regard is a roadmap with defined milestones for the next 37 months, when the current programme will run out and the nation will be on its own.

Copyright Business Recorder, 2024