IMF: reputation at stake

A new report of the International Monetary Fund (IMF) disclosed that the lender has risked its reputation by extending a $7 billion bailout package to Pakistan, as any decision about whether to lend or not to lend carries risks due to chances of the programme going off track.

The report disclosed that Pakistan’s overall risk of sovereign stress was high, reflecting a high level of vulnerability from elevated debt and gross financing needs and low reserves. But for now the IMF has declared Pakistan’s debt as sustainable.

The underlying message this revelation carries is that Pakistan’s fiscal and economic sustainability is vulnerable.

With this background at hand, it has also become understandable as to why the monitoring of this particular IMF programme is different from the previous ones. The IMF monitoring this time involves perpetual micro-management of the programme and at times reprimands on critical issues. Its observations are hard hitting, but meaningful and factual, and often driven by frustration on non-compliance and foot-dragging on certain targets and commitments.

The IMF by pledging its reputation appears to be a stakeholder in the fiscal and economic sustainability of the nation. It is therefore expected to take every possible step aimed at preserving and protecting its reputation. It has in its hand the release of the next tranche to make things happen.

The IMF recently recorded some rather strong observation, that, Pakistan’s growth is hindered by favouritism in these two segments

• Identifies textile sector as having highest tax gap relative to its value-added potential;

• Recommends simplifying trade policies, avoiding tariffs aimed at industrial protection.

The IMF has asked Pakistan to swiftly end preferential treatment, tax exemptions and other protections for the agriculture and textile sectors, which, it says have stifled the country’s growth potential for decades.

In its staff report on the diagnosis of the factors behind Pakistan’s struggling economy, the IMF blamed these two sectors not only for failing to contribute adequately to the national revenue but also for consuming large portions of public funds while remaining inefficient and uncompetitive.

As part of the recently approved $7 billion Extended Fund Facility (EFF), the IMF stressed that Pakistan must break free from its economic practices of the past 75 years to escape its recurrent boom-bust cycles.

IMF has come hard on Pakistan’s performance compared with its peers. The staff report released this week highlighted the country’s significant lag behind similar nations, a stagnation that has compromised living standards and pushed over 40.5 per cent of the population below the poverty line.

The IMF said Pakistan has “moved further and further behind” its regional peers in terms of living standards, “underscoring the need for urgent policy correction”.

The report added:

“Pakistan has been falling behind its peers in recent decades in terms of income per capita, competitiveness, and export performance. From 2000 to 2022, Pakistan’s GDP per capita grew at an average annual rate of only 1.9%. By contrast, Pakistan’s peers achieved more than twice this rate: Bangladesh averaged growth of 4.5%, India reached 4.9%, Vietnam 5%, and China a growth of about 7.5%.”

Compared to regional peers, Pakistan’s export growth has been weak, while its competitiveness has declined, given an appreciated real exchange rate relative to productivity growth.

Pakistan’s growth underperformance reflects weak contributions from human and physical capital and shrinking productivity, the lender said.

“Economic growth during 2000–20 was mostly driven by physical capital accumulation and an increase in labor hours, with these factors contributing about 1.9 and 1.15% points per year, respectively.

The IMF said that Pakistan’s declining export performance and limited openness to trade challenge the country’s development and external viability.

“Beyond weak exports, Pakistan has struggled to innovate and develop production of more sophisticated export goods, as indicated by its low and declining share of knowledge-intensive exports,” the IMF noted.

Apart from economic indicators, Pakistan’s health and education indicators have significantly lagged behind those of its regional peers, which have also undermined growth, investment, and productivity, said the IMF.

Citing World Bank data, the IMF said that Pakistan’s expenditure on education as a percentage of total expenditure is lower than that of India, Bangladesh, and Nepal.

Moreover, Pakistan’s health expenditure is a significantly lower share of GDP than that of Nepal and Sri Lanka. “Pakistan has the highest infant mortality rate and one of the highest rates of stunting among children less than five years in age in the region,” it said.

The IMF said that in order to place Pakistan on a new economic trajectory, the country requires addressing many distortions as well as improving the quality and level of public investment including in human capital.

“Key reforms center on removing the remnants of the old growth strategy based around protection, preferences, and concessions. This has limited competition and the incentive for innovation and investment, locking resources into low-productivity activities (including through Special Economic Zones), which only survive because the state supports their profitability.

“Removing these detrimental protections will spur competition and innovation as new players enter (including from outside Pakistan) and lead to a productivity-enhancing reallocation of resources, including labor.”

Moreover, to create space for higher investment in physical and human capital, there is a need to reduce the government’s crowding out of private investment and raise additional revenue from under-axed sectors by removing exemptions and other tax concessions, said the IMF.

The said observations made by the IMF in its report constitute a wake-up call, if not a charge-sheet, for the policymakers of the country. Whereas, the country’s progress on the IMF’s ‘Do list ‘ is wanting.

The federal government has informed the International Monetary Fund (IMF) that it plans to finalize the privatization of two power distribution companies (DISCOs) by the end of January 2025. This commitment comes as part of the government’s structural reforms under the $7 billion Extended Fund Facility (EFF).

Despite progress on the DISCOs, the government acknowledged delays in the privatization of Pakistan International Airlines (PIA) and Faisalabad Electric Supply Company (FESCO). The government had initially aimed to complete these transactions earlier, but the targets were missed.

On the fiscal end the debt repayments are worrying. Pakistan’s central bank has reported the country is scheduled to repay maturing foreign debt and make interest payment on the accumulated external debt totalling $30.35 billion in 12 months (August 2024 to July 2025) including those significant loans which bilateral creditors roll over every year.

Citing State Bank of Pakistan’s (SBP) latest data of Friday, JS Global reported the country is to repay maturing foreign debt worth $26.48 billion in the 12 months and pay another $3.86 billion on account of interest expense in the period.

On the subject of loan repayment challenges, the IMF in its report has underlined that Pakistan’s capacity to repay the International Monetary Fund (IMF) remains subject to significant risks, adding that the country remains critically dependent on policy implementation and timely external financing.

The lender said the Fund’s exposure would reach SDR 6,816 million by September 2024 (336% of quota) with purchases linked to the request.

“With completion of all purchases under the arrangement, the Fund’s exposure would peak in September 2027 at SDR 8,774 million (432% of quota; approximately 55% of projected gross reserves for FY27), around double the average for recent EFFs,” the lender said.

The solution to fiscal and economic challenges posed to the nation is embedded in the sincerity or effectiveness of implementation of the stipulated reforms - while rising above political and vested interest considerations. There are no two ways about it.

Copyright Business Recorder, 2024