It takes one to know one. The only IMF structural adjustment program ever successfully implemented by Pakistan was the 2013–2016 Extended Fund Facility, completed under the stewardship of then-finance minister Ishaq Dar. By the end of that program and the government’s term, Pakistan was on an external debt borrowing spree, the economy was set to create a crater in the current account, with the deficit reaching 5.5 percent of GDP, and the country was placed on the FATF’s grey list.
By any measure, Pakistan’s only successfully completed IMF program was, in fact, a complete failure. The only notable ‘successes’ achieved under that program were the sell-offs of government minority shareholding in various financial institutions, the creation of the “non-filer” income tax return category, and a fall in exports – both in absolute terms and as a percentage of GDP.
Yet, the program was deemed a success by both the IMF and the government of Pakistan because Dar was able to deliver what the Fund valued most: adherence to quantitative targets. Pakistan managed to meet the program’s major numerical benchmarks, reducing the budget deficit as a share of GDP, improving the primary balance and revenue collection, lowering inflation and government borrowing, enhancing the sovereign credit rating, and, most importantly, closing the external financing gap by building foreign exchange reserves through bilateral and multilateral funding. With all due respect to the profession, this is what accountants do best – ensuring targets are met, if not in substance, then at least in name. But are these numbers meaningful if they don’t lead to sustainable economic health?
Both the government of Pakistan and the IMF appear to have evolved in the eight years since then. The Fund no longer limits itself to quantitative targets alone, taking a stronger stance on structural reforms and calling for adherence to substantial benchmarks. Meanwhile, Pakistan’s leadership is slowly realizing that quantitative targets alone won’t guarantee the country’s economic survival. This shift has created a glimmer of hope that Pakistan’s ruling elite might wean itself off the adrenaline rush of perpetually living on the edge of fiscal crises.
But there is a real danger that both sides may relapse. Reportedly, the Fund mission is visiting Pakistan to address concerns over the country missing its revenue collection target for Q1-FY25. If the shortfall is not met by December, pre-agreed contingency measures will be triggered. These include an additional one percent advance income tax on raw material and machinery imports, an additional one percent withholding tax on domestic supplies, services, and contracts, and a five percent increase in FED on various products. But what real change does this produce?
Similarly, the Fund has expressed concerns over the delay in a deferred oil payment facility from a friendly country, which was critical to closing the projected external financing gap. Any delay in this commitment could mean that the second disbursement under the program might face obstacles. The IMF’s insistence on these measures and commitments, while understandable, risks returning to the same pattern of prioritizing quantitative assurances over meaningful reform.
The Fund must take a pause and reassess its priorities. Missing quantitative indicators matters, yes, but it pales in comparison to Pakistan’s failure to even begin the long journey toward genuine reform. While the prime minister and his cabinet tirelessly proclaim the need for Pakistan to collect taxes from the untaxed and undertaxed segments of the economy, the federal budget laid bare their true preferences, with rates on the existing narrow tax-paying base – namely salaried and corporate classes – raised up to 40 and 45 percent. The priority to squeeze already compliant taxpayers, rather than broaden the base, reflects a misaligned focus that the IMF should firmly push back on.
Another example of misplaced priorities may be telling. In a web interview with Kamran Khan, the chairman of Gul Ahmed Textile Mills recounted his meeting with the prime minister over a year ago, where he warned the government about the energy sector quagmire and recommended deregulation. The prime minister was surprised and dismayed, as he had been told this had already been done. He was later assured by the minister and secretary in charge that energy sector deregulation would be completed by June, or at the latest, August 2023. Fourteen months later, the Fund can see for itself whether even the letter “D” has been typed out on the title page of the empty document labeled ‘deregulation plan for the energy sector.’
Blaming political economy or vested interests for thwarting difficult reforms – especially in energy – would be charitable. That a sitting prime minister is unaware of the state of energy sector regulation – an existential challenge to Pakistan’s economic sustainability – reveals the government’s lack of both willingness and capacity to make meaningful changes.
But this shouldn’t come as a surprise. If Pakistan’s political class had any intent to implement reform, those plans would be part of their electoral manifestos. If subsequent prime ministers must conduct stock-taking exercises upon assuming power and only then start outlining what their reform agenda might be – whether it’s ‘home-grown’ or a ‘100-day plan’ – then what were they elected for?
This brings us back to the original point: the Fund must focus its energies on making the government of Pakistan do the hard stuff first. Quantitative indicators are important, but implementing contingency measures that further tax the formal sectors of the economy would only bring it to a standstill.
Accountants (and bankers) may indeed deliver primary fiscal and current account surpluses if the Fund applies sufficient pressure. But should the Fund exhaust its goodwill on enforcing more taxes on Pakistan’s already squeezed populace, driven by a single-minded objective to achieve quantitative targets? Or should it leverage its influence to force the government to undertake the difficult reforms first, such as deregulating the energy sector, privatizing loss-making public sector enterprises, cutting redundancies across ministries and departments, and reducing government footprint across various sectors of the economy?
Mark Twain once said that if you must eat a live frog, do it first thing in the morning, as nothing worse will happen to you for the rest of the day. Pakistanis are remarkably skilled at deferring difficult tasks to tomorrow and never really getting to them.
This time, the IMF must make government of Pakistan eat the frog first. But for that, the Fund must stop behaving like an accountant as well. Remember, Pakistani accountants are top-rated in the world.
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