Federal Finance Minister Muhammad Aurangzeb has consistently pledged implementation of all agreed reforms in the twenty fourth (7 billion dollars thirty-seven months long) ongoing Extended Fund Facility (EFF) programme – from the time he took oath on 11 March 2024 till date.
This was the hallmark of his more than a week sojourn in Washington DC to attend the IMF/World Bank annual meeting, like all his predecessors barring none, where he proactively engaged with multilateral staff tasked to formulate programme and/or project loans for Pakistan, prospective private sector investors, and US officials engaged in project support to the visit of the Fund team on 11 to 15 November 2024 to as per the Fund website “to engage with the federal and provincial governments, the State Bank, as well as representatives from the private sector on economic developments and policies.”
The question is why has Pakistan failed to turn its economy around after such a large number of IMF programmes that, on an average of 3 years per programme, indicate that the country’s implementation of the agreed reform conditions was being strictly monitored by the Fund for 69 out of the 75 years since its creation? Two factors appear to be paramount.
First, administration after administration, civilian or military, secured a Fund programme and implemented it for only as long as it took to ease the serious balance of payment issues that surfaced with great cyclical regularity every three to four years which, in turn, explains the escalating macroeconomic issues identified in the ongoing EFF document as, “structural fiscal policy weaknesses and repeated boom-bust cycles (that) have increased external financing needs and depleted buffers, leaving a narrow path to fiscal and external sustainability.”
In its twenty-second programme (2019) to Pakistan the Fund began to be severely critical of partial implementation of its reform agenda (and pointed the finger of blame at Ishaq Dar leading to his dislodgement from the Finance Ministry post 2023).
In the July 2023 staff report on the request for the nine-month Stand By Arrangement the Fund noted the following: “Misaligned economic policies—including large fiscal deficits, loose monetary policy, and defence of an overvalued exchange rate—had fuelled consumption and short-term growth, steadily eroded macroeconomic buffers, increased external and public debt, and depleted international reserves.
Long-standing structural weaknesses had remained, including a narrow tax base and weak tax administration, a difficult business environment, inefficient and loss making SOEs, and low labour productivity amid a large informal economy…..Downside risks to the baseline and programme implementation are exceptionally high.
Amplified by the tense political environment, policy slippages could undermine program implementation, in turn jeopardizing macro-financial and external stability and already stretched debt sustainability.
External financing risks are exceptionally high and delays in the disbursement of planned external financing from IFIs and bilateral creditors pose major risks to a very fragile external balance given the extremely limited buffers.”
Notwithstanding the flawed policies of our economic managers, the Fund paid little attention to its own programme designs that are simply not attuned to unique Pakistani conditions (for example unlike the West the discount rate has little impact on inflation control and more on reducing the debt servicing costs of the government).
Fund programme design changed marginally over the years (the focus remains on administrative measures to achieve full cost recovery without dealing first with severely flawed pricing mechanisms that remain in place), and privatization which remains stalled due to a climate that is not conducive for the sale either domestically or internationally.
Multilaterals have adjusted their design only to accommodate policies that relate to evolving global concerns for example money laundering, the pandemic, and climate change rather than the deepening domestic Pakistani issues that not only continue to prevail but have strengthened over time.
The programme design continues to place heavy reliance on the economic team leaders input to provide a unique domestic framework. This input has been sorely lacking in this country by either qualified economists, whether they have been plucked out of multilaterals or foreign banks, or accountants.
All have agreed to the design and have parroted the same language as the Fund staff with their only concern being the phasing out of the conditions as they have become harsher and more up front since 2019.
In the July 2024 Staff Level Agreement documents the Fund prepared a box titled Pakistan’s Implementation of Past Fund Advice maintaining that all areas of concern were dealt with in the nine-month-long Stand By Arrangement but highlighted two outstanding issues: “Concerning the establishment of a Sovereign Wealth Fund and the creation of the Special Investment Facilitation Council (SIFC), staff has highlighted the need to ensure a level playing field with regard to the investment environment and avoid a watering down in governance standards. These issues remain to be addressed.”
This indicates that while the government has agreed to implement the Fund’s time-bound quantitative reforms and structural benchmarks, conditions pertaining to policies that were agreed in previous programmes but not implemented due to political challenges, yet the government has so far resisted/not capitulated on the SWF and the SIFC.
The obvious conclusion is that the prevailing mindset of all those selected to head the Finance Ministry - be they qualified economists or bankers or indeed investment bankers as is the case with Muhammad Aurangzeb or an accountant – the prevailing mindset due to long sojourns in the West (in universities or jobs or in self-imposed exile) has been remarkably similar with the following mantras continuing to resonate in the media: (i) acceptance of the relevance of all donor conditions with negotiations focusing on the phasing out of these conditions as the economic situation has worsened over time; (ii) full cost recovery the guiding principle without first dealing with sectoral flawed policies for example the massive budgeted tariff equalization policy to the privatised K-Electric while insisting that privatisation of other Discos is the way forward; (iii) government must not be in the business of business – a 1970s mantra that does not relate to all public sector entities which was challenged after the completion of evaluation studies; has been completed; and (iv) difference between the policy rate and inflation hovering at a little under 9 percent which may be a root cause of the negative 240.7 billion rupee credit to private sector 1 July to 11 October 2024.
The overwhelming conclusion is two-fold: Programme designs have changed but little reflecting the unchanged mindset of the multilateral staff as well as this country’s selected economic managers with the popular mantra remaining the same: pass on the onus of full cost recovery onto the consumers, rely on indirect taxes as a source of revenue (currently around 80 percent), privatisation irrespective of the prevailing climate and last but not least allowing current expenditure to rise exponentially each year (this year’s budget raised this item by 21 percent).
And secondly while pre-2019 the government persisted in elite capture (in its expenditure and resources) yet with 41 percent poverty levels attempts to sustain that sort of budget evident in the 2024-25 budget threatens eruption of socio-economic unrest that may spill onto the streets sweeping away all commitments to reform under its wake.
Copyright Business Recorder, 2024
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