EDITORIAL: The International Monetary Fund (IMF) mission is scheduled to undertake the first review of the 7 billion dollar 37-month Extended Fund Facility programme early next month to evaluate the implementation of the time bound conditions and structural benchmarks by Pakistan.
This has generated much speculation in the country as to whether political and/or economic considerations will determine the success or otherwise of the mission — speculation based on ongoing efforts by members of the opposition as well as by independent economists.
Be that as it may, engagements with the Fund staff on the last three programmes (EFF approved in 2019, Stand-By Arrangement approved in 2023 and the ongoing EFF approved in the third quarter of 2024) account for three disturbing factors.
First; failure to implement a major structural benchmark or time-bound quantitative condition would lead to the mission’s refusal to reach a staff-level agreement, thereby suspending the tranche release which, in turn, would lead to the suspension of pledged rollovers by the three friendly countries namely China, Saudi Arabia and the United Arab Emirates.
The country’s foreign exchange reserves are shored up by the rollovers from the three friendly countries (up to 16 billion dollars) as well as multilateral assistance, which provide stability to the rupee-dollar parity.
The current account is in surplus but this is largely due to India’s ban on rice exports, since lifted, and the inability of Bangladesh companies to meet their export orders due to political unrest, since resolved, while imports continue to be curtailed through administrative measures.
There is no doubt that remittances have risen; however, the rise is not sufficient to lift import controls nor to meet the contractual obligations to independent power producers to import fuel or to remit profits — an inability that is the cause of much consternation amongst Chinese investors who, as a consequence, are unable to get insurance coverage from Sinosure that is necessary for any Chinese investment abroad.
Second; the authorities’ agreement to attain full cost recovery by passing on the costs to the consumers, a policy that was in force in most previous administrations, is increasingly unviable from both a political and an economic perspective, given the rise of poverty levels to 44 percent, higher than in Sub-Saharan Africa, and the erosion of income by between 20 to 25 percent of the 93 percent employed in the private sector though administrations have been consistently raising incomes of the 7 percent paid for at the taxpayers’ expense with a raise of 20 to 25 percent granted this year in spite of the extremely narrow fiscal space.
The government has claimed a rise of 100 billion rupees in income tax collections during the first seven months this year but this is at the cost of raising the tax rates on the salaried leading to a resultant erosion of their take-home pay that is fuelling poverty levels in this country.
This situation could exacerbate and may lead to socio-economic turmoil that may be spontaneous rather than led by politicians.
And third; the country appears to be relying heavily on foreign direct investment to jump-start the economy. And while there have been numerous Memoranda of Understanding signed with Saudi Arabia, the UAE and other countries yet no binding contract has been signed which explains why the foreign direct investment inflow remained 1329 million dollars July-December 2024, an appallingly low amount compared to other regional countries (India April to September 29.79 billion dollars and China 747 billion dollars in the first 11 months of 2024), though it represented a rise of 19.9 percent from the comparable period of the year before and disturbingly was a decline of 32.5 percent from December 2023 (252 million dollars) to 170 million dollars in December 2025. It is worth noting that both China and India focused on first developing a business-friendly environment, which led to massive foreign direct investment inflows.
There are several issues facing Pakistan’s economy today and so far reforms in major sectors, particularly power sector and the tax structure, remain pending. Reports indicate that with an emerging multi-polar world order, Pakistan can no longer exclusively rely on Western support to get a staff-level agreement which, in turn, will activate funds from other sources to meet the dues on external loans - interest as well as repayment as and when due.
Delivery of reforms is necessary not only from the donor perspective but the nature of reforms is increasingly critical for support from the public. One would hope that as an interim measure the government slashes its current expenditure that would, in turn, reduce the pressure to meet the 40 percent raise in the revenue budgeted for the current year and thereby ease public concerns.
True that the administration has pledged governance reforms but until and unless they are implemented and begin to bear fruit there is a need for the elite capture of resources to be abandoned.
Copyright Business Recorder, 2025
Comments