Many had criticised when Pakistan signed up for IMF's programme last year. But this week's approval of additional poverty-alleviation centric lending by the IMF should silence those critics, whatever is left of them, even more.
The global lender said Pakistan can use the additional $431 million, lent under its conventional facility, for priority fiscal spending on top of the $1.4 billion approved as a fiscal support until the country receives pledged donations from the Friends of Pakistan forum.
One of the main terms under which the loan has been signed is that a chunk of the proceeds must be used to support social welfare or protection programmes. In line with the disbursement of the package, the IMF has cited support for the early implementation of Value Added Taxes (VAT) and the continuation of the in-process tax reforms.
Currently, the government depends on a very narrow tax base which is particularly draining on the middle classes. The tax reforms hope to broaden the tax base and improve its administration. The implementation of both these programs would generate sufficient resources to decrease poverty, finance infrastructure development and bring forth much needed economic justice in the system.
Previously, loans have largely been used to finance subsidies, mainly in fertiliser, power and oil sectors. These indirect subsidies have been applied to resources and not to the final product implying that financial support of subsidies spreads to the population equally - not equitably - ie benefiting not only the poor, but also the rich. This defeats the purpose of subsidies, whose main function is to ease the financial strain on low-income classes.
The latest IMF policy would be focused on financial support to the IDPs and for funding the social safety net. These programs cater to the needy directly through cash transfers and other mechanisms and, in doing so, meet the intended purpose of the loan by ensuring that its benefits are received, in entirety, by poor households who urgently require this assistance.
What is left now is developing strategies for the effective administration of such financial support programs. Complexity in disbursing cash transfers or other payment methods arises from the fact that individuals from poverty stricken classes often do not have National Identify Cards, thus, making identification extremely difficult.
A possible solution to this predicament would be an incentive-based documentation program. Such a programme could be implemented by broadcasting the benefits of registering with the government as it would result in the receipt of payment if conditions of need are met. Not only would such extensive and comprehensive documentation smooth out the disbursement process, but would also be a major step in taking Pakistan towards the status of a developed state.
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