Professor Adnan Khan, Chief Economist at the Foreign, Commonwealth and Development Office (FCDO) of the UK in a recent statement to the Pakistan media is reported to have stated that “A normal country does not need an International Monetary Fund programme but Pakistan’s next few years seem difficult without its support, considering that, the country’s economic needs are much bigger than the potential size of any bailout that the global lender could offer”.
He further adds that Pakistan’s tax system is unjust as the poorest 10% of citizens were paying a larger share of their income in taxes than the richest 10% and that Pakistan should opt for foreign investment only in the export-related sectors and barring any investment channeled into the power sector.
Pakistan going for its 24th IMF program in its short history of 75 years is a reality that perhaps classifies the country as ‘not a normal country’.
Professor Adnan Khan echoed and concurred with the severity of concerns expressed by other noted economists and the global lenders, notably, the IMF and World Bank.
A new IMF programme that could offer $6 billion in three years against the requirement of $75 billion does not cover the need of the nation. The investments in the power generation had been reckless without considering the supply and demand mapping and its cost impact on the consumer. Today, the country has an installed base of 46,000 MW of which more than half is idle - as there are no takers.
As the talks between the finance managers of Pakistan and officials of IMF move on for a much bigger package, the news of dictates and concerns expressed by the IMF find their way into the national media.
Significant and rather rare is the IMF’s strong reservations on the unfolding political and social concerns, which could undermine Pakistan’s capacity to repay the loan.
“Pakistan’s fiscal and external vulnerabilities remain very high, including debt sustainability and refinancing risks, the IMF said and added that “restoring external viability was critical to ensuring Pakistan’s capacity to repay the Fund, and hinges on strong policy implementation”.
Pakistan was also facing risks related to credit concentration, capacity to repay, reputation and engagement, socio-political tensions, and the security situation, it added.
Gross debt-service obligations remain substantial, and current account imbalances stemming from insufficient exchange rate flexibility and import restrictions may require additional policy adjustment to reach external equilibrium, it further added.
While noting that the government has delayed implementation of some reforms, the International Monetary Fund (IMF) said this week: “high political uncertainty and resurgence of social tensions due to a complex political scene could undermine execution of economic stabilisation policies”.
Concerns on political uncertainty and social tensions have also been voiced by local investors on multiple occasions. The bad news, which is systemically emerging out of this uncertainty, is one of the main factors that are keeping the local and foreign investors away from Pakistan.
This holds true even with investment from friendly countries of the Middle East, and China. Multiple MoUs on investments signed with Saudi Arabia and the UAE has not materialized into something tangible on ground. The country needs many good news on political stability and social harmony to inch towards economic stability and fiscal sustainability.
Although, the IMF publicly voices its concerns on many important matters, one wonders if the Fund really means business and is assertive enough to ensure its compliance. Probably not! There are many examples of non-compliance with IMF conditionalities.
The IMF, since years, has been asking for reforms in the energy sector to manage circular debt on a more of strategic basis. New official data reveals that the government has failed to keep the power sector’s circular debt under Rs 2.31 trillion as agreed with the IMF with the debt stock soaring by Rs325 billion to Rs2.64 trillion in the first seven months of the current fiscal year.
The circular debt’s unceasing surge, in spite of multiple rounds of electricity price hikes and fuel adjustments, shows that the authorities are yet to begin fixing the actual problems — poor recoveries, widespread theft, high system losses, generation costs, etc. — that are dragging down the power sector. The growth in the debt stock has forced the government to commit to the IMF an increase of Rs 5-7 per unit in the base tariff from July to restrict the circular debt growth in the next fiscal.
No reforms worth the name have been initiated in the power sector. A comprehensive plan for full cost recovery from consumers has been drafted to address the circular debt plaguing the power sector.
The IMF’s prescription of managing the circular debt through tariff increase, which has been endorsed by the government, is getting into danger zone. The recent violent protests over power tariff hikes in Azad Jammu and Kashmir and the government succumbing to the public pressure is a clear sign that the prescription of tariff hike is no longer digestible as the income of ordinary people is no longer sufficient to meet their even most essential needs. This prescription appears outdated, to say the least.
The IMF last Friday asked Pakistan to immediately slash expenditure in the range of Rs163 billion to Rs183 billion, as it is not ready to compromise on the goal of achieving a primary budget surplus this year despite a significant revenue shortfall.
It is most unlikely that the government would be making any tangible cuts in its expenditure. The recklessness in relation to the expenditure will continue to persist as there appears to be no mechanism nor is there political will to slash expenditure.
The Fund has also demanded Pakistan revise power purchase agreements and increase gas prices on a half-yearly basis, starting in June. The implementation of both is, however, quite questionable.
The lack of assertiveness on the part of the IMF for strategic reforms and the government’s laid-back attitude to them clearly indicates the existence of a kind of marriage of convenience between the lender of last resort and Pakistan. It is perhaps a marriage that is arranged for political purposes.
Copyright Business Recorder, 2024