EDITORIAL: The IMF (International Monetary Fund) Executive Board has approved a 37-month programme amounting to approximately $7 billion for Pakistan under the Extended Fund Facility (EFF) with an immediate release of $1 billion tranche.
The prevailing sentiment is that the Fund has shown leniency towards Pakistan. Not only did it take a sympathetic view of Pakistan’s economic plight during the Staff-Level Agreement (SLA) negotiations, it also showed a great deal of empathy so as to enable a cash-strapped country to successfully meet the gross financing requirement for its executive board’s approval.
Notably, the programme reviews will take place every six months as opposed to every three months, further indicating some flexibility on the part of the lender of last resort.
It is important to note that Pakistan is perpetually engaged in IMF programmes, with one being followed or replaced by another. No lender including our best friends currently considers the country a solvent nation without the IMF’s involvement. Pakistan is effectively using the IMF lending as working capital while meaningful reforms remain elusive. Without these reforms, achieving sustainable economic growth remains a pipedream.
Be that as it may, a potential windfall is on the horizon due to the softening in global commodity prices and a domestic economic slowdown, which are easing inflationary pressures and allowing interest rates to fall sharply without necessitating a currency adjustment. This situation makes the programme’s numerical targets relatively easier to achieve. The overall conditions of this programme are not stringent per se. There is not much emphasis on broadening the tax base or enhancing the competitiveness through global integration.
Instead, the focus is on short-term goals such as meeting specific revenue levels, controlling the primary deficit, and achieving State Bank of Pakistan (SBP) reserves targets. However, there is not much clarity on how these targets will be ultimately achieved.
On broadening the tax base, there is a condition to rationalise agriculture taxes by the provinces, but no specific targets have been set. The retail tax target is modest. In other words, the burden will likely continue to fall on the existing tax base as evidenced by this year’s budget. In terms of competitiveness, while there are some steps to lower tariffs, they are woefully insufficient to drive significant global integration.
It is also important to note that some initial efforts to broaden the tax base have been made, but they remain inadequate. The current situation can be described as ‘business as usual.’ Structural reforms, particularly in public finance, are urgently required.
The government’s continued struggle in securing financial support underscores that even with an IMF programme, international investors and the global community remain unconvinced that substantial reforms are underway. Without a comprehensive overhaul of the public finance system, Pakistan is likely to face identical fiscal challenges when the current programme ends, leaving no room for sustainable growth.
For growth to occur without worsening the current account, fiscal space must be created—something that can only be achieved through fundamental reforms in public finance. The focus must be on structural changes and moving forward. Three core areas must be addressed:
There needs to be a clear, persuasive plan to expand the tax base. This is crucial not only for fiscal stability but also for creating a fairer economic environment for capital and labour allocation. A key step is to abandon the ineffective approach towards non-filers. While digitalization is a critical component, it will only succeed if it leads to genuine transformation and is rigorously enforced, supported by a strong legal framework.
A comprehensive strategy is needed to restructure government spending, shifting from recurrent expenditures to public investment.
The current budget does little to enhance spending efficiency. Without structural changes to recurrent spending, increasing public investment is not feasible as it risks triggering another balance of payments crisis. Simply increasing debt is not a solution; cutting unnecessary spending that would significantly reduce current expenditure must be a central priority.
The bias against industry in general and exports in particular along with absence of market-friendly policies in public finance must also be addressed.
Implementing these changes will require significant political will, followed by meticulous planning. Serious efforts must be made to ensure rapid and effective enforcement. A fiscal agreement with the provinces will be essential, but it must be grounded in principles that reflect structural reforms in their operations and revenue collection.
Here the Centre or Federation must not lose sight of the fact that the provinces are not delegates of the Federation, but they are fiscally and financially autonomous within their own spheres as allotted by the Constitution particularly since the passage of the 18th Constitutional Amendment.
The Federation and the provinces are also equally subjected to the limitations imposed by the Constitution. Last but not least, the current developments in relation to country’s economy are better or positive, but there are no grounds for complacency.
Copyright Business Recorder, 2024