EDITORIAL: The Federal Finance Minister Muhammad Aurangzeb’s attendance at the International Monetary Fund (IMF)/World Bank meeting in Washington DC has, as has become the norm, generated numerous reports of his interaction with the Fund staff, DC-based think tanks, and press interactions.
There are three noteworthy reports – one citing Azour, Director, IMF Middle East and Central Asia Department and two citing Aurangzeb.
Azour regurgitated the standard normal IMF policy thrust and its projected outcome, which remain elusive despite Pakistan being on the twenty-fourth Fund programme at present – a failure that should have indicated to the wise that there are some serious social, economic and/or political lacunae that are not being taken account of.
Azour, for example, stated that the reform package has the ambition to strengthen macroeconomic stability, while ignoring the ongoing impact of around 75 to 80 percent reliance for revenue on indirect tax measures whose incidence on the poor is greater than on the rich – a burden increasingly becoming unbearable for the low to middle income groups as well as for the over 40 percent operating below poverty levels.
In the event of failure to realise the budgeted revenue (approved by the Fund staff) contingency measures will come into force that envisage an even higher reliance on indirect taxes on some items. Azour added that reform measures will be implemented in the appallingly run energy sector, though sadly; the IMF supported reform objective to-date, i.e., to achieve full cost recovery and privatise, has the seeds of failure because the former accounts for a massive drop of over 20 percent in demand and the latter will prove ineffective as what needs change is the government’s policy of tariff equalization that accounts for billions of rupees budgeted for the power distribution companies in public and the private sectors in this year’s budget.
And finally, Azour mentioned reforms in State-Owned Entities (SOEs), however, as correctly cautioned in the recent State Bank of Pakistan report, there is “overemphasis on privatisation as the single most important yardstick to success with limited focus on strengthening of competition and regulation,” and “to ensure that post-privatisation service delivery is not weak [one hopes that not including the word ‘not’ is a typographical error] which is particularly pertinent for SOEs operating in public goods and services sectors.”
The Finance Minister on the sidelines of the Fund/World Bank meeting met with all possible lenders - multilaterals and bilaterals (including with the US officials) - and claimed, like his predecessors, that foreign investors are willing to invest in Pakistan and all global rating agencies have stated that Pakistan is moving in the right direction. True; that Pakistan has signed off billions of dollars of memoranda of understanding, however, these are non-binding agreements and one will have to wait for the actual fruition of the proposed investment.
Additionally, two of the three major international rating agencies have upgraded Pakistan post-IMF staff loan agreement this year (Pakistan was retained in the high risk category albeit at the lowest level) though Standard and Poor’s has not upgraded Pakistan since 2022 as it already had placed Pakistan in the lowest level of the high risk category.
It is important to note that there are major geopolitical considerations at play with the emergence of a multi-polar world as opposed to the US being the sole superpower.
The IMF and the World Bank are Western-led institutions, to which Pakistan owes considerable interest as well as principal as and when due, while China is not only extending loans to Pakistan but is also engaged in investing under the umbrella of the China Pakistan Economic Corridor (CPEC); and, together with other countries referred to as the axis of resistance, participating in the de-dollarisation of the global economy albeit at a slow pace.
In this context, Pakistan would do well to lower dependence on borrowing from the West, and limit it to meeting our emergent dollar needs, which would require a massive slash in current expenditure (increased by an inexplicable 21 percent this year which may have been approved by the Fund to forestall the possibility of a gradual delinking from the Western financial institutions).
And finally, the Finance Minister also indicated that a formal request for one billion dollars will be made to the IMF for assistance in dealing with external climate-related shocks. Pakistan is one of the most vulnerable countries to climate change, not of our making, and therefore there is a legitimate reason to access funding under this item.
The positivity emanating from Washington DC with respect to Finance Minister Aurangzeb’s recent visit follow the same pattern as during previous years with a firm pledge to adhere to the Fund programme design, which was slavishly lauded, with no in-house out of the box thinking forming any component of the reform package.
One can only hope that there is a revisit to this approach that has failed every time in the past – failed not because it was abandoned as claimed by the Fund but because it had the seeds of creating serious socio-economic general public discontent.
Copyright Business Recorder, 2024