In March, the government and International Monetary Fund (IMF) are due to hold first review of the Extended Fund Facility (EFF) programme, which was negotiated in September 2024.
There are overall programme objectives which, unlike a Standby Arrangement (SBA), cover not only macroeconomic stability but also economic growth. Within this over-arching policy endeavour, the programme seeks reaching/carrying out mainly ‘policy credibility’, ‘[macroeconomic] stability’, ‘structural reforms’, ‘public services’, ‘private-led growth’, ‘fiscal consolidation’ (or in other words, practice of austerity policies), ‘institutional reforms to strengthen the fiscal framework, including the federal-provincial fiscal relations, ‘[using] monetary policy to bring down inflation and exchange rate flexibility’, ‘energy tariff adjustments’, deregulation of product markets’, ‘removal of subsidies’, relaxation of trade barriers, and ‘strengthen climate resilience’.
From the objectives, it is quite clear that neoliberal policy forms the philosophical underpinnings of the programme, given under ‘market fundamentalism’, there is call for product market deregulation, little role of government both in terms of call for deregulation, and also growth to be led by private sector; and, under liberalization objective, not only deregulation is being prescribed, but also subsidies are being asked to be removed, and trade barriers to be relaxed. More is this regard in some subsequent paragraphs.
In addition, to bring greater detail to these programme objectives, the programme carries, (i) ‘performance criteria’, and in terms of being ‘quantitative’, and ‘continuous’, and provides for certain ‘indicative targets’ in this regard, and (ii) ‘structural conditionality’, where some of it was ‘prior actions for program approval’, all three of which were met, while others are ’structural benchmarks on the ‘fiscal’, ‘governance’, ‘social’, ‘monetary and financial’, ‘energy sector’, ‘state-owned enterprises’, and ‘investment policy’.
Starting with quantitative performance criteria, for instance, one sees that end-March ceiling for general government primary budget deficit is set at Rs. -2,707 billion, which means the programme calls for government to run a primary surplus of Rs. 2.7 trillion.
At the same time, under indicative targets for example, the programme calls for a very ambitious target of tax collection, whereby for end-March floor for net tax revenues collected by the national tax authority, FBR (Federal Board of Revenue), at Rs. 9,168 billion, while end-June FY2023-24 it stood at Rs. 9,251 billion! Already, the tax reportedly collected during July-January FY2024-25 reportedly stood at Rs. 872 billion.
Primary surplus, and revenue taken together, the programme objective of revenue-based fiscal consolidation appears quite unrealistic, and instead reaching primary surplus, or fiscal austerity by likely cutting otherwise much-needed development spending – given low projected growth rate of between 2-3 percent for the current fiscal year, and increasing poverty rate – given high level of prices at the back of prolonged level of high inflation rate – before it came down a few months ago – will likely not allow cutting development expenditure, not to mention lack of any significant visible drive in the federal and provincial governments to increase the efficiency of current or non-developmental expenditures.
Another reason it is difficult to control expenditures is because of the over-board use of monetary austerity policy, whereby instead of proactively, and innovatively using fiscal policy to reach better price discovery through provision of better governance and incentive structures, policy rate is used to primarily reduce inflation; not to mention also causing in the process an unnecessarily high level of growth sacrifice, especially in a country with a high population growth rate of around two-and-a-half percent, and with the biggest youth bulge calling for greater capacity of economy for labour force absorption.
Hence, the programme objective of basically controlling inflation through monetary policy creates a serious contradiction between growth aspirations, and revenue generation, on one hand, and putting pressure on cutting development expenditure, especially as both monetary and fiscal austerity policies also reduce political voice, which is important for creating much-needed pressure of legislators to push for, for instance, reforms that are necessary for broadening tax base but receive a lot of resistance for well-entrenched elite-capture interests.
Moreover, lack of revenue realization, as seen in the reasons spelled out above, and in a much more equitability way in terms of tax burden, also means that another indicative target of the programme for end-March ’floor on the consolidated net tax revenues collected by provincial revenue authorities at Rs. 606 billion is likely to remain a pipe-dream, especially when there is lot of pressure on provincial governments to do economic stimulus/welfare spending due to high level of prices, and lack of increase in real wages, and lack of public pressure on legislators for broadening tax base due to poor investment in demos over the years under the assault of austerity.
Among other important problems with the programme is taking measures to protect ‘tax revenue’ that are otherwise very dangerous for the already suffering agricultural sector in the wake of climate change crisis and very poor price discovery, especially due to the unwarranted presence of ‘middle-men’.
Hence, putting tax regime on agriculture sector – which holds strategic importance, especially in the wake of climate change crisis, the presence of ‘Pandemicene’ phenomenon, and the practice of overboard nationalism by countries disrupting global supply chains of even essential grain, as seen during the pandemic when countries hoarded more than needed quantities being over-cautious, and to over-appease domestic voter-base – as seen in the structural benchmark, which although has missed the January programme deadline, is being pushed legislatively for showing compliance in the first review in March.
Under this structural conditionality it is being asked that ‘each province amends their Agriculture Income Tax legislation and regime to fully align it with the federal personal income tax regime for small farmers and the federal corporate income tax regime for commercial agriculture, so that taxation can commence from January 1, 2025.’
Given personal income tax regime needs to be brought to a much lower side, while tax base increased, it is being implemented on agriculture sector, which has lot more randomness with regard to income being earned, as indicated above, and also given there is very little subsidy, and are facing very high prices of fertilizer and electricity amid very poor and volatile prices of their produce.
The programme should, instead, rein in overboard austerity policy so that a lot of ‘tax revenue’ protection is achieved through reduced interest payments. Imagine the fiscal space available with the government in terms of interest payments not needed to be made if policy rate was kept at half at each stage of where it actually was, and the rest effort came from improving the aggregate supply side and market reforms, where, unlike the programme objective of ‘deregulation of product markets’, greater hierarchy was brought in markets, with greater role of government in better market creation for far better price discovery.
Imagine the lack of economic growth sacrifice in the face of far lesser practice of austerity policy, and the decrease in poverty as a result, not to mention much greater build-up of political voice, and more activism pushing for otherwise difficult reform-related legislation in the presence of deep extractive politico-economic institutional design.
Moreover, instead of learning from the misgivings of neoliberal assault, the programme calls for private sector-led economic growth, when increasing inequality and greater elite capture called for greater role of public sector in better realization of productive and allocative efficiency, which is a pre-requisite for improving economic resilience.
Ascendancy of primarily price signal in economic decision-making has caused big cracks in reaching far better economic resilience, as seen during the heyday of the pandemic, when years of de-regulation and outsized trend in public sector to ‘outsource’ has exposed the weakness of supply chains, markets, and overall governments in responding to crises, which in an era of fast-unfolding climate change is becoming more of a norm than an exception.
In this context, the role of institutional reform is given very limited scope in the programme, which is in line with its neoliberal orientation, whereby the otherwise much-important role of transaction costs remains out of favour of IMF policy thinking because it comes into conflict with its vision of government as only a facilitator to private sector, and as only a fixer of market imperfections.
Such thinking has been significantly called out globally with great success otherwise, for instance, in the aftermath of Global Financial Crisis of 2007-08, and in the wake of the Covid pandemic.
Copyright Business Recorder, 2025