FeaturedNationalVOLUME 16 ISSUE # 17

Between the IMF and pandemic

Pakistan has accepted harsh conditions for the revival of the International Monetary Fund (IMF) bailout package, under which the government will have to increase taxes by a whooping Rs1.272 trillion in the next budget and hike electricity rates by almost Rs4.97 per unit in the remaining three months of the current fiscal year. On the other hand, the pandemic continues to pose serious challenges to Pakistani lives and the economy. In the situation, new taxes and a heavy power tariff hike would not only spell disaster for the common people, already struggling to make both ends meet, but also eliminate any chance of Prime Minister Imran Khan to win the next election.

The only option left with the government is to approach the IMF for relaxations in the conditions to save people from their adverse effects and itself from the people’s wrath. According to the new conditions, the government will increase taxes by a massive Rs1.272 trillion, almost 2.8pc of GDP) in the budget, and hike electricity rates by Rs4.97 per unit in the next three months. The tax collection target for the Federal Board of Revenue in next year’s budget has been committed at Rs5.963tr against a Rs4.691tr revised target for the current fiscal year. About Rs500b will be generated through the general sales tax (GST) and a personal income tax reform with the FY2022 budget, yielding an estimated 1.1pc of GDP.

According to documents released by the IMF after it approved a modified extended fund facility (EFF) for Pakistan, the government will make electricity tariff adjustments next year on a monthly, quarterly and annual basis through the “automaticity” of NEPRA’s amended powers. The government has already increased power rates by Rs3.57 per unit in its almost half term.

The government has also committed to increasing petroleum levy on oil products to the maximum level (Rs30 per litre) this year and the next year to amass about Rs510 billion this year instead of the budgeted target of Rs450b. Under the agreement, the government would also bring down the current year’s development programme to Rs1.169tr against the budgeted target of Rs1.324tr. Adjustments in gas tariff are also expected and the government has promised not to consider any tax exemption or tax amnesty in future. The IMF has also linked the programme conditions with a detailed audit of the funds allocated for combating COVID-19, including contracts and beneficial ownership of bidding results, including medical supplies.

In its latest report, the IMF forecast a subdued economic growth rate of 1.5pc for Pakistan, coupled with a higher rate of inflation and rising unemployment, during the current fiscal year. The IMF projections are in line with estimates of the World Bank, which has projected growth at 1.3pc for the current year. In its World Economic Outlook (WEO) 2021 report, the IMF projected an 8.7pc average rate of inflation, the current account deficit at 1.5pc of GDP and unemployment rising by 0.5pc to 5pc during the current fiscal year. It projected the economic growth rate recovering to 4pc of GDP next year (FY2022) and 5pc by 2026. It says the inflation rate would come down from 10.2pc last year to 8pc year on year and 10pc on average by FY2022. It sees the current account deficit rising from 1.1pc of GDP in FY2020 to 1.5pc in FY2021 and then going up to 1.8pc of GDP in FY2022 and peaking at 2.9pc of GDP by 2026.

It projects global growth making a strong recovery to 6pc in 2021, a 0.8 percentage point above the June 2020 forecast. “After an estimated contraction of –3.3pc in 2020, the global economy is projected to grow at 6pc in 2021, moderating to 4.4pc in 2022,” it says. The contraction for 2020 is 1.1 percentage points smaller than projected in the October 2020 report, reflecting the higher-than-expected growth outturns in the second half of the year for most regions after lockdowns were eased and as economies adapted to new ways of working. Global growth is expected to moderate to 3.3pc over the medium term — reflecting projected damage to supply potential and forces that predate the pandemic, including aging-related slower labour force growth in advanced economies and some emerging market economies. Thanks to unprecedented policy response, the COVID-19 recession is likely to leave smaller scars than the 2008 global financial crisis. However, emerging market economies and low-income developing countries have been hit harder and are expected to suffer more significant medium-term losses, it observes.

The IMF estimates 5.1pc growth during 2021 for advanced economies including 6.4pc for the euro area, 3.3pc for Japan and 5.3pc for the UK. The growth prospects for emerging market and developing economies are put at 6.7pc led by 12.5pc for India and 8.4pc for China.

Notwithstanding, the recent rise in COVID-19 cases, Pakistan has been showing signs of a fragile economic recovery with a gradual resumption of economic dynamism, according to a new World Bank report. Pakistan’s economic growth is expected to reach 1.3pc in FY2021 and strengthen to an average of 2.7pc for FY2022-23, according to the Pakistan Development Update. The baseline economic growth forecast, however, is highly uncertain, especially given the third and more-contagious wave of the pandemic currently circulating in the country.

Against the bleak IMF and WB forecasts, Pakistan is optimistic about a 4pc sustainable economic growth rate for the next fiscal. New Finance Minister Hammad Azhar believes Pakistan can achieve the target by curbing tax evasion. In a series of tweets, he said the national economy would grow at a faster rate than the earlier forecasts. Earlier, the State Bank of Pakistan (SBP) also revised the economic growth rate upward to 3pc for the current fiscal year.

The pandemic is worsening in Pakistan and it will seriously affect its economy. In the situation, it will be difficult for the government to enforce harsh conditions set by the IMF. It will have to renegotiate the terms to bail people and itself out of the IMF bailout package.