FeaturedNationalVOLUME 14 ISSUE # 20

IMF: The last resort

After lengthy and fractious discussions spread over several months, Pakistan and the IMF have finally agreed on a bailout package. Under the IMF programme, Pakistan would receive $6 billion worth of funds over a period of three years. Besides the IMF assistance, Islamabad will also receive $2-3bn from the World Bank, the ADB and other international financial istitutions.

Explaining the IMF accord, Dr. Hafeez Sheikh, PM’s adviser on finance, said that the bailout package was necessary because the country’s foreign loans had exceeded $90 billion, and exports registered a negative growth over the past five years. According to him, “the trade deficit reached $20 billion and our foreign exchange reserves dipped by 50 per cent in the past two years. So, we have a $12 billion gap in our annual payments and we don’t have the capacity to pay them without the help of the IMF”.

The agreement incorporates an ambitious structural reform agenda which is designed to supplement economic policies to rekindle growth and improve living standards. As conceived by its authors, the package aims to support the Pakistan authorities’ macroeconomic and structural reform agenda during the next three years. This includes improving public finances and reducing public debt through tax policy and administrative reforms to strengthen revenue mobilisation and ensure a more equal and transparent distribution of the tax burden. At the same time, a comprehensive plan for cost-recovery in the energy sector and state-owned enterprises will help eliminate or reduce the quasi-fiscal deficit that drains scarce government resources.

These efforts will create fiscal space for a substantial increase in social spending to strengthen social protection as well as help in infrastructure and human capital development. The modernization of the public finance management framework will increase transparency and spending efficiency. Provinces are also on board and will contribute to the efforts by better aligning their fiscal objectives with those of the federal government.

The reform agenda will kick off with the forthcoming budget which would lay out a new fiscal strategy. The budget will aim for a primary deficit of 0.6 per cent of the GDP, supported by tax policy and revenue mobilisation measures to eliminate exemptions, curtail special treatments and improve tax administration. It will be accompanied by containing spending growth aimed at preserving essential development spending and improving targeted subsidies, with the goal of protecting the most vulnerable segments of society.

Another major target of the IMF programme is to reduce inflation and safeguard financial stability. A market-determined exchange rate will help the functioning of the financial sector and contribute to a better resource allocation in the economy. To this end, measures will be adopted to strengthen the State Bank of Pakistan’s operational independence.

A comprehensive structural reform agenda will focus on priority areas, such as improving the management of public enterprises, strengthening institutions and governance, continuing anti-money laundering and combating the financing of terrorism. The IMF programme also aims at creating a more favorable business environment, and facilitating trade. To improve fiscal management, the federal authorities will engage provincial governments on exploring options to rebalance current arrangements in the context of the forthcoming National Financial Commission.

An IMF bailout package is never an easy pill to swallow. It exacts its costs in terms of higher taxes, lower subsidies and increased rates of utilities. Asked to share the conditions that Pakistan has agreed to as part of the agreement, Dr. Hafeez Sheikh said there were many things desired by the Fund that the government already saw as being in the country’s interest; they include aligning expenditure with resources, improve the functioning of loss-making state-owned enterprises, curtail the subsidies available to the wealthy classes and tax the rich segments.

He, however, admitted that in order to enforce financial discipline and resolve fiscal challenges, the programme would entail raising prices in some areas in order to recover the costs. But he qualified his statement by adding that the government wiould try not to put too much burden on the common man. For example, if power tariff is increased under the IMF programme, it will not affect consumers utilising less than 300 units, who form the bulk of electricity consumers. For the purpose, the government will allocate an additional Rs50 billion for an electricity subsidy in the upcoming budget. Under the programme, the government is also allocating an additional Rs80 billion for social safety programmes, like Ehsaas and the Benazir Income Support Programme, in order to minimise the burden on the common man.

To a question Dr. Hafeez Sheikh was reluctant to say whether it would be Pakistan’s last IMF programme. He said it would depend on how successfully “we as a country implement this programme and approach it as a reform or structural change programme instead of a mere revenue-earning programme.” But, being at the helm of affairs, Hafeez Sheikh cannot absolve himself of the responsibility for whatever results, positive or negative, the IMF programme produces.