FeaturedNationalVOLUME 19 ISSUE # 1

There is a world beyond IMF

Eagerly awaited by the government, the International Monetary Fund has finally reached a staff-level agreement with Pakistan on the first review of a $3 billion bailout, whereby the country will receive $700 million after approval from the Fund’s Executive Board.

It may be recalled here that in June, the IMF executive board had approved the nine-month standby arrangement (SBA) with Pakistan “to support its economic stabilisation programme.” The approval had allowed for an immediate disbursement of $1.2bn, with the rest to be phased over the programme’s duration — subject to two quarterly reviews. Consequently, the IMF’s technical staff had initiated the first evaluation of the short-term loan agreement on Nov 2, which concluded on Nov 10.

In a statement, the IMF said: “Anchored by the stabilisation policies under the SBA, a nascent recovery is underway, buoyed by international partners’ support and signs of improved confidence.” In the IMF’s view, continued adjustment of energy prices and renewed flows into the foreign exchange market had lessened fiscal and external pressures. Inflation is also expected to decline over the coming months amid receding supply constraints. Following a smooth completion of the first review of the short-term $3bn bailout package, the stock market turned buoyant and the rupee improved in the currency market.

The statement issued by the IMF mission at the end of its visit commended the progress made by the authorities and improvements in the macroeconomic fundamentals under the Stand-by Arrangement (SBA). But Pakistan is not yet out of the woods. The Fund has warned Pakistan’s economy is highly susceptible to the “significant external risks, including the intensification of geopolitical tensions such as in Gaza, resurgent commodity prices, and the further tightening in global financial conditions”. It further said that timely disbursement of committed external support remains critical to support the policy and reform efforts.

It is relevant to point out here that policy-level discussions with the visiting IMF staff mission mainly focused on the external financing gap. That is the reason why the visiting staff mission had started direct communications with key bilateral partners to confirm their committed support to Pakistan, including rollovers and additional flows, during the current fiscal year. The IMF has also asked for greater transparency in the operations of the Special Investment Facilitation Council and the management of the assets under the Sovereign Wealth Fund.

Needless to say, this demand by the IMF shows that the lender is concerned that the recently constituted body, with powers to override any policy or decision and recommend fresh legislation to facilitate the promised investments from the Middle East, could cause distortions in the country’s investment regime and climate and create a favoured group of investors as against others. This means that the relevant authorities will need to have a second hard look at the powers and functions of SIFC so that the Council does not get into the crosshairs of IMF which is the sheet anchor of the last resort to solve our economic woes.

As mentioned by the IMF and endorsed by many local experts, macroeconomic sustainability and laying the conditions for balanced growth are the key priorities for the incumbent government. In this connection, the predominant issue in the country is “tax collection”, as underlined by the IMF mission chief. At present, the tax-to-GDP ratio is only 12 percent. It is agreed on all hands that this percentage must be raised to at least 15pc to earn more revenues necessary for the proper functioning of the economy.

IMF authorities have repeatedly emphasized that “the people in Pakistan that can pay taxes, collect it from them.” It is time we tackled the issue seriously and raised enough revenue to avoid going again and again to foreign lenders for assistance. Pakistan is one of the most indebted nations in the world today because we have built an elitist economy where the rich and powerful enjoy all the privileges but pay little taxes. An example is the agriculture sector which accounts for about 20 percent of the GDP but its share in the total tax collection is hardly 2 percent. Besides enhanced agriculture tax, there is tremendous tax potential in the retail and services sectors which should be tapped without further loss of time.

There is also an urgent need to cut the extra flab and waste in government expenditure, including royal perks and privileges for high officials which are unparalleled anywhere in the world. In the view of experts, the present ‘macroeconomic stability’ is superficial and temporary and vulnerable to multiple risks, both local and external. The underlying economic conditions are stressed and will remain so unless we undertake overdue long-term structural reforms.