It’s IMF way or the highway?

By Farhat Ali
Published in Business Recorder on March 23, 2024

Announcing the staff-level agreement on the successful completion of the 23rd short-term facility, the IMF (International Monetary Fund) has confirmed that a cash-strapped Pakistan is seeking a 24th successor medium-term bailout package for a permanent push towards longstanding structural reforms.

The IMF in its end-of-mission statement made this week said the cash-strapped country “expressed interest in a successor medium-term Fund-supported programme to permanently resolve Pakistan’s fiscal and external sustainability weaknesses, strengthening its economic recovery, and laying the foundations for strong, sustainable, and inclusive growth”.

The IMF expects that these discussions to start in the coming months; the key objectives are expected to include: (i) strengthening public finances, including through gradual fiscal consolidation and broadening the tax base (especially in undertaxed sectors) and improving tax administration to improve debt sustainability and create space for higher priority development and social assistance spending to protect the vulnerable; (ii) restoring the energy sector’s viability by accelerating cost reducing reforms, including through improving electricity transmission and distribution, moving captive power demand to the national electricity grid, strengthening distribution companies’ governance and management, and undertaking effective anti-theft efforts; (iii) returning inflation to target, with a deeper and more transparent flexible FX market supporting external rebalancing and the rebuilding of foreign reserves; and (iv) promoting private-led activity through the above-mentioned actions as well as the removal of distortionary protection, advancement of SOE reforms to improve the sector’s performance, and the scaling-up of investment in human capital, to make growth more resilient and inclusive and enable Pakistan to reach its economic potential.

If one looks at the objectives of the 23rd IMF programme and the press release issued by IMF on March 20, 2024, on conclusion of Pakistan’s US $ 3 billion Stand-By Arrangement (SBA), the foreseeable 24th programme is not much different and can be described as the unfinished agenda of 23rd IMF programme.

Noticeable similarities can be found in the IMF press release of March 24, 2021 announcing conclusion of its ‘second through fifth reviews of the Extended Arrangement under the Extended Fund Facility (EFF)’ for Pakistan allowing for an immediate disbursement of about US$500 million, bringing total purchases for budget support under the arrangement to about US$2 billion of Pakistan’s 39-month EFF arrangement approved by the Executive Board on July 3, 2019 for about $6 billion at the time of approval of the arrangement.

To term the 24th IMF programme a permanent push towards longstanding structural reform is being over-optimistic, so to speak. While Pakistan is struggling with one IMF programme after another the key performance economic and fiscal indicators are moving from grey into red zone.

Considering the situation between IMF review of March 2021 and March 2024 things have gone from bad to worse. Power circular debt of Rs 2.3 trillion in March 2021 escalated to Rs 2.7 trillion by 2024 (total power and gas circular debt is Rs 5.7 trillion), national debt in the said period has increased from $122 billion to $131 billion, State-Owned Enterprises’ (SOEs’) losses in FY 2021-22 have reached Rs 1.4 trillion, GDP growth of 6.5 percent in the FY2021-22 has shrunk to below 1 percent with a forecast of 2 percent for 2024.

IMF’s financial support through multiple programmes rolled out in the last three years did not work for the economic development and fiscal strength of the country.

What worked well, however, was the IMF condition of maintaining market-based value of rupee against foreign currencies and its non-negotiable policy of “no subsidies” by the government to industries so far addicted to subsidies (the US$3 billion deal between the International Monetary Fund (IMF) and Pakistan, approved in July 2022 mandated the government remove energy and fuel subsidies and move to a market-based exchange rate, as well as increase taxes).

This resulted in skyrocketing gas and electricity tariffs, fuelling inflation from 9.5% in 2021 to 25% in 2024 as per government figures, poverty rate moving from 22% to 40% and the US dollar moving up from Rs163 to a dollar in 2021 to Rs 278 in 2024.

What did not work well was the IMF’s agenda of structural reforms in the fiscal and economic discipline of the country. Circular debt and loss-making SOEs continue to bleed the economy, reckless government expenditure continues with some cosmetic improvements here and there, while poor governance, confusion and incompetence continue to prevail.

The unfinished agenda of reforms by Pakistan is by no means the fault or responsibility of the IMF but one does wish if IMF could have maintained the same level of non-negotiable strictness and surveillance on economic and fiscal reforms as it exercised on subsidies.

The IMF lending, by its definition and purpose, is a stopgap arrangement to seek funds to fill in the fiscal slippages and move on with reforms to build up the revenue generation capacity of the state through growth and pay off IMF loans in the shortest period of time – as done by many some developing nations successfully.

Pakistan’s addiction to IMF loans has now lowered down to a level to only avert default. This option too may not last long as a good 70 percent of state revenue is consumed by payments against loans. The state cannot survive with a remainder 30 percent.

The 24th IMF programme, which, according to the incumbent government, has become inevitable, would be something more of the former IMF programmes if the targets this time set are not met. As of today, there appears to be no tangible working on the privatisation of loss-making SOEs, the restructuring or privatisation of power distribution companies, and any meaningful strategy to arrest the circular debt.

Growth of 2 percent aimed for the year 2024 is extremely low but this too is challenging in the prevailing environment. Benefits expected out of China Pakistan Economic Corridor (CPEC) and planned Iran-Pakistan gas pipeline to provide cost- effective energy to our industry will face restraints under the IMF programme.

With a foreign direct investment (FDI) of a mere $ 1.3 billion in 2023, Pakistan has to look towards West and extend its outreach and diplomacy beyond the stop-over limited to Riyadh and Beijing. While the industry may not pick up in view of high energy tariffs and lending rates the potential in agriculture and IT can be exploited.

To spin off the much needed money transactions in the market and to mobilize optics of business confidence, the shortest and the fastest channel is the transactions in the real estate sector. This sector, with massive resources, is hibernating out of fear of FBR (Federal Board of Revenue) surveillance.

This fear needs to be mitigated and the sector is allowed or encouraged to play its part while the objective of bringing it into the tax net be gradually set in motion through automation, devoid of physical exposure of the investors.

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