Published in Dawn on July 14, 2024
PRIME Minister Shehbaz Sharif’s budget for the present fiscal year has whipped up seething anger against his administration at home but won him a $7bn package from the IMF to temporarily shore up an embattled economy.
An IMF statement says that it has reached a staff-level agreement with Pakistan on a 37-month Extended Fund Facility. Islamabad will be able to access these funds once the deal is approved by the IMF Executive Board, which is contingent upon “the timely confirmation of necessary financing assurances from Pakistan’s bilateral development partners” [read: China]. The programme “aims to capitalise on the hard-won macroeconomic stability achieved over the past year by furthering efforts to strengthen public finances, reduce inflation, rebuild external buffers, and remove economic distortions to spur private sector led growth”.
While it was relatively easy for the government to cross the first bridge towards the agreement by imposing exceedingly painful direct and indirect taxes on the urban middle classes, the new programme targets will continue to test its commitment to reforms over the life of the deal.
For starters, the IMF wants the authorities to go after the under-taxed sectors and properly tax exporters, retailers and agriculturists to continue fiscal consolidation and increase tax revenues through measures contributing to 3.5pc of GDP. The current budget already aims to raise tax revenues by 1.5pc of GDP to meet the programme goal of 1pc primary surplus this year.
Another contentious condition relates to the abolition of agricultural support prices, especially for the staple wheat crop, and associated subsidies. It is pertinent to recall how farmers came out to protest after wheat prices plummeted sharply when the state did not purchase their surplus. The statement indicates that the government has also agreed to phase out incentives to Special Economic Zones, and refrain from new regulatory and tax-based incentives, or any guaranteed returns that could distort the investment landscape, including for projects channelled through the army-led SIFC, to create a level playing field for all businesses. How it will affect SIFC efforts to lure investment from ‘friendly’ countries is anybody’s guess.
Other programme goals — periodic power and gas price adjustment, SOE governance reforms and privatisation, transfer of more fiscal responsibility to the provinces, and market-based monetary and exchange rate policies — actually represent the unfinished agenda of the previous programmes. The agreement has indeed provided much-needed breathing space to the government, but it has also created serious political challenges for it.
While most reforms agreed with the Fund are the need of the hour for future debt sustainability, others are going to seriously impact economic growth and fresh investments, at least in the short term. The country’s finance team must feel relief after clinching the deal. But they should remember that it has just kicked the can a little further down the road. The challenges facing the economy will compound soon if this relief is not turned into an opportunity.
