The good news is that the Financial Action Task Force (FATF) has formally recognized that Pakistan has completed its two action plans covering 34 action items. With this, Pakistan met all technical requirements to exit from the FATF’s list (grey list) of countries with serious deficiencies in anti-money laundering (AML) and counterterrorism financing (CTF) framework.
Exit from the ‘grey list’, after satisfying the onsite visit will be a significant achievement. On top of it, completing all action points will also help in the much-needed resumption of Pakistan’s stalled IMF programme, as this was one of the 21 agreed structural benchmarks with the IMF.
The bad news is that the positive development on the FATF front alone will not reduce Pakistan’s economic woes. For macroeconomic stability and to halt its nosediving exchange rate, Pakistan would have to win back the trust of the IMF.
It must be noted that the previous government deviated from the fiscal side policies it agreed to in the IMF’s last review, partly through energy and fuel subsidies. Consequently, the IMF programme was halted. However, it must also be noted that despite the repeated statements of the finance minister about rolling back energy subsidies, the coalition government kept providing these subsidies for almost seven weeks after coming into power, widening the trust deficit between the government and the IMF.
The coalition government was asked to complete three prior actions for getting the IMF’s next tranche: remove all energy subsidies and levy petroleum development levy; reform (increase) personal income tax (PIT); and avoid the practice of issuing new preferential tax treatments or exemptions.
The fuel subsidies have been removed in three phases, and an increase in electricity and gas tariffs is on the cards. The remaining measures were to be taken in the federal budget for FY23. However, contrary to its commitments to the IMF, the government took the opposite measures in the budget. It proposed relaxations in PIT, tax holidays/reduced taxes for certain sectors, and GST exemptions for sectors like agricultural equipment, seed, solar panels, etc.
There is nothing wrong with the relief measures proposed by the government in the budget, provided it had or could generate the revenue to fund them, and revenue generation is the most challenging part. Let me explain why:
The difference between income and expenditure in the budget stands at Rs4,598 billion. The fiscal gap would increase further as (like always) the income is overstated, and the expenditures are understated. Rs800 billion is estimated in the budget as provincial surplus, Rs200 billion as Gas Infrastructure Development Cess, and Rs750 billion as petroleum development levy. The estimated revenue from these three heads – Rs1.75 trillion – is overstated by at least one trillion rupees. The IMF found the budget numbers neither clear nor credible and asked Pakistan to compensate for this shortfall through increased tax revenue and controlling current expenditures (revision in budget numbers before parliament passes it).
For tax revenue mobilization, the government has agreed to reduce tax concessions, withdraw tax exemptions, strengthen the collection of provincial taxes, and ensure a more efficient tax administration. It would have to control current account expenditures to make space for more social spending. Can any sane mind disagree with the recommendations mentioned above? No. Interestingly this is what the IMF proposed for Pakistan in its last review.
There is a growing consensus now that to avoid a balance of payments crisis, Pakistan needs to shift from consumption and import-driven growth and build foreign currency reserves (which are barely sufficient for 5-6 weeks of our imports now). The IMF advises that in the medium-to-long run, we should bring structural changes in the quality of our growth. In the short run, it asks Pakistan to follow a prudent monetary policy stance with positive real interest rates, focus on foreign currency reserve building, and stop the central bank’s forex interventions to stabilize the exchange rate artificially. According to the Fund, negative interest rates, and an overvalued rupee ultimately leads to a balance of payment crisis.
Despite the recent fuel price hike, the power sector’s circular debt stock will touch four per cent of GDP at the end of FY2022. A substantial circular debt stock of nearly one per cent of GDP has also accumulated in the gas sector. To reduce power-sector circular debt, the IMF suggests passing on the cost of electricity generation in a timely manner, phasing out uncovered subsidies, and reducing transmission and distribution losses. Likewise, for the gas sector, the IMF advises reducing ‘unaccounted for’ gas losses, timely sales price adjustments, improving collection, and phasing out subsidies (especially for export and zero-rated industries).
The IMF also advises cutting current expenditures and stepping up social safety nets by broadening population coverage under the Benazir Income Support Program (BISP). It also suggests increasing educational transfers, advancing structural reforms, improving the state-owned enterprises’ governance and business climate, and stepping up to the challenges posed by climate change.
Almost all of the IMF’s recommendations are valid. The Fund has been giving such suggestions in all its 22 programmes that Pakistan has availed. However, there is a twist in the story: in the past 22 programmes, our successive governments, none of which went to the IMF on its own choice or politically owned it, breached the commitments made with the Fund. As a result, Pakistan has lost its credibility – hence the demands from the IMF for frontloading and prior actions before releasing any tranche are increasingly increasing.
Marred by a trust deficit and lost credibility, our successive governments are unable to explain to the IMF that the transition cost of macroeconomic stability is born by ordinary folk. And that it is the ordinary people, bearing the brunt of decade-old bad policies and practices, who require support and protection to pass through the turbulent times of policy and structural adjustments. Part of the reason our successive governments cannot plead the case of the country’s people with the IMF is the fact that in the name of the people, they have been providing across-the-board protections and subsidies that favoured the elite.
The incumbent government is revising the budget numbers to address the IMF’s queries and concerns before parliament approves it. Stepping up for the required reforms through political courage, persuasion, and policy ingenuity, the government of Pakistan should win back the trust of its development partners and donors – but most importantly, it should win back the trust of its people.
Amidst the ‘triple C’ (Covid, Conflict, Climate change) crisis, the IMF is clear that budget disciplines are important but not at the cost of targeted subsidies for the poor and downtrodden segments of society. All that governments like ours need to do is prioritize spending to prove that the fiscal deficit they are accruing is due to their pro-poor expenditures.