Our reliance on multilateral and bilateral partners to overcome persistent economic crisis, especially pressing difficulties and daunting challenges on external front, is not going to end in the foreseeable future. The primary cause behind our unending economic turmoil lies in our failure to maintain fiscal discipline and continuously ignoring fundamental structural reforms. Over the past five years, we entered into two agreements [US$3 billion 9-month Standby Arrangement (SBA) and a US$6 billion 39-month Extended Fund Facility (EFF) programme] with the International Monetary Fund (IMF).
The initial EFF programme, which the Government of Pakistan Tehreek-e-Insaf (PTI) had initially agreed upon, prematurely expired after completion of the first eight reviews due to a failure to adhere to the agreed-upon reforms. Besides neglecting initiation of these reforms, the coalition PTI government deviated from the agreed conditions for political reasons leading to a more challenging review process with the IMF. To resuscitate the ongoing IMF programme, the Government of Pakistan Democratic Movement (PDM) had to implement stringent measures to meet the global lender’s requirements. This, in turn, resulted in inflation surging to over 30 percent and the policy rate reaching 22 percent.
In the wake of abandoned EFF programme, the IMF’s Executive Board sanctioned 9-month SBA totaling SDR2,250 million (equivalent to about $3 billion or 111 percent of the country’s quota). This support was aimed at bolstering the economic stabilization programme during PDM government’s final days with disbursement of SDR894 million (or about US$1.2 billion) taking place in July 2023. However, as agreed, the remaining installments were to be disbursed subject to successful quarterly reviews.
IMF’s press release, highlighted that SBA included a strategy to address both domestic and external imbalances, along with a framework designed to secure financial backing from various multilateral and bilateral partners. Key objectives of SBA were outlined as: (1) implementing the fiscal year (FY) 2024 budget to facilitate necessary fiscal adjustments and ensure sustainable debt, while safeguarding crucial social expenditures; (2) transitioning to a market-driven exchange rate and fostering efficient functioning in the foreign exchange market to absorb external shocks and alleviate currency shortages; (3) maintaining an appropriately stringent monetary policy aimed at curbing inflation; and (4) advancing further in structural reforms, especially concerning the viability of the energy sector, governance of state-owned enterprises (SOEs), and initiatives for climate resilience.
Despite the positive impact of SBA approval, which improved Pakistan’s foreign exchange reserves and restored market confidence, the country is lagging behind in initiating structural reforms agreed upon with international lenders. Presently, an IMF team is in Pakistan to conduct the second SBA review. The process seems to be progressing smoothly as Pakistan appears to be compliant with a significant part of IMF conditions.
IMF conditions specifically pertain to action items such as petroleum product prices, imposition of petroleum levy, electricity prices, and maintaining exchange rate. This compliance indicates a positive alignment with key areas outlined in the IMF agreement, highlighting a constructive step towards meeting the stipulated measures. However, these measures have inadvertently exacerbated hardships faced by ordinary citizens, causing increased inflation.
The persistently high policy rate of 22 percent has adversely affected the growth of various business sectors. Consequently, small and medium enterprises (SMEs) are encountering difficulties in their efforts to sustain their operations and viability amidst these conditions.
Obviously, Pakistan is still struggling to address mismanagement of its resources, hindering the much-needed structural reforms aimed at enhancing revenue generation. These reforms, which involve expanding tax base, streamlining energy sector to reduce unnecessary costs, elevating social indicators, optimizing SOE performance, and pursuing privatization of identified entities, remain largely pending. Delay in implementing these crucial reforms perpetuates the country’s financial challenges and obstructs its path towards economic stability and growth.
Even in the ongoing IMF team’s review, concerns regarding our performance on these issues have been notably highlighted. The absence of marked progress in broadening the tax base has prompted IMF to recommend additional taxation in areas such as agriculture, real estate, and retail sector, based on their revenue potential. In cases where tax revenue falls short, IMF has suggested implementation of a real estate tax. There are contemplations for imposition of a fixed tax on retailers, possibly after December 2023 in the current fiscal year. Discussions are also underway to introduce taxes on agricultural income.
There are reports in the media indicating that the top revenue collection authority, Federal Board of Revenue (FBR) has concluded efforts to separate tax policy from enforcement. There is consideration for senior officers of grade 21 to be stationed in the finance division to finalize tax policy matters, indicating a potential restructuring to streamline tax policy related issues.
Though adhering to the agreed upon conditions related to energy sector, Pakistan has failed to check persistent inefficiencies in the energy sector. Circular debt has reached around Rs. 2.31 trillion, close to 3% of the GDP. Authorities must address the need to rectify policy slippages related to energy sector. Slow progress in improving social indicators and lack of improvement in performance of SOEs, including privatization initiatives, have elicited widespread criticism for impeding the country’s economic progress and sustaining financial vulnerabilities. The global lender of last resort is pressing for inclusion of SOEs like Pakistan National Shipping Corporation (PNSC), Radio Pakistan, and Post Office under the Finance Division’s Central Monitoring Unit (CMU), mandating these entities to regularly submit their performance reports to the federal cabinet.
Media reports also indicate that the authorities have assured IMF of their commitment to advancing the long-delayed full implementation of a CMU within the Ministry of Finance. They aim to issue the first periodic report on the performance of SOEs to the government by the end of November 2023.
Meanwhile the government has commenced a recruitment process for Director General of SOEs that is pending, as the identified candidate could not meet the required criteria. Moreover, the draft SOEs’ Policy 2023, earlier approved by the Cabinet Committee of SOEs (CCoSOEs), is being refined and prepared for re-submission for second approval. The committee has thoroughly reviewed essential aspects of the policy, in view of feedback from previous meetings, specifically concentrating on governance structures, performance, and accountability mechanisms.
Unfortunately, our efforts to tackle pressing issues and steering the country towards prosperity are still falling short of meeting the urgency of our needs due to perpetually deteriorating economic conditions. Despite the recent positive trend in stock market, reflecting a promising sign for the economy, our foreign exchange reserves remain inconsistent with our potential and profile. The pace of GDP growth is alarmingly low, accompanied by highest ever interest rates, skyrocketing inflation, especially of food items, and rising unemployment.
The way forward requires the unwavering implementation of agreed-upon reforms with IMF and strict adherence to the principle of separation of powers. Failing this, our continued dependency on internal and external borrowing will persist and expand, further delaying the realization of the cherished goal of a self-reliant and prosperous Pakistan.
