“I am not among those who fear the people. They, and not the rich, are our dependence for continued freedom. And to preserve their independence, we must not let our rulers load us with perpetual debt. We must make our election between economy and liberty, or profusion and servitude” – Letter to Samuel Kerchival, 1816.
The economy of Pakistan will get some breathing space after the signing of staff level agreement with the International Monetary Fund (IMF) to receive US$ 3 billion loan on terms of new standby arrangement (SBA). The existing Extended Fund Facility (EFF) programme which was initially signed by Pakistan Tehreek-e-Insaaf in 2019 expired on June 30, 2023 before completion. The new short-term financing will help Pakistan in addressing its external financing requirements and streamlining adjustment policies.
The staff level agreement signed between Pakistan and IMF on June 29, 2023 states that “the new SBA will support the authorities’ immediate efforts to stabilize the economy from recent external shocks, preserve macroeconomic stability and provide a framework for financing from multilateral and bilateral partners”. The new SBA will also create space for expenditure on social and development matters through improved domestic revenue mobilization and careful execution to help address the needs of Pakistan’s people.
The staff level agreement further highlights that a steadfast policy implementation is key to Pakistan’s overcoming its current challenges, including greater fiscal discipline, a market determined exchange rate to absorb external pressures, and further progress on reforms, particularly in the energy sector, to promote climate resilience, and to help improve business climate. As a result of this agreement, Pakistan will get an amount of SDR 2,250 million (about $3 billion or 111 percent of Pakistan’s IMF quota).
The IMF acknowledges: “Since the completion of the combined seventh and eighth reviews under the 2019 Extended Fund Facility (EFF) in August 2022, the economy has faced several external shocks such as the catastrophic floods in 2022 that impacted the lives of millions of Pakistanis and an international commodity price spike in the wake of Russia’s war in Ukraine”.
The staff level agreement further highlights that “as a result of these shocks as well as some policy missteps—including shortages from constraints on the functioning of the FX market economic growth has stalled. Inflation, including for essential items, is very high. Despite the authorities’ efforts to reduce imports and the trade deficit, reserves have declined to very low levels. Liquidity conditions in the power sector also remain acute, with further buildup of arrears (circular debt) and frequent loadshedding”.
Although the disbursement of SBA is subject to IMF Executive Board’s approval, which is expected to consider it by mid July 2023, it requires Pakistan to ensure that the budget should be executed as planned, no unbudgeted spending and further tax exemptions, market determined foreign exchange, no further import restrictions, obtaining of new financing as agreed with bilateral and multilateral partners in terms of IMF agreement, including roll-over on due debt, energy sector reforms and timely tariff rebasing and improving the governance of State-owned entities.
The country report is currently being processed and is scheduled to be presented to the Executive Board for its review. The final approval for disbursement of loan will be based on this report, which will provide a comprehensive overview of the agreed-upon terms with the lender. However, Pakistan cannot ignore the demand for long overdue comprehensive fiscal reforms. The IMF Executive Board while approving US$ 3 billion SBA will ensure that Pakistan implements the already agreed agenda of implementing key structural measures, which are essential for achieving program objectives.
Approval of SBA by the IMF Executive Board will help improve foreign exchange reserves, stabilize economy and accelerate GDP growth, which is currently hovering around 0.3 percent. It will also enable securing funds from friendly countries such as US$ 2 billion from Saudi Arabia and US$ one billion from United Arab Emirates—measures that would allow maintenance of fiscal balance and avert default in the current fiscal year.
Though Pakistan so far has averted default on external front, but securing US$ 3 billion SBA from IMF is insufficient to repay close to US$ 9 billion of loan/net roll-overs and import bills during financial year 2024. After elections to be held by October 12, 2023 as per the Constitution of Pakistan, the new government would have no choice but to sign yet another long-term bigger programme with IMF to address balance of payments issues.
Therefore, even after the upcoming elections, daunting economic challenges faced by Pakistan will persist with the risk of default looming on the horizon. The new government will continue to grapple with prevalent fiscal imbalances. Unfortunately, since the signing of the EFF programme in July 2019, we wasted four years without making progress on the agreed reform agenda. One of the key issues is the circular debt (both electricity and gas) that is accumulating at a rate of over Rs. 100 billion annually. Additionally, challenges related to theft and line losses remain unresolved. Despite the government’s commitment to implementing smart metering on a large scale to address these problems, implementation has not yet taken place.
In the current budget, the government has allocated Rs. 1150 billion as development expenditure with the hope that it would help to boost economic activities in the country. However, at the same time, an amount of Rs. 1074 billion is provided as subsidies to fund loss bearing entities and other initiatives. These are not going to add any value but would create a further burden on the national treasury. The subsidies’ amount is close to development budget, reforming sick industrial units and fixation of other issues including circular debt. This amount could have been utilized for improving social indicators to secure positive impact on the lives of ordinary citizens.
Although, uncertainty surrounding the economic plight has largely been removed after SBA with IMF, yet Pakistan will not achieve prosperity until it addresses fundamental governance and fiscal impediments. It is crucial for those who assume they can handle any task, despite lacking expertise, to recognize that their involvement in every matter is not only unwarranted, but is detrimental. Instead, they should concentrate on their designated responsibilities and improve the performance of their respective institutions. Moving forward, collective efforts within the framework outlined in Pakistan’s Constitution are the only viable path for putting the country back on the trajectory of prosperity.
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Dr. Ikramul Haq, Advocate Supreme Court, specializes in constitutional, corporate, media and cyber laws, ML/CFT, IT, intellectual property, arbitration and international taxation. He holds LLD in tax laws with specialization in transfer pricing. He was full-time journalist from 1979 to 1984 with Viewpoint and Dawn. He served Civil Services of Pakistan from 1984 to 1996. He established Huzaima & Ikram in 1996 and is presently its chief partner as well as partner in Huzaima Ikram & Ijaz. He studied journalism, English literature and law. He is Chief Editor of Taxation. He is country editor and correspondent of International Bureau of Fiscal Documentation (IBFD) and member of International Fiscal Association (IFA). He is Visiting Faculty at Lahore University of Management Sciences (LUMS) and member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE).
He has coauthored with Huzaima Bukhari many books that include Tax Reforms in Pakistan: Historic & Critical Review, Towards Flat, Low-rate, Broad and Predictable Taxes (revised & Expanded Edition, Pakistan: Enigma of Taxation, Towards Flat, Low-rate, Broad and Predictable Taxes (revised/enlarged edition of December 2020), Law & Practice of Income Tax, Law , Practice of Sales Tax, Law and Practice of Corporate Law, Law & Practice of Federal Excise, Law & Practice of Sales Tax on Services, Federal Tax Laws of Pakistan, Provincial Tax Laws, Practical Handbook of Income Tax, Tax Laws of Pakistan, Principles of Income Tax with Glossary and Master Tax Guide, Income Tax Digest 1886-2011 (with judicial analysis).
He is author of Commentary on Avoidance of Double Taxation Agreements signed by Pakistan, Pakistan: From Hash to Heroin, its sequel Pakistan: Drug-trap to Debt-trap and Practical Handbook of Income Tax. He regularly writes columns for many Pakistani newspapers and international journals and has contributed over 2500 articles on a variety of issues of public interest, printed in various journals, magazines and newspapers at home and abroad.
Abdul Rauf Shakoori, Advocate High Court, is a subject-matter expert on AML-CFT, Compliance, Cyber Crime and Risk Management. He has been providing AML-CFT advisory and training services to financial institutions (banks, DNFBPs, investment companies, money service businesses, insurance companies and securities), government institutions including law enforcement agencies located in North America (USA & CANADA), Middle East and Pakistan. His areas of expertise include legal, strategic planning, cross border transactions including but not limited to joint ventures (JVs), mergers & acquisitions (M&A), takeovers, privatizations, overseas expansions, USA Patriot Act, Banking Secrecy Act, Office of Foreign Assets Control (OFAC). The recent publication, coauthored with Huzaima Bukhari is: Pakistan Tackling FATF: Challenges & Solutions,
available at: https://www.amazon.com/dp/B08RXH8W46 and https://aacp.com.pk/
