Pakistan’s continuous reliance on the International Monetary Fund (IMF) to address its balance of payment needs poses a daunting challenge for the people. The lingering process of implementing crucial structural reforms remains unresolved, while the government is squeezing struggling families and businesses for mobilizing revenue through raising oppressive indirect taxes, levying duties, and increasing prices for petroleum products and electricity. This is exacerbating inflationary pressures amid dwindling purchasing power of the vast majority of population. Unchecked inflation has placed people in difficult predicaments, forcing them to make tough choices between providing for their children’s needs or settling utility bills.
Pakistan has so far availed twenty-three IMF’s programmes. The first Standby Arrangement (SBA) of SDR 25000 for one year in December 1958 was to expire on September 22, 1959, but the amount was not withdrawn, and it lapsed. The latest 9-month SBA of US$ 3 billion was signed by Pakistan Democratic Movement (PDM) Government on July 12, 2023. and IMF issued Country Report No. 23/260 on July 18, 2023. As per ‘Total IMF Credit Outstanding Movement’ from August 1, 2023, to August 24, 2023, the country’s debt to the international lender stands at an amount of SDR 6,123,145,835. However, in each of these programmers, we committed to implement reforms in agreement with IMF but shortly after receiving the funds, we often failed to uphold our pledge. Consequently, we found ourselves compelled by the IMF to implement highly aggressive revenue-generating measures that only enhanced financial burden on the population.
The coalition government of Pakistan Tehreek-e-Insaf (PTI), after much hesitation and delay, availed on July 3, 2019 IMF’s US$ 6 billion 39-month Extended Fund Facility (EFF). Failing to kick start the promised reform agenda, it conceded to IMF’s demand of making State Bank of Pakistan (SBP) autonomous as the main agenda of EFF was structural reforms in monetary and exchange policies. The PTI Government ensured full operational independence and financial autonomy to SBP for price stability, strengthening profit distribution rules, and specifying adequate recapitalization requirements. In view of the agreed terms, the then Parliament introduced amendments in the State Bank of Pakistan Act, 1956 [SBP Act] through SBP Amendment Bill 2021.
These amendments were aimed at three core objectives—ensuring domestic price stability being the primary one, secondary was safeguarding financial stability and tertiary objective was facilitating advancement of the government’s economic policies. Powers given to SBP regarding price stability proved to be counterproductive. In the existing administrative structure, responsibility for price management was within the jurisdictions of both federal and provincial governments. Expecting that SBP should take on the task of ensuring domestic price stability was thus misallocation of responsibilities. Resultantly, we had witnessed price stability and inflation control through increase in policy rate alone.
Due to climate change, we are facing devastating floods. In 2022, nearly half the country was inundated that led to severe shortages of essential goods. The government opted for a conventional approach instead of seeking alternative solutions to address demand and supply issues. Rather than exploring innovative strategies, the PDM government chose to tackle the situation by raising policy rate. This had two adverse effects: first, it exacerbated inflation instead of curbing it, and second, it increased the cost of conducting business within the country. This decision proved detrimental, specifically affecting viability of small and medium enterprises (SMEs) thus confirming that the powers delegated to SBP were misplaced, as the country experienced an historically highest inflation of 38 percent and policy rate of 22 percent.
Another objective of amendments in SBP Act was to enhance operational and administrative autonomy of the Bank that curtailed the government’s role in overseeing exchange rate. IMF and other foreign lenders have been consistently promoting the idea of market forces to determine exchange rates. The idea was that this could relieve some of the pressure on foreign exchange reserves. Consequently, market forces are now guiding parity of rupee to the dollar, which has surpassed the threshold of Rs. 300 per one US dollar.
In economies such as Pakistan, where regulatory control is relatively lax, it is an admitted fact that market forces are capable of manipulating exchange rates. In such a situation, the central bank cannot remain a silent spectator. Pakistan heavily relies on imports, and even a slight devaluation can trigger a cascading increase in the overall cost of goods—raw material, intermediaries and finished items. To break this potentially detrimental cycle, an active oversight by SBP is essential.
It is apparent that despite the explicit authority vested in SBP to intervene and prevent market manipulation, it failed to fulfill its responsibilities. Consequently, the country’s top financial institutions were found guilty of engaging in exchange rate manipulations. SBP authorities exhibited clear negligence in tightening their control over dollar acquisitions from the open market, as these financial institutions continued to facilitate the process through credit cards, while the regulator appeared oblivious to the situation.
Media reports indicate that an investigation was initiated against SBP by Pakistan’s leading financial crimes agency. Nevertheless, the harm has already been inflicted, and manipulators continue to tamper with and establish new dollar exchange rates on daily basis. Unfortunately, due to the authorities’ lenient approach, the value of Pakistani currency has depreciated by over 200 percent since late 2017—it was once considered as the most stable currency in the region. It started losing its value after disqualification of the thrice-elected Prime Minister, Mian Nawaz Sharif by a five-member bench of the Supreme Court.
Another factor is the illicit movement of currency. According to Bloomberg, traders and smugglers have been transferring US$5 million daily from Pakistan to Afghanistan. However, Pakistan customs and border control authorities have failed to stop this illegal transportation of dollars from the cash strapped country.
The financial wizard of the Pakistan Muslim League (Nawaz) and four-time Finance Minister, Muhammad Ishaq Dar, promised to restore Pakistani Rupee to its original value upon returning from self-exile in 2022. However, this only proved to be a meaningless promise, as during his tenure, it depreciated by nearly Rs. 75. Advisor to the Prime Minister on Revenue, Tariq Pasha, was tasked by the Finance Minister Ishaq Dar with a special mission to combat currency smuggling and determine the volume of dollar smuggling to Afghanistan. Unfortunately, neither any report has been presented on this matter, nor any significant measures undertaken to curb this menace.
It is high time to implement corrective measures to address these issues. Exchange rate plays a pivotal role in our overall economy and the well-being of businesses. It is imperative that we actively monitor and combat exchange rate manipulations and smuggling. Moreover we should prioritize the renegotiation of capacity charges with power generation companies, while simultaneously initiating agreed-upon structural reforms to prevent revenue wastage. Failing to take timely action to reduce inflation and provide relief to the public may lead to unrest in the country, which is something that cannot be afforded.
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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/
Dr. Ikramul Haq’s brilliant analysis sheds light on Pakistan’s reliance on the IMF, the challenges posed by unchecked inflation, and the need for comprehensive reforms to stabilize the economy. The intricate details provided about the country’s history of IMF programs and recent efforts to address financial issues highlight the urgency for corrective measures. The discussion on the State Bank of Pakistan’s role and currency manipulation amply points toward the importance of active oversight in maintaining stability. It’s evident that Dr. Haq’s article emphasizes the crucial steps required to alleviate economic pressures and promote a prosperous future for Pakistan.
As a reader, I must acknowledge that
Dr. Ikramul Haq’s astute analysis and comprehensive insights demonstrate his profound understanding of Pakistan’s economic challenges, highlighting his role as a thoughtful and knowledgeable commentator on critical financial matters.
Thanks a lot dear Mr. Sajjad Rizvi for your words of encouragement, appreciation and support.