IMF: Misplaced expectations?

Prime Minister Imran Khan while remarking on (the United Nations Development Programme’s) UNDP’s Pakistan National Human Development Report stated it is time for a new International Monetary Fund (IMF) package given the economic disruptions ahead due to a “very scary” third wave of Covid-19. These sentiments, be they coincidental or by design, mirror the sentiments expressed in a report titled ‘Pakistan Development Update’ released by the World Bank the same day wherein it was stated that “Pakistan’s economic growth is expected to recover slowly, given heightened uncertainty surrounding the Covid-19 pandemic, besides economic activity is projected to be dampened in the short-term by fiscal consolidation measures associated with the resumption of the IMF stabilisation programme.”

For decades, there has been a persistent multilateral concern with two extremely poorly performing sectors in Pakistan – the tax sector and power sectors. Programme/budget support loan after programme loan as well as numerous project specific loans have highlighted the need to reform these two sectors through administrative and policy measures to attain the country’s tax potential to meet its expenditure requirements and reduce power sector inefficiencies which is the root cause of rising circular debt – from 1.3 trillion rupees that the government inherited to over 2.3 trillion rupees today. This in turn has necessitated seeking additional loans/equity debt through issuance of sukuk whose interest is payable by the consumers through higher tariffs as well as persistent transmission and distribution losses.

The response of successive administrations to calls for reforms in these two sectors, including that of the incumbent, has been: (i) not to focus on reforming the tax structure which remains unfair, inequitable and anomalous while relying on increasing total taxes collected through enhanced reliance on the low hanging fruit – or those sectors already taxed, with a negative impact on productivity, as well as high rates of sales tax whose incidence is greater on the poor than the rich which fuels poverty; and (ii) to raise tariffs to meet the power sector inefficiencies rather than through improving governance and while the Pakistan Tehrik-e-Insaf (PTI) administration has taken a step in the right direction and revisited the grossly flawed contracts signed with Independent Power Producers (IPPs) in the past, yet their implementation is deferred till after the successful conclusion of an ongoing National Accountability Bureau (NAB) inquiry. NAB has after much procrastination agreed to green light the agreement reached with the IPPs. In any event, the benefit to consumers is not projected to be significant especially in the short to medium term.

There are two other sectors whose performance has been poor as per the World Bank report. One, export potential as per the report is 88 billion dollars, four times the current level, and to reach this level is doable as it requires exports to grow at the same rate as Bangladesh for 13 years. And secondly, in spite of claims to the contrary by the Cabinet led by the Prime Minister, 5.8 million additional people fell into poverty in 2020 as a consequence of the pandemic; and one may safely assume that the increase in the numbers falling into poverty may partly be sourced to the harsh upfront contractionary monetary and fiscal policies pre-Covid-19 that the PTI government had agreed with the Fund.

One would assume that the focus of the Prime Minister’s observations was on the projected rise in tariffs as well as taxes envisaged in the recently-concluded staff-level agreement; however, the World Bank report disturbingly pointed to what is feared by the productive sectors in this country, notably, a rise in interest rates: “when the pandemic struck Pakistan, in March 2020, “longer-term expectations signalled lower interest rates, resulting in a largely downward sloping yield curve. However, these expectations have recently changed, leading to the reversion to a normal upward sloping yield curve in January 2021. This indicates that interest rates are expected to increase over time, making borrowing for longer-term investments potentially more expensive.”

It is therefore imperative that the government must take appropriate mitigating measures in all poorly-performing sectors through policy and administrative reforms on an urgent basis while engaging with the Fund on recalibration of some harsh conditions. At this point in time one would assume that the new team in place in the Ministry of Finance remains focused on the budget formulation exercise which is unlikely to witness significant changes in the post-Hafeez Sheikh era though Shaukat Tarin, reportedly the next man in charge of the ministry, clearly stated during a recent interview that there is a need to focus less on the budget deficit and more on curbing growth of government expenditure to jump-start a seemingly stalled economy. It is obvious that there is a need for revolutionary reforms to deal with the economic malaise that besets our economy from before the onslaught of Covid-19 (clearly identified not only in previous studies that are gathering dust in the ministries but one would assume also by the forty plus task forces that the Prime Minister set up during his initial weeks in power). To achieve this, the Prime Minister requires a competent team, able and willing to take bold policy and administrative measures – a team sadly not in place as is evident from the state of the economy two and a half years into the ongoing PTI administration’s five-year tenure.

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