Pakistan: comfortably numb
Subject to the approval by the International Monetary Fund (IMF) executive board, the stalled Extended Fund Facility (EFF) for Pakistan will be revived, making available about US$1.17 billion. The announcement of the Staff-Level Agreement (SLA) will also help in raising additional financing from multilateral agencies, friendly countries and commercial sources. Depending on how effectively the policies underlying the SLA are implemented, the country may avert the risk of default. However, both short- and long-term Pakistan Eurobonds continue to trade at a steep discount to par value, which indicates that the international debt markets remain skeptical about the country’s debt sustainability.
Pakistan needs to rebuild its credibility, abiding by the actions outlined in the SLA, which include reduction in government borrowing by targeting an underlying primary surplus of 0.4 percent of GDP, notifying Oil and Gas Regulatory Authority petroleum and gas prices determined on the basis of international market prices, full restoration of energy taxes and updating of power tariffs as determined by the National Electric Power Regulatory Authority. If the government succeeds in executing these goals, stability might be restored.
That would undoubtedly be a welcome development, but unfortunately many of the Fund’s earlier stipulated actions have been put on the back burner, inter alia, enhancing revenue mobilization and making it more progressive by reforming tax policy and administration; ensuring openness to trade and integration with the global economy; and improving State-Owned Enterprises (SOEs) governance, transparency, and efficiency. Hopefully, these much-needed reforms have only been postponed and not altogether sacrificed at the altar of political expediency.
The EFF program can be credited for promoting better resource allocation through a market-determined exchange rate, and enacting legislation to ensure State Bank of Pakistan (SBP) autonomy with price stability as one of its primary objectives. However, the SBP’s penchant for intervening in the open market to defend the Pakistani rupee despite persistent trade and current account deficits as well as its reticence to pursue “appropriately tight monetary policy to guide inflation and inflation expectations” as stated in the approved EFF, raises doubts about the central bank’s commitment to these objectives.
In Pakistan's case, the IMF facility has repeatedly been used to minimize the pain and cost of reform, while avoiding fundamental structural change. Consequently, the 22nd structural adjustment program has achieved little more than prepare the country for the 23rd, and maybe many more to follow.
Javed Hassan
The latest FY2023 budget fails to make progress on the earlier EFF structural benchmark to “broaden the tax base while maintaining a low tax rate, aiming to ensure progressivity of the tax system.” While the government may claim that the recently enacted personal income tax reform is a step in that direction, the budget nevertheless represents a missed opportunity in terms of “strengthening taxation on real estate and on agricultural turnover or income by provinces” as laid out in the EFF program approved in 2019. The latest tax revenue generation measures predominantly rely on further burdening the already heavily taxed segments of society, effectively leaving sectors with a significant contribution to the gross domestic product, such as the retail sector, outside the tax net.
Earlier efforts to ensure the documentation of the economy have been undermined by the withdrawal of the condition of requiring the registration of computerized national identity card numbers (CNICs) on purchases above Rs50,000. The reversal of this measure will also make it easier to park illicit funds. Moreover, the latest budget reintroduces some of the GST exemptions that had been removed through the Finance Supplementary Bill 2022. On the benchmark to “improve State-Owned Enterprises (SOEs) governance, transparency, and efficiency,” little progress has so far been made. The enactment of the umbrella SOE bill, which is an essential step towards making the sector viable, remains pending.
Finally, the imposition of predictably ineffectual import bans on so called luxury products laid to rest the pretense of Pakistan improving trade across borders. Since the start of the EFF program there has been an increase, not a reduction, in exchange restrictions and imports restrictions, whereas at the beginning of the program the commitment was to phase out the existing ones. Virtually every EFF benchmark that would have ensured underlying structural reforms and increased competitiveness in the economy, as well as move towards efficient allocation of resources, has either been significantly diluted or delayed.
The fault lies neither with the IMF nor the EFF program it outlined. Similar programs in other countries have led to dramatic economic transformation. For example, South Korea, India, Britain, Poland, Thailand and Uruguay have successfully implemented IMF schemes. These countries utilized the space provided to implement difficult structural adjustments that put them on a path of sustainable and balanced growth.
In Pakistan’s case, the Fund’s facility has repeatedly been used to minimize the pain and cost of reform, while avoiding fundamental structural change. Effectively, the IMF programs have been used by the elite to make the people comfortably numb in a continuing sclerotic status quo. Consequently, the 22nd structural adjustment program has achieved little more than prepare the country for the 23rd, and maybe many more to follow.
– Javed Hassan has worked in senior executive positions both in the profit and non-profit sector in Pakistan and internationally. He’s an investment banker by training.
Twitter: @javedhassan
