Post floods, Pakistan’s engagement with the IMF should be revised
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The completion of the seventh and eighth review by the Executive Board of the International Monetary Fund (IMF) has put the Extended Fund Facility (EFF) back on track and unlocked USD 1.1 billion for Pakistan. IMF’s press release has acknowledged that Pakistani authorities have taken measures to address fiscal and external account challenges which could help reduce pressure on the rupee and foreign reserves. The emphasis on prioritizing a market-determined exchange rate, a proactive monetary policy, and measures to improve performance of state-owned enterprises (SOEs) remains. In terms of near-term outlook, the staff report has noted …. “program risks remain exceptionally high and consistent and decisive implementation will be essential to improve economic prospects.”
Where have these risks emanated from? Primarily, the staff report argues that political tensions in Pakistan have led to significant fiscal slippages. To remedy these gaps, the federal government and IMF have agreed to several measures. While the agreed steps are necessary, in the short term they could dampen economic growth prospects and even lead to further price hikes. While the blame regarding a reversal in policies earlier agreed with the fund is justified to some extent, one wonders if the agreed measures can be delivered by the economy battling the damages caused by ongoing floods, the destruction of productive assets and job losses. The IMF staff report perhaps needs revision.
The financial leakages in the energy sector are well acknowledged. However, higher taxes on fuel and electricity need to be revisited at least for the next two quarters. Various other measures in the fiscal framework including taxing of contributions to welfare schemes; an increase in taxes faced by commercial raw material importers, or fixed taxes on retailers (varying by the amount of electricity consumed) may also need to be revisited in the interest of the revival of local area economic activity and jobs. While the fund has taken a generous view of cash transfers and fuel subsidies for the eligible, even this eligibility may need to be broadened in view of rising losses. It will be timely now to engage in a fresh round of talks with the fund to reset the performance criteria and its indicative targets. Can relaxation in certain quantitative or continuous performance criterion help the government’s rehabilitation and growth revival efforts? This exercise should not necessarily be done with the goal to request waivers but to reduce the ambition level now rather than face an adverse review later.
As Islamabad makes a pitch for empathy, it is important to back this with strong resolve to implement promised reforms in a timely manner.
Dr. Vaqar Ahmed
The above mentioned could result in movement away from the agreed fiscal targets and could throw up a budgetary gap which can’t be bridged unless IMF steps in and expands support to the flood-hit economy. Talks with donors regarding disaster-related assistance have only resulted in modest pledges which is surprising given the scale of damage and displaced population not yet fully estimated.
The debt sustainability concerns of the IMF are also well placed. For long, the fund has advised against the temptation of issuing guarantees to foreign investors including China. Perhaps this is also where the fund will have to revisit and advise how in its current circumstances, Pakistan could attract private investment from abroad and not create future implicit debt.
Pakistan is also engaging external creditors to secure financing to meet debt sustainability objectives. With floods now exerting even greater pressure on the economy, convincing Saudi Arabia, Qatar, and UAE will remain an uphill task. This is also where the fund can come in and provide comfort instruments to potential creditors – something that the fund used to do during ‘Friends of Pakistan Consortium’ engagements in the 2000’s. IMF’s forward-looking and favorable narrative on Pakistan will help renew maturing commercial loans, and swap agreements.
As Islamabad makes a pitch for empathy, it is important to back this with strong resolve to implement promised reforms in a timely manner. The promised agenda in Memorandum of Economic and Financial Policies section provided by Islamabad to the IMF includes measures under tax policy, public finance management, debt strategy, energy sector arrears and many others which require political will and astute execution – not exhibited by any of the governments in Pakistan’s 75-year history. This is worrisome and requires all stakeholders to go back to the drawing board and see what ails reform implementation in Pakistan. How have our peers managed to reduce regulatory burdens and become preferred investment destinations, and why is our investment landscape struggling despite all the tax breaks for industrial and special economic zones?
Several parts in Pakistan are still under water. While the stability of macroeconomic indicators is a good start, boosting social protection and smoothing household consumption should be prioritized. Pakistan is still a long way from protecting the vulnerable or accelerating progress towards sustainable development goals. This is also an area where the federal government can’t win without provincial governments playing their due part.
— Dr. Vaqar Ahmed is an economist and former civil servant. He tweets @vaqarahmed
