Economy under IMF program | Political economics


Akistan’s economy is going through a turbulent phase. Fiscal imbalances and global challenges had a negative impact on leading economic indicators. The International Monetary Fund (IMF) Expanded Financing Facility (EFF) program approved in 2019 was halted earlier this year when the Pakistani government Tehreek-i-Insaf (PTI) deviated from its written commitments and announced populist moves to gain political ground against the opposition parties plan to table a motion of no confidence in the prime minister.

This violation of the IMF agreement by the PTI and the announcement of an unfunded subsidy on petroleum products cost the Treasury dearly, exposing the country to the risk of default. Most pundits criticized the PTI leadership for its reckless decision to gain political ground at the cost of economic collapse. On the other hand, the situation on the external front was rapidly deteriorating. The cash-strapped economy was headed for default.

The current government took office as alarm bells rang globally vis à vis Pakistan’s Economic Prospects. The situation took an unfortunate turn when an SOS appeal to the IMF in May this year did not yield the expected results for Pakistan. The communication shared by the IMF said: “The team stressed the urgency of concrete policy actions, including in the context of the removal of fuel and energy subsidies and the fiscal year 2023 budget, to achieve program objectives.

Left with few options, the government had to swallow the bitter pill and revoke unsustainable subsidies at the cost of political capital. The impact on the economy was immediate and abysmal. Inflation soared to an all-time high and the policy rate rose to 15%. Along with other factors, these tough decisions paved the way for the resumption of EFF for Pakistan. The IMF Executive Board completed the seventh and eighth combined reviews of the MEDC and authorized an immediate disbursement of SDR 894 million (about US$1.1 billion), bringing total purchases for budget support in the under the agreement to approximately $3.9 billion.

The IMF staff report blames the previous government for failing to implement the IMF program soon after the completion of the sixth review. Committed budget adjustments have been reversed and several key EFF commitments have been canceled to respond to the national political landscape.

The report acknowledged and appreciated that the current government has taken several steps to get the EFF back on track. These measures include increasing the policy rate, removing after-tax fuel subsidies, and implementing fuel taxation and pending/previously committed electricity tariffs. The impact of these measures and other slippages in the third and fourth quarters of fiscal year 22 is estimated to have widened the budget deficit by more than 1.5% of GDP.

At end-June, the performance criteria (PC) on net international reserves and the primary fiscal deficit and seven structural benchmarks (SBs) were missed. The worsening external situation is also a legacy of the ousted PTI government, where in 11 months of FY22 the trade deficit widened to a record $40.1 billion (10.7 percent of GDP). The current account deficit widened to about $15 billion (4.5 percent of GDP) in FY22, a fivefold increase from FY21.

The IMF staff report blames the previous government for failing to implement the IMF program soon after the completion of the sixth review. Committed budget adjustments have been reversed and several key EFF commitments have been reversed.

Gross reserves slipped to $9.8 billion at the end of June 2022 from $17.6 billion at the end of December 2021, sufficient only for 1.5 months of import cover. Following the measures adopted by the new government, the current account deficit is expected to narrow to 2.5% of GDP in FY23, from 4.7% of GDP in FY2022. The positive trend of the current account will bring the reserve coverage to more than 2 months of imports.

The IMF report highlighted concerns about possible effects related to ongoing geopolitical tensions. The war in Ukraine, high food and fuel prices and global financial conditions are likely to have a direct impact on the external position and the exchange rate, which weighs heavily on the Pakistani economy. In addition, the transition to an election year in the context of the domestic political situation and increasing public pressure may force the government to deviate from policy and reform measures and not align with the fiscal adjustment strategy. .

The IMF report further states: “…the authorities will seek to broaden the personal income tax base by an additional 300,000 people using corporate withholding data, third-party and physical surveys to book new individuals. They will also seek to bring the service sector, including retailers, into the tax net by making better use of data (for example, the tax levied on electricity bills on commercial connections). Continued progress in rolling out track and trace will create a solid foundation for raising additional revenue, including from tobacco sales. The authorities have also pledged to clear the large stock of income tax refund arrears at 225 billion rupees by the end of July 2022, down from the 377 billion rupees accumulated in mid-June. (a 70% increase over exercise due to slow processing)”.

The PTI government left a huge circular debt from the electricity sector to the new government and added a gross amount of Rs 536 billion, which was well above the target envisaged under the debt management plan Circular (CDMP) updated and supported by IFIs. The gas sector, at the end of March 2022, is engulfed by a circular debt of around 720 billion rupees (1.1% of GDP). The unaccounted driving forces for gas losses (UFG) are late sales price adjustments (since September 2020), uncovered subsidies (especially for export and zero-rated industries), and collection shortfalls. These challenges haunt the current government, which is struggling to close the budget gaps left by its predecessors.

The IMF wants it to ensure transparency, showing its concerns over the audit report of Covid-related expenditure and social payments for the financial years 2020 and 2021. The IMF wants the audit report to be made public as soon as possible . In addition, the IMF team has focused on establishing an asset declaration system focused on senior government officials, including members of the federal cabinet.

The benchmark was to be met by the end of March 2022. It has now been reset to September 2022. It requires a complete overhaul of the anti-corruption institutional framework (that’s to sayNational Accountability Bureau) by a working group of independent experts with international experience and civil society organizations, the proposed timeline for compliance is January 2023. Suitability risk weights applied to real estate investment trusts to promote financial sector soundness.

Despite the strict conditions imposed by the IMF, the government is still faced with the question of the balance of payments. Since the current floods have affected a large part of the country and destroyed important crops as well as infrastructure and livestock, the country has suffered a huge loss and required immediate financial support from the international community. In this situation, it will be difficult for the government to achieve the agreed targets. Although the government has been working hard on the diplomatic front to arrange funding commitments through bilateral and multilateral partners to help meet gross external funding needs in fiscal year 2023.

In addition to the consent and commitment to fully pass on international oil prices to consumers to contain spending and fiscal risks, the government presented its commitment to increase fuel levy rates and customs duties. on crude oil, so that they reach 50 rupees per litre. on gasoline and diesel by January 2023 and April 2023, respectively. In addition, the government has agreed to increase crude oil tariffs from the current 2.5% to 5%. Crucially, the government has agreed that if monthly revenue data shows signs of underperformance compared to the first quarter of fiscal 2023, immediate action will be taken to impose the General Sales Tax (GST) on petroleum products in addition to streamlining GST exemptions on sugar-sweetened beverages as well as other exemptions available to exporters.

The government must bear in mind that these measures will seriously affect the lives of ordinary citizens suffering from the highest inflation in the region. It seems that the public is not seeing any visible relief in the price of petroleum products anytime soon. Since the period of the EFF program has been extended until June 2023, the government must comply with the terms of the agreement. The only way forward is to reduce dependence on the IMF by improving external relations. In addition, the government should control the loss of revenue by improving the governance of public enterprises.

The Minister of Finance must realize that imposing the price of oil and heavy taxes on the poor is not really linked to rationalizing the performance of these white elephants.

Dr. Ikramul Haq, a Supreme Court barrister and writer, is an adjunct professor at Lahore University of Management Sciences (LUMS).

Abdul Rauf Shakoori is a US-based corporate lawyer

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