Deliberating beyond the IMF deal
GOING through the state of confusion and anxiety, the Pakistani Government is still waiting for the IMF aid package — which is still pending for the approval from the IMF’s Executive Board. But by no means, the seemingly IMF package could be a lasting relief as we are grappling with an economic turmoil, the redemption of which cannot be possible until we fundamentally root out the causes via a comprehensive policy reforms programme– so as to resurrect again as a self-reliant state in the comity of nations. To achieve this objective, we must follow some strict policy measures — accompanied by resourceful deliberations — in order to address the looming challenges.
Today, Pakistan seems to have transitioned ‘’from the poster child of development to the sick man of emerging markets’’. For a country with a population of 220 million and on the frontlines of the fallout from global warming, this is suicidal. Notably, Pakistan’s ratio of taxes to gross domestic product (GDP) is one of the lowest in the world and key segments of the economy, such as agriculture and some military-run corporations, are exempt from income tax. Instead of raising revenue through taxes, governments have preferred to keep giving subsidies to avoid political and social unrest. Needless to say, a growing proportion of public resources are now needed for debt servicing, leaving little room for much-needed physical infrastructure, education and health expansion and climate change preparedness. It is also sad that Pakistan’s enviable record of the steepest reduction in South Asia’s extreme poverty is under threat.
Pakistan’s economic crisis is deeply worsened as structural deficiencies and policy uncertainty raise recessionary risks in the country which will exacerbate political instability and security challenges. Pakistan’s high foreign debt has caused a severe financial crisis and speculations of default. It is ignominious that country’s foreign exchange reserves are at a nine-year low, leaving the government unable to purchase essential imports like oil, gas, fertilizers and food items. Pakistan’s economy remains dependent on the export of cotton textiles, with little investment in diversification. The literacy rate stands at 52 percent, the lowest in South Asia.
Moreover, the country has experienced persistent high inflation through most of the past year, with food inflation hovering around 30%. This is adversely affecting economic activity and causing hardships for millions in Pakistan. In 2022, the government imposed import restrictions on various commodities to save dollars which has modestly lowered the current account deficit. But this has also slowed industrial operations across Pakistan and has even caused shutdowns and layoffs in some sectors.
Nonetheless, the IMF is asking the government to fill the yawning gap of Rs600 billion on the fiscal front through additional taxation measures or cutting down on expenditure in order to restrict the budget deficit and primary deficit within the desired limits. Differences persisted over the exact fiscal gap and both sides will hold parleys to evolve consensus over the exact estimates for taking additional taxation measures through the upcoming mini-budget. By all means, this seems to be the most painful quid pro quo deal between the Pakistani government and the IMF monetary team. The currently imposed IMF conditions have compelled the coalition Government to charter a mini budget.
Though the IMF deal package could temporarily help Pakistan avoid default on its international obligations, it is not without a profound impact on its economy and its people. And most importantly, replenishing foreign reserves seems profoundly crucial in this regard. The Fund’s aid programs will hardly be a panacea for our economic ailments. Yet this will be much more manageable if Pakistan’s reserves rise to levels that instill confidence in its ability to pay its debts. Nevertheless, Pakistan’s economic management challenge is two folds: The first—reducing the current account deficit and building up reserves to stabilize the exchange rate, targets of IMF programs—is relatively easy. And second– correcting the persistent fiscal deficit requires addressing long-recognized fragilities in public expenditure management and revenue collection—is somehow difficult as it requires good governance. Because Pakistan’s deficit is government-led, the IMF program creates the enabling environment for cutting back public investment in infrastructure, education and health and to implement quick fixes on the revenue side. True, stabilization is much harder to achieve when the private sector gets into trouble.
The most important measures to be taken are: (i)-ensuring a manageable trade deficit by adopting productivity; (ii)-enhancing technology to make domestic production more competitive and attracting much higher than current levels of investment in exports; (iii)-enacting a supportive institutional, regulatory and monetary policy stance, including a market determined exchange rate; (iv)-stepping back from the ongoing highly charged political confrontation between the leading political parties to reach a cross-party agreement on the core structural reform; (v)-engaging with the judiciary so that legal challenges to the structural shift are met successfully; (vi)-adopting a prudent fiscal stance by making public expenditure more productive and equitable, especially energy and public enterprise subsidies; (vii)-implementing a non-discriminating tax regime across individuals and economic activity; correcting misallocation of expenditure and revenue between the federal and provincial governments; (viii)-incentivizingthe powerful elites who currently enjoy huge rents to switch to investment patterns consistent with the new structure of the economy by maintaining a consistent policy framework while eschewing any backdoor deals that slip in exemptions and thus deviate/distort from the framework by recognizing achievements and giving social status to exporters and large tax payers.
It is high time for Pakistan to utilise its blue potential and work towards sustainable policies and strategies that could advance the blue economy. Noteworthy, our coastal areas should no longer be viewed as vast and empty wildernesses, but as a source of prosperity and well-being of all citizens. Pragmatically investing in the blue economy could help diversify Pakistan’s economy and reduce its dependence on traditional sectors, such as agriculture and manufacturing. Foreseeably, this can richly help the poor economy country to become more resilient to economic shocks while providing new sources of growth. And above all, Pakistan should establish a national security framework beyond our traditional needs, thereby developing a formal review mechanism to ensure that key reform milestones are accordingly met with in order to positively enhance and cement the necessary condition for the government’s longevity. And last but not the least, the issue of good governance is the real issue that requires to be addressed to implement the governmental reform policy.
The writer, an independent ‘IR’ researcher-cum-international law analyst based in Pakistan, is member of European Consortium for Political Research Standing Group on IR, Critical Peace & Conflict Studies, also a member of Washington Foreign Law Society and European Society of International Law. He deals with the strategic and nuclear issues.
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