Surviving through the IMF pressure
AFTER a long journey of the IMF demands vis-a-vis the governmental negotiations, Pakistan has become successful in convincing the IMF to approve the loan package.
For the last many months, Pakistan’s governmental teams—previously of the PTI government and subsequently of the present government — remained in exhaustive exercise to instrumentalise the tax reforms— demanded by the IMF.
These reforms made by the Government of Pakistan have apparently caused a harrowing economic effect regarding the cost of living of every Pakistan.
“Discussions between the IMF staff and the authorities on policies to strengthen macroeconomic stability in the coming year continue, and important progress has been made over the FY23 budget,” Esther Perez Ruiz, the IMF’s Resident Representative in Islamabad, told Reuters.
Fortunately or unfortunately, since the creation of the Bretton woods institutions in 1945—the World Bank and the International monetary Fund (IMF) — they have been used to pressurize the developing economies in order to achieve their own agenda of vested interests.
For the record, it is positive to note that until 1986, Pakistan’s economy was passing smoothly enough thereby having had no such external pressure of the Bretton woods institution.
But later, in 1990s, and 2000s the affairs of our national economic resources seemed to be declining rapidly and consequently, we have had no option other than to approaching the IMF.
But in our search of seeking the IMF help, we gradually lost our moorings to the extent that today we are obliged to do what is demanded by the IMF bureaucracy.
So far, we have gone to the IMF 22 times with no sign of a positive impact on the economy and we cannot blame the IMF for this failure, rather we are ourselves responsible for such an upheaval.
In the post pandemic phase, generally, in many low and middle-income countries (LMICs), ‘’poor policy choices have created financial and economic problems’’ such as inflation, fiscal deficits, balance-of-payments difficulties and heavy debt-servicing obligations.
As per the 2021 data with regard to the global competitiveness, “we have ranked at 110 out of 131 countries”, whereas India has 68, Bangladesh has 105, and Sri Lanka has 64.
The ultimate goal of these IMF programs is highly desirable, but there is a severe problem of sequencing and prioritization of goals.
In an extreme case, growth or stabilization, none can survive in isolation.There is an organic relation between economic growth and political stabilisation.
Pakistan’s economy lags far behind its contemporary economies like Bangladesh’s growth rate is around 7 percent of GDP whereas our growth rate forecast is around 1.3 percent.
So even from the growth rate perspective, our economy is deficient.In current scenario, the Sri Lankan dilemma is an eye opener for us.
In exercising its choice of exchange for bailouts over the past three decades, Islamabad has repeatedly ‘’agreed to draconian spending cuts and arbitrary taxes in pursuit of fiscal targets’’.
Consequently, the State economy has been largely weakened and hollowed out. Though so far, Pakistan is still committed to complying the conditions already set and stipulated in the 2019 IMF programme.
It was approved in July 2019 thereby fostering a revenue-based fiscal sustainability strategy removes exemptions and privileges, enhances social and productive spending, coordinates with provinces, and eliminates quasi-fiscal circular debt and SOE losses- a market-determined and flexible exchange rate, an independent central bank with a primary focus on price stability; yet strengthening of the social safety net, to protect the most vulnerable as needed, and most importantly; strengthening institutions in the areas: PFM, central bank’s autonomy, tax policy and administration, energy sector, SOEs, anti-corruption institutions, FATF, and improving the business climate
“The IMF still has some concerns regarding our budget, “said Miftah Ismail.If any alterations are mandated to bring them on board, we will consider them, he added.
He stated that the IMF was displeased regarding fuel subsidies, a growing current account shortfall, and the need to enhance direct taxes.
Fuel subsidies have been lowered in the last two weeks, and the remaining assistance is presumed to be phased out in the days ahead.
Proposed budget estimates also aim to reduce the current account deficit, but direct tax revenues remain a concern.
Needless to say, for years, Pakistan seemed to have been under the buckling of the IMF pressure to keep its economy afloat and avert a sovereign default, needs about $3.16 billion to pay dollar bonds and loans this year, $1.52 billion next year and $1.71 billion in 2024, according to data compiled by Bloomberg.
With a $45 billion trade deficit in the current fiscal year to June Pakistan faces the prospect of default for the second time in its history.
Due to the increase in the petroleum prices, the inflation rate measured by the Sensitive Price Index (SPI) in Pakistan increased by 3.38 per cent in comparison to the previous week.
The data was released by the Pakistan Bureau of Statistics (PBS). The increase in the weekly inflation is the highest since the change of the base year for measuring the SPI, the Dawn reported.
The IMF had asked Pakistan to address its elevated fiscal and current account deficits before releasing a bailout package, as Pakistan had deviated from policies agreed in the last review under the multilateral agency’s Extended Fund Facility programme.
The government would target a fiscal deficit of 4.9% of gross domestic output for 2022/23, sharply lower from the estimated 8.6% in the current year, Ismail said.
“Budget FY23 is an attempt to satisfy IMF on key matters relating to revenue collection, subsidy reductions and attainment of fiscal discipline,” said Umair Naseer from Topline Research, a brokerage.
While reversing its previous decision, the Government has now reached an understanding with the IMF, the government has introduced a slab of Rs600,000 to Rs Rs1.2 million and those parts of it will have to pay a 2.5 percent tax on their earnings.
Reportedly, Pakistan’s envoy to the US Masood Khan met Assistant US Trade Representative (USTR) for South and Central Asia, Christopher Wilson to discuss expanding trade relations between the two countries and encouraging US investments in Pakistan.
The office of the US Trade Representative (USTR) is responsible for developing and coordinating US international trade, commodity, and for directing investment policy.
It also oversees trade negotiations with other countries.The joint efforts rendered by our civil-military establishment have ultimately averted a strategic failure since three positive indicators –Pakistan’s current $ 2 bn IMF agreement; the Chinese rollover$ 2.3 bn bailout package for Pakistan; and Pakistan’s $3.68 bn debt relief from G-20 — will nonetheless save us from the ongoing economic turmoil.
—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.