In the wake of lingering challenges on internal and external fronts, economic and non-economic, the government must come up with a ‘contingency plan’ to fend off a possible suspension of International Monetary Fund (IMF) program in case Financial Action Task Force (FATF) finds something to blacklist Pakistan.
The upcoming visit of Prime Minister Imran Khan to US is crucial. The PM’s meeting with US President Donald Trump will set the stage for Islamabad to muster required support at IMF’s board as well as on the FATF front to come out of the crisis mode.
In return there are some non-economic issues on the White House’s wish list, including helping US in Doha talks to get a breakthrough for peaceful settlement among different stakeholders in Afghanistan.
Some circles fear President Trump may also put the US demand for curtailment of China on the table.
On the internal front, the political mercury is shooting up and can plunge the country in agitation in the shape of protests and strikes in the days to come.
The shutter-down strike observed by the traders all over the country against taxation measures and especially the condition of Computerised National Identity Cards (CNICs) for buyers purchasing over Rs50,000, can escalate down the line causing political unrest in the country. Although, there is no justification for demands to withdrawal of CNICs condition because it aims at promoting documentation of economy.
But the government has made a mistake by taking two steps in one go. When the broadening of tax base is done it should not be coupled with raising tax rates but the government did it. So it is hard to resist politically. The government not only slapped the condition of CNIC but also abolished zero-rating for five export-oriented sectors. A top official, privy to negotiation with the IMF, said the government reluctantly accepted the demand of the fund to withdraw zero-rating regime and impose 17 percent GST at standard rate.
At one stage, the talks with the IMF were on the verge of a breakdown then the good offices of newly inducted Governor State Bank of Pakistan Dr Reza Baqir were used to convince the IMF team as Pakistani side wanted to move ahead with reduced rate of GST initially with a commitment to phase in the standard rate of 17 percent down the line.
Finally, Pakistani team decided to seek guidance from Bani Gala and at one stage Prime Minister Imran Khan decided to call Christina Lagarde, MD IMF, for convincing the IMF but Advisor to PM on Finance Dr Abdul Hafeez Shaikh intervened arguing that it was still too early for the PM to use its political capital to convince the IMF’s top management on this issue. He had suggested that the PM should use his good office for getting waivers during the course of the IMF program at more crucial stage.
In these circumstances the front-loaded IMF program was accepted. The FBR has incorporated 107 tax measures through Finance Act 2019-20. Now the GST on textile and other five export-oriented sectors can only be reduced if the IMF agrees to grant a waiver after which the government will have to amend the law passed.
The IMF has approved $6 billion package under 39-month Extended Fund Facility (EFF) but it seemed that the staff report was not fully read out and endorsed by ministry of finance fully.
The IMF in its report highlighted risks attached to the fund-sponsored program. The IMF states that risks to the program are significant, but the program offers Pakistan an opportunity to break from the unsustainable policies of the past.
Pakistan’s track record in program implementation is weak, punctuated by incomplete reforms and policy reversals. The Pakistani authorities’ upfront efforts, exchange rate flexibility, fiscal consolidation, and tariff adjustments in particular, may be received with a strong backlash from vested interests and the wider population as the benefits may not be immediately obvious. Pressures to reverse policies may quickly emerge, which must be resisted to allow reforms to take hold and restore confidence. Similarly, the fruits from structural reforms may take years to materialise, possibly leading to reform fatigue and backtracking of policies. Strong ownership and an unwavering commitment to program implementation will be critical to ensure program success and turn Pakistan’s economy around. In this context, international support will hinge crucially on the implementation of these reforms. Other political and external shocks may further complicate an already challenging environment.
The first quarter will be critical for Pakistan as the Federal Board of Revenue (FBR) will have to collect Rs1,071 billion in July-September 2019-20, so in case of revenue shortfall, the government will have to seek waiver from the IMF’s executive board.
The IMF’s executive board will review Pakistan performance by October and the FATF will also analyse our progress on 27 action plans. Any negative development on FATF front can potentially derail the IMF program because it is the first time the fund put the international terror financing watchdog’s condition as part of structural benchmark.
The IMF stated that the effectiveness of Pakistan’s AML/CFT regime must be urgently strengthened to support its exit from the FATF list of jurisdictions with serious deficiencies.
Pakistan was placed in the FATF list in June 2018 owing to shortcomings in effectively addressing terrorist financing risks. The authorities are stepping up efforts to implement all measures committed to in an action plan with the FATF (end-October 2019 structural benchmark) to support the country's exit from the FATF list. The National Executive Committee (NEC) is monitoring and coordinating efforts to implement the FATF action plan. The Asia Pacific Group on Money Laundering is expected to discuss Pakistan's mutual evaluation report in August 2019. The authorities will work with technical assistance providers, including the IMF, to complete the action plan and further strengthen the effectiveness of the AML/CFT regime.
—The writer is a staff member