Extended indebtedness

After facing a series of crises ranging from macroeconomic instability to adjustment pains and then lockdowns to combat the deadly COVID-19 pandemic, this government is currently dead set on rejoining IMF’s $6 billion Extended Fund Facility (EFF) program that is going to have extensive fallouts for a long time.

Prime Minister Imran Khan appointed Kamran Afzal as new Secretary Finance after the retirement of his predecessor Naveed Kamran Baloch and tasked him to resuscitate the IMF program without burdening the national economy. It required the program to be designed in a way that should not suffocate the struggling growth momentum through tightening of fiscal and monetary policies especially in the aftermath of the pandemic's devastating impact.

Before analysing macroeconomic picture, there is a need to focus on the political arena of the country in the context of Pakistan Democratic Movement’s (PDM) ongoing campaign to oust the PTI-led government through mass protests, long marches, sit-ins, and resignations from National Assembly and provincial assemblies. These increasing political temperatures will have an overall impact on the economy of Pakistan.

However, the newly inducted Minister for Finance Dr Abdul Hafeez Shaikh, in a recently held seminar organised by Institute of Policy Reforms (IPR), pointed out 10 basic realities about Pakistan.

He stated that there wasn’t a single prime minister in the country’s history who had completed his/her five-year tenure.

If that is so then there is no way to assure the sustainability of policies. Former PM Liaquat Ali Khan, who served from 1947 to 1951, was the only one to have the longest tenure, and there was none who could surpass him in terms of serving the country in a single tenure. There is a need to ponder over it.

Highlighting the second fact about Pakistan, Dr Sheikh said Pakistan had passed through patches of higher growth rate during the decades of 60s, 80s, 90s, and 2000s but it could not be sustained for a longer period.

The third fact, according to him, was that Pakistan did achieve high growth spurts, but it could never become inclusive, so the benefits of this higher growth could not be shared with all the segments. Fourth, he said, there was little integration with the world economy, so we did a pretty lousy job and it was a big, big fact about Pakistan’s economy. The fifth point, he highlighted, was Pakistan chose to ignore its people that had grave consequences for the country.

Sixth, he said we had done a very bad job on account of taxing the rich, so tax to the GDP ratio remained the lowest in our region. About the seventh fact, he said the period of higher economic growth was followed by frequent transition through changes in government, so such periods had to witness agitations, and lastly lockdowns.

On the eighth fact, he said the limited tenure of elected governments did not help to build institutions and nurture democratic norms. Speaking on the ninth point, he said some countries such as China, Brazil, and others had achieved macroeconomic stability and then achieved higher growth for longer periods.

There is a need to understand that macroeconomic stability is a prerequisite for sustainable growth, so we need to develop patience for it. He said no country could achieve sustainable growth without higher savings and investment rates. About the 10th highlighted issue, he said the role of a capable government was very important as it was a prerequisite for achieving the desired destination. The market-based economic system can only deliver instead of running of factories by bureaucrats.

With these 10 basic realities, Pakistan and IMF are making renewed efforts to revive the Fund sponsored program. Pakistan’s renowned economist Dr Hafiz A Pasha had clearly stated that Islamabad did not have any other option but to go back to the IMF program. There are some reasons behind this statement as the government was thumping over on current account surplus but the financial account was showing a deficit to the tune of $1 billion in the first five months of the current fiscal year. So the balance of payment position is not as comfortable as portrayed by the ruling regime and its economic wizards.

For reviving the IMF program, the government will have to hike power tariff by 25-30 percent and abolish up to Rs200 billion corporate sector income tax exemptions.

The IMF program got stalled in February 2020 after the COVID-19 outbreak. The second review is now under completion and it is yet to be seen whether the second and third reviews will complete simultaneously or be done separately. The IMF and FBR teams held a virtual crucial round of talks last Monday night and both sides explored the possibilities of abolishing the corporate sector income tax exemptions.

The FBR has so far identified Rs150 billion worth of tax exemption of the corporate sector, which could be withdrawn either through a presidential ordinance or a mini-budget by moving a fresh finance bill in the second half (Jan-June) of the current fiscal year.

The IMF team inquired about the income tax exemptions granted to the Chinese companies under the CPEC arrangement. The Pakistani side told the IMF officials that these exemptions were meant for 25 to 30 years and could not be withdrawn.

The IPPs exemptions are going to end after expiry of 30 years, probably next year, and both sides have agreed that no further exemptions would be provided. Now the ball is in the government's court, and when Islamabad moves towards fulfillment of pre-requisite conditions, the IMF will complete its second review and its board will grant approval for release of a third tranche of $450 million probably in February or March 2021.

The revival of the IMF program is a must but there is a need to design the targets very carefully because at this stage the economy could not afford further suppression through tightening of monetary and fiscal policies. On other hand, Pakistan’s financing requirements could not be materialised without the revival of the IMF program. So the economy will have to run on a roller coaster to achieve stabilisation and then gather growth momentum in months and years ahead.

The writer is a staff member