Hypocrite IMF

LAHORE: The deal with the International Monetary Fund (IMF) is uplifting for the government that depends solely on foreign funding but is depressing for the common man as we have accepted the toughest conditions ever attached to a loan programme by the lender of the last resort.

The decision to increase petroleum levy by Rs4/month means in seven months we would be buying petrol at Rs175/liter. This is the minimum increase consumers would bear for the next eight months. The increase would be higher if the global crude oil prices increased or if the rupee value further deteriorated. Petroleum levy is the easiest way to jack up revenues.

The government lacks the courage to nab tax evaders. It shudders at the thought of withdrawing tax exemptions granted to the most influential segments of the society. The IMF staff thinks that inflation would be contained once the volatility of Pakistan currency stops. But the declining rupee is not the only factor that impacts inflation, increase in utility and petroleum products rates also have strong inflationary impact. One could condone an increase in petroleum products rates if it is based on increase in its prices in the international market, but it looks criminal to generate revenue from this commodity that is already priced very high.

The IMF has shown a soft corner for the small and medium industries, but it seems like lip-service as the measures it has imposed on Pakistan would hurt SMEs more than the large-scale industries. The larger industries would absorb the increase in petroleum and utility rates by increasing the rates of their products correspondingly. They have a qualified sales team, and their products have demand in the market. The SMEs mostly serve the smaller retailers. These retailers serve the lower strata of society that buy cheap though low quality products. The increase in cost after increase in petroleum levy and power rates would be inevitable, which the SMEs would not be able to pass on to the consumers. They will suffer on two counts. First their sales would dwindle and second they would find it difficult to recover the due amounts from previous supplies made to the small retailers.

The culture in our country is such that the small retailers clear the dues of previous supplies, while buying fresh supplies. They usually clear the amount equivalent to the fresh supplies. Since they would be ordering less, they would clear fewer dues.

These are the ground realities of our market. High inflation and high costs force numerous SMEs to close. Already about 20 percent of the SMEs were shut down for good during the pandemic. This 20 percent comes to about 700,000 SMEs out of 3.5 million operating in Pakistan as per estimates released by SMEDA (Small and Medium Enterprises Development Authority.

One point worth noting about the negotiations between IMF and Pakistani officials is they got away with their main demands of providing full autonomy to the State Bank of Pakistan (SBP) and regular increase in petroleum levy and power rates. The negotiations remained stalled for months until these measures were agreed by the Pakistani government. A team of federal ministers confirmed Pakistan’s acceptance of the conditions at a press conference well before the meeting of the IMF board scheduled for January 16, for approval of the next IMF tranche.

Another interesting point is IMF fought hard for complete independence of SBP but continued to dictate it on the monetary policy measures. It means they want the central bank to be independent only from the government of Pakistan and not from the lender of the last resort.

It would have been more appropriate had the IMF insisted on removing the widespread corruption in the power sector that has increased the cost of power to an unbearable limit. For a start it could have withheld this tranche until the distribution losses were reduced by 20 percent (from current 19 percent to around 16 percent) and recovery of the billed amount (from government and private ) to 100 percent. Then it could have set a target of lowering distribution losses by 20 percent every quarter (when the new tranche becomes due).

This government has after all fulfilled most of the FATF (Financial Action Task Force) conditionalities by taking measures against highly influential money launderers when it was made clear by the international community Pakistan would be blacklisted if appropriate measures were not taken to curb money laundering and terror financing. The way the IMF goes soft on corrupt practices in Pakistan, despite promoting transparency, shows it is not sincerely interested in eradicating this threat.