Letter from the IMF

It is now official. The International Monetary Fund (IMF) has drawn up a Letter of Intent (LoI) outlining the mutually agreed reform programme for Pakistan’s economy, in effect acknowledging that the coalition government has delivered on all the prior actions required for the restoration of a stalled Enhanced Fund Facility (EFF). Although strictly speaking the deal is not done until the Fund’s board has given its nod and the managing director has signed off on it, it is practically money in the bank. That, however, is not Pakistan’s prompt to take out the chequebook and go on a spending spree. On the contrary, now is the time for Finance Minister Miftah Ismail to renew his resolve to put the economy in order and make all the pain inflicted on the people to get this far count for something.

Probably the most unkindest cut of all in this context was the abolition of unbudgeted energy subsidies. It was the single-most significant driver of the sky-high inflation that has the common Pakistani groaning under an astronomical price hike. The rupee, which has already recouped some of its lost value over the last couple of weeks, should now recover more of the lost ground, further easing price inflation. A downward trend in international oil prices – the key component of imported inflation – should also help. If the government can now chime in with an oversight mechanism for food prices to curb undue profiteering by unscrupulous middlemen, the people's lot should improve in short order, conveying the sense that we are all stakeholders in good as well as in bad times.

The bigger task at hand, however, is the removal of macroeconomic distortions from the economy to achieve deeper and broader stabilization. The finance minister must not take his eye off the ball on that count. Pakistan’s efforts to improve tax-to-GDP ratio over the last several years have fallen flat, with the ratio currently languishing at 10.8 per cent. There is a dire need to exorcise the taxation system of distortions and to simplify formal procedures. Above all, the taxation system must be modernized to plug tax evasion. Paucity of reliable data on production and sales has seriously hampered collection, in particular of indirect taxes like GST and FED. The government must act firmly to remove any legal hurdles in the way of the implementation of a modern track-and-trace system. Such a system implemented in the tobacco sector in the second quarter of 2022 is expected to help prevent tax evasion to the tune of Rs70 billion over the current fiscal year alone. The system has also been implemented in the sugar industry, but there is an urgent need to roll it out across as many sectors of the economy as possible with the greatest possible speed. Cement, fertiliser, and beverages are the next sectors in line but the implementation of this system must not stop there.

The finance minister must realize there is no substitute for domestic value addition. How can we increase our exports without a commensurate increase in imports? There is no way we can balance our current account without first whittling down the trade imbalance. Given how our manufacturing exports have stubbornly refused to show any considerable improvement and how they inevitably push up the import bill, a foray into the services may well be the answer. Can we find a way to tap into the global knowledge economy? Pakistani youngsters have carved out a respectable niche in the international freelance marketplace all by themselves. Can the government give that sector a leg up here and achieve a quantum leap in forex inflows? Novel solutions are the need of the hour because all conventional approaches have already failed. Apart from that, the only potential spoiler over the horizon now is political instability. All we can do in that respect right now is hope that Sharif’s PDM coalition has not bitten more than it can chew.