Pakistan has been a constant recipient of the International Monetary Fund’s (IMF) packages to float the ill-structured economy. Whenever Pakistan felt that our economic parameters were over-stretched and could not be contained, the IMF’s dose of dollars did the course correction, albeit for the short run. According to Ishrat Hussian, former governor of the State Bank of Pakistan, there are a few primary reasons whenever any country approaches the IMF: financial resources to avert a Balance of Payments (BOP) crisis, easy access to funds from other sources, a seal of approval for investment, to shift the blame for politically unpopular decisions, and for debt relief and rescheduling. The PTI government penned an IMF deal in 2019 for a $6 billion economic stimulus package under its Extended Fund Facility. The programme was stalled in 2020 after Pakistan failed to meet the IMF’s conditions. The crisis led to the resumption of the programme with the PTI government agreeing to implement the stiff measures proposed by the IMF. This included raising oil prices and electricity tariffs. However, by the end of PTI’s ouster, it gave a subsidy on oil prices and the price of petrol remained stagnant at rupees 150. The PTI government argued that it had allocated funds for the subsidy from moving numbers around its budgetary allocations, however, the coalition government statement said it did not find any allocation for the subsidy.
At present, the petrol prices have been raised by 84 rupees in two months to the historic high of rupees 234 and diesel prices have been raised by rupees 115 to 263. With this raise, the government has zeroed subsidies on POL products. These prices are expected to go further once the petroleum levy is implemented. Once the country meets the IMF’s conditions, it is hoped that it will unlock other external funding options as well. Currently, Pakistan is struggling hard to get $900 million if conditions are met. So far Pakistan has only got $2 billion as part of the $6 billion deal. The stalled agreement with the IMF also locked budgetary support from the World Bank and the Asian Development Bank; Thus making the IMF the sole key to Pakistan’s economic stability. The country is only ahead of Sri Lanka in terms of the economic outlook in South Asia. Sri Lanka has recently defaulted on its external debt commitments and Pakistan is headed down a similar trajectory with foreign reserves falling below $10 billion dollars. Inflation has touched double digits and with increased petroleum prices, the production cost will also soar, adding more inflationary burden on the already crunched populace.
The coalition government has largely agreed to the IMF’s conditions of raising POL prices and electricity tariffs as these two are deal breakers for the facility. The IMF also wants to increase direct taxation of salaried individuals. For this purpose, different slabs have been proposed with revised tax rates, however, to cushion the salaried individuals from rising inflation, the federal government has increased the minimum annual taxable salary from rupees 600,000 per annum to rupees 1,200,000. Beyond this individuals will be progressively taxed. In 2020, the agency had asked Pakistan to structurally reform State Owned Enterprises (SOEs). A legislation had been drafted on the conduct of SOEs, but since then no concrete work has been done on it. The initial IMF deal is still stalled as negotiations fell apart between the facility and Pakistan. Fiscal adjustments are essential for Pakistan and this should have been done earlier to strengthen the economy. Now the IMF facility wants Pakistan to make fiscal adjustments to the level of 2.5 percent of GDP.
The IMF’s policies are largely directed at economic stabilisation, but at the expense of the middle class and the poor. The fund wants FBR revenue to increase to rupees 7.5 trillion with more deductions in subsidies. The rupee has shredded its value against the dollar as uncertainty looms in the market. At the same time, stock exchanges are losing points amid the political and economic uncertainty. However, the IMF deals must not be singularly blamed for Pakistan’s economy because the historical mishandling of the economy and poor structural deficits have a major role. Global politics is now directly impacting countries. For instance, the European energy crisis also has a part in exacerbating Pakistan’s energy woes with Europe pushing the global gas prices due to high demand. If nothing concrete takes us out of the current economic crisis, then the future might be even grimmer.
Source: Published in The Nation