By Dr. Vaqar Ahmed
Following more than a month’s contemplation, Prime Minister Imran Khan’s government has finally taken the decision to approach the International Monetary Fund (IMF) for financial aid with an aim to support the country’s dwindling foreign exchange reserves and put in place a much-needed recovery program.
This decision was of course preceded by desperate requests by Pakistan to its most notable ally, Saudi Arabia, to bail the country out of its economic situation. The government’s cause for concern was further amplified by a widening gap between the public sector revenue and expenditure, a questionable difference between foreign currency inflows and import payments, and the repayment of past debt which is due during the current fiscal year.
While the case for the IMF program was presented to the citizens, the Ministry of Finance was expected to explain what the support package entailed, and the terms and the conditions that the government may face from the IMF. It also needed to create awareness on the impact, if any, that the decision would have on the private sector, middle-income groups and the poorest segments of the society and how it intends to protect them from the expected inflation.
This unfortunately did not happen. As a result, the Pakistani rupee plummeted in the open market, with many news sources reporting the sudden disappearance of the US dollar as well. Such an economic situation is certainly the last thing that Pakistan – slowly emerging from a low-growth equilibrium — would have wanted. It highlights the mediocracy of the Ministry of Finance in planning out a macroeconomic framework to justify the economic projections to stakeholders and offer a succinct communication which could in turn have prevented the markets from reacting in such a manner.
Let us be certain that the IMF’s bailout package will not automatically rid the country of its economic woes — an end result of a consistent lack of structural reforms. The predicaments were well-documented in ‘Pakistan’s Agenda for Economic Reforms’, a book published by the Oxford University Press recently.
It explains that on the fiscal side, past governments have been slow in improving their tax and non-tax revenues. In fact, tax reform programs of the past decade resulted in distortions and a clear increase in the cost of doing business. The expenditures of the federal and provincial governments remained bloated too, while politically-motivated public sector development schemes led to limited funds available for human resource development and other drivers of economic growth. The losses of public sector enterprises and growing debt in the energy sector also led to additional pressures on the exchequer.
In the case of Pakistan’s external balance, a lack of seriousness — for measures to improve export competitiveness and apply brakes on non-essential imports — ultimately resulted in a widening trade deficit.
Pakistan’s central bank, which for a very long time lacked power to exercise an autonomous exchange rate and monetary policy, continued to maintain the currency’s value at an artificially low level as compared to other major currencies. This, in turn, created an environment for more imports of non-essential and luxury items. While the liberal import regime for raw materials and intermediate goods could have benefited the export sector, most export-oriented industries were grappling with other issues such as a high cost of energy and utilities; blocked refunds at the Federal Board of Revenue; double taxation by multiple tax authorities, rising transport, warehousing and distribution costs and more. These issues faced by the business community further eroded competitiveness and played a major role in delaying the inception of special economic zones, planned under the China Pakistan Economic Corridor.
The timing of Pakistan’s request to the IMF is not ideal either. The negotiations are taking place at a time when Islamabad is hosting an expert group to investigate issues related to illegally-acquired cash and assets. The Asia Pacific Group on Money Laundering, a body which is assisting the country’s financial action taskforce, will review measures taken by Pakistan to curb money laundering and terror financing.
Secondly, US President Donald Trump’s administration is eagerly waiting to see how and when Pakistan will approach the IMF. Recent statements by US diplomats clearly signal the steps which Washington would like Islamabad to take to ensure regional security. A failure to cooperate with the US could have an impact on the IMF negotiations and possibly lead to the US blocking the deal too. This would leave the country with fewer options and could include the worst forms of fiscal contraction (higher taxes and a cut in public expenditure) coupled with an even larger devaluation, higher than expected interest rates and inflation. For upcoming debt repayments, Pakistan’s only option then would perhaps be to convince past lenders on restructuring its debt – something which it had to do in 1999.
(Dr. Vaqar Ahmed is Joint Executive Director of the Sustainable Development Policy Institute, Pakistan. His book ‘Pakistan’s Agenda for Economic Reforms’ was recently published by the Oxford University Press. @vaqarahmed)