Dr. Ikramul Haq & Abdul Rauf Shakoori
The government of Pakistan Democratic Movement (PDM) assumed power with the promise to address various challenges faced by Pakistan, such as, flawed and weak foreign policy, perpetual risk of default on eternal account, unsustainable debt burden and current account deficit, depleting foreign reserves, rising inflation, falling Pak rupee, political instability, poor governance etc.—just to mention a few. Pakistan is facing challenges since long while dealing with two international institutions—Financial Action Task Force (FATF) and International Monetary Fund (IMF)—to comply with their conditions/demands.
We are working with FATF since 2018. They first issued a warning that Pakistan would be included in the grey list unless it streamlined matters falling in their purview in 2016 but despite a lapse of almost six years, the country is still in the list. FATF action plan has a direct link to governance. Implementation of their standards can help in curtailing waste of resources due to corruption and corrupt practices. It can ultimately pave the way for economic prosperity and wellbeing of the masses. We are also in the 22nd IMF’s programme since July 2019. It was to be completed in 2022, yet after three years implementation of reform agenda is nowhere to be seen. Resultantly, the state at one point of time was exposed to the risk of default—which, for now is averted. However, in the process, masses and businesses have already suffered immensely due to hyperinflation, economic stagnation and devaluation of Pak rupee. The Pakistani people are presently faced with constant price hike of items of daily use especially, fuel and energy. Inflation reached a 14-year high level of 21.3% in June 2022 and many say the worse has yet to come.
The IMF and FATF have been reviewing our performance frequently showing that key functionaries entrusted with implementation have failed to meet standards to achieve required goals. Their incompetence is certainly weakening the state—though elites remain unaffected. Indeed, the previous coalition government of Pakistan Tehreek-i-Insaf (PTI), like its predecessors, failed to implement FATF action plan and reforms agreed with IMF putting the country at greater risk of economic default. PTI’s 4-year policies created uncertainty forcing global lenders and business partners to exercise caution while dealing with Pakistan. For the incumbent government of PDM deviation from agreements with IMF became a challenge for resumption of IMF/s stalled US$ 6 billion Extended Fund Facility (EFF) programme with experts showing concern that if EFF was not resumed it would have been very difficult to avoid default.
Differences between IMF and the Q Block team led by Finance Minister Miftah Ismail widened on account of fuel and energy subsidies. This non-compliance was directly attributable to the PTI government that was also reflected in the IMF statement on 25-May-2022 read as follows:
“On the fiscal side, there have been deviations from the policies agreed in the last review, partly reflecting the fuel and power subsidies announced by the authorities in February. The team emphasized the urgency of concrete policy actions, including in the context of removing fuel and energy subsidies and the FY2023 budget, to achieve program objectives.”
This placed Pakistan in a very difficult position with very limited options. The current leadership showed courage notwithstanding political costs to take unpopular decisions that were mandatory for our economic survival. Subsidy on petroleum products was removed complying with IMF’s requirements. Although these paved way for the resumption of the IMF’s programme, imposition of Rs. 50 petroleum levy on all petroleum products was a harsh step along with others, like increase in policy rate and imposition of new taxes that have fueled up inflation estimated to hover around 18% to 20% for quite some time now..
With continuous efforts and political support, our economic team has succeeded in reaching a staff-level agreement (SLA) with IMF for concluding the combined 7th and 8th reviews of the EFF-supported programme. As a next step, this agreement is going to be presented for approval to IMF’s Executive Board. On approval, it will entail release of about US$ 1.17 billion (SDR 894 million)—bringing total disbursement to US$ 4.2 billion approximately. Further, the EFF would be extended till June 2023 with a total value of US$ 7 billion as compared to US$ 6 billion previously agreed.
It may be highlighted that the recent release by IMF emphasises on achievement of a budgeted primary surplus of 0.4 % of GDP that will help curtail reliance on borrowed funds to that extent. This surplus is going to provide some fiscal space for development spending and expansion of social support schemes.IMF’s statementalso points a finger towards weak implementation of the plan agreed by the previous government due to which power sector circular debt—reported to be around Rs. 2.5 trillion by the end of March 2022 is expected to accumulate further Rs. 850 billion. Due to this power generating companies are finding it difficult to produce energy and continue their businesses causing power outages throughout the country.
Pakistan has submitted its commitment to the IMF for timely adjustment of power tariffs and quarterly adjustments, which will help improve the power sector situation. In a recent tweet, the Minister of Water & Power Khurram Dastagir claimed that in a short span of three months, the power sector circular debt was reduced by almost 10%, and on 30-Jun-2022 stood at Rs. 2253 billion, which was Rs. 214 billion lower than March end levels. Though it is good news but the government needs to expedite efforts for sustained decline in the accumulation of power sector circular debt, follow monthly monitoring scheme, aligning power tariffs with cost recovery level, offering better targeting subsidies, renegotiate purchasing power arrangements, medium-term reforms to reduce costs and circular debt by introducing smart metering, cutting off delinquent consumers, and scaling up transmission and distribution infrastructure to bring at par with generation capacity as highlighted in the IMF’s staff level report of February 2022.
Pakistan has once again been able to secure staff level agreement and is close to getting IMF’s Board approval for the release of 1.17 billion dollars without introducing fundamental changes in its fiscal policy. IMF’s statement on staff level agreement dated July 13, 2022 highlighted that delayed policy action worsened Pakistan’s fiscal and external positions in fiscal year (FY) 2022.
IMF has suggested that Pakistan needed to bring policy action in line with its programme to stabilise the economy. It has also suggested steadfast implementation of the FY 2023 budget, catch-up in power sector reforms, proactive monetary policy guiding inflation to more moderate levels, reduce poverty and strengthen social safety, improve governance. All these measures can definitely boost up economy. Though IMF seems happy with the current budget, however, the revised tax slabs for both corporate and salaried class will badly affect growth and living standards. The present government should reconsider its actions to provide relief to salaried class that is already facing heavy burden of high inflation. The government must compensate it by offering either relief in tax or providing them targeted subsidies in electricity and petroleum consumption, through stimulus packages as well as restore rebates that encourage savings and protect its future.
The government should also accommodate businesses by offering various incentives to offset the burden of heavy taxes and diminish preferential taxation available to various sectors that is promoting theft and parallel economy. Though we have successfully reached to a staff level agreement to obtain another tranche of $1.17 billion, yet this dependence on IMF and other lenders will continue to compromise our sovereignty unless we undertake rational and pragmatic fiscal reforms as suggested from time to time.
Dr. Ikramul Haq, Advocate Supreme Court, specialises in constitutional, corporate, media, ML/CFT related laws, IT, intellectual property, arbitration and international tax laws. He is country editor and correspondent of International Bureau of Fiscal Documentation (IBFD) and member of International Fiscal Association (IFA). He isVisiting Faculty at Lahore University of Management Sciences (LUMS) and member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE).
Abdul Rauf Shakoori, Advocate High Court, is a subject-matter expert on AML-CFT, Compliance, Cyber Crime and Risk Management. He has been providing AML-CFT advisory and training services to financial institutions (banks, DNFBPs, Investment companies, Money Service Businesses, insurance companies and securities), government institutions including law enforcement agencies located in North America (USA & CANADA), Middle East and Pakistan. His areas of expertise include legal, strategic planning, cross border transactions including but not limited to joint ventures (JVs), mergers & acquisitions (M&A), takeovers, privatizations, overseas expansions, USA Patriot Act, Banking Secrecy Act, Office of Foreign Assets Control (OFAC).
The recent publication, coauthored by these writes with Huzaima Bukhari, is: