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Pakistan’s rendezvous with IMF

Dr. Ikramul Haq & Abdul Rauf Shakoori

During the first quarter of the 2022-2023 financial year (FY) Pakistan emerged successful in the combined seventh and eighth reviews of the Extended Fund Facility (EFF) approved by the International Monetary Fund (IMF) which instrumented the resumption of the Extended Arrangement and unlocked immediate disbursement of Special Drawing Rights (SDR) 894 million (about USD 1.1 billion). In the backdrop of Pakistan’s higher financing needs in the current FY, the EFF, which was initially approved for SDR 4,268 million/USD 6 billion was enhanced by SDR 720 million bringing the program outlay to approximately USD 6.5 billion.

However, this resumption emanated with a long list of “things to do” for Pakistan, like an uphill task of achieving a primary surplus of 0.4% of GDP, reversing tax arrears accumulation during this fiscal year, reducing them to PKR 225 billion by end of September 2022, fully operationalize the Treasury Single Account (TSA) by end of December 2022 to ensure an efficient debt and cash management.

At the time of IMF’s last review, Pakistan barely had reserves sufficient for 1.5 months of imports. It was committed that reserve buffers would be rebuild to a more prudent level of at least 2.2 months of import coverage by end of the FY 2022-2023. Earlier this year, the State Bank of Pakistan (SBP) reduced the gap between the policy rate and the interest rate on the Long-Term Financing Facility (LTFF) and Export Finance Scheme (EFS) facilities to 500 bps. The government committed to drawing a clear line between SBP operations and the refinancing schemes to allow SBP to focus on its core objectives and to extend support to the export sector transparently. To materialize this initiative, the government shared its plan to establish a Development Finance Institution to support the eventual phasing out of the refinance facilities by end of December 2022.

The government undertook numerous aggressive measures to restrict imports to scale down the flight of scarce exchange reserves.  In April 2022, 100% Cash Margin Requirement (CMR) was imposed on imports of 177 items and subsequently in May 2022 import of 33 categories of luxury and nonessential items was banned. However, in August 2022 restrictions were toned down by reducing the CMR up to 25% where the credit terms of import were more than 90. Similarly, these conditions were completely relaxed in cases where the credit terms of import were more than 181 days. These steps were in sheer contrast with performance criteria agreed upon with the global lender as they barred imposition of import restrictions for balance of payment purposes.

Considering the economic and political landscape of Pakistan, adhering to commitments made with IMF was already a strenuous task for us due to various factors including an unprecedented catastrophe caused by floods that damaged an area of around one third of the country and affected at least 33 million people, out of which, at least 7.9 million people were displaced, while more than 1.2 million livestock got killed.  Nearly 15% of the rice crop and 40% of the cotton crop were adversely impacted. 

The post-disaster needs assessment report states that the flooding caused US$14.9 billion in damages and US$15.2 billion in economic losses. This has added further pressure on the government to channelize its resources and revenues toward the rehabilitation of flood-hit victims. The same is also reflected in the Economic update issued by the Ministry of Finance for November 2022 which states that during the first quarter (Q1) of FY 2022-2023, acceleration in total expenditures is beyond the progression in revenues.

The Ministry of Finance publication further states that during Q1 FY23, total revenue increased by 12% to PKR 2,017 billion against PKR 1,809 billion in the same period last year. This report shows that the total tax collection grew by 16%, however, receipts from non-tax sources were reduced by 15%. Total expenditures grew by 26% to reach PKR 2,826 billion in Q1 of FY 2022-2023 against PKR 2,247 billion in the same period last year. This mismatch has resulted in increased fiscal deficit that is reported to be 1.0% of GDP in Q1 FY 2022-2023 compared to 0.7% in the same period last year.

The loss of crops and livestock is expected to take a heavy toll on overall business output and negatively impact local revenue and export inflows. In fact, the government may have to import food staples in greater quantity than before to fulfill local demand. This situation, coupled with the global economic landscape has made it difficult to cope with the benchmark set by IMF, making it practically impossible in some cases. The following extract from World Bank’s publication Is a Global Recession Imminent?” has raised serious concern on the overall economic situation of the world:

Policymakers face a difficult balancing act. Concerns about high inflation and the rising risk of de-anchoring inflation expectations have already led to significant monetary policy tightening in many countries. At the same time, a marked erosion of fiscal space, especially across most emerging and developing economies (EMDEs), and excess demand pressures in many advanced economies, as well as a diminishing impact of the pandemic, have led to withdrawals of fiscal support. As a result, the global economy is in the midst of one of the most synchronous episodes of monetary and fiscal policy tightening of the past five decades.

At this critical juncture, when talks for the 9th Review of IMF are reported to be in the advanced stages, it is expected that IMF will duly take cognizance of the impacts of ongoing global economic challenges and that of floods on the macroeconomic framework of Pakistan.

A sympathetic approach from IMF will help to keep the programme on track and ensure timely disbursement of the tranche. Since Pakistan is claiming that it has already met the targets and if it is the case, then IMF should facilitate the government in meeting its financial needs. This would enable the country to start rehabilitation activities in the affected areas rather than imposing severe conditions on its people who are actually victims of global warming caused by the First World and forced to live under open skies in the cold December nights.

On the other hand, the Pakistan should focus on introducing long-awaited fiscal reforms, implementing privatization laws, and taking measures to reduce circular debt. The government should also improve its border control system to stop smuggling of goods and currency. It also needs to implement effective controls to stop the wastage of resources.

We have to realize that dependence of a country with a population of 222 million on EFF programme of US$ 6 billion is an embarrassment and not an achievement. Therefore, we must explore new avenues for revenue generation. The orthodox approach of running the country through loans, grants, and aid can never meet the economic requirements of the world’s fifth most populous country.

Dr. Ikramul Haq, Advocate Supreme Court and writer, is Adjunct Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE).

Abdul Rauf Shakoori is a corporate lawyer based in the USA and an expert in ‘White Collar Crimes and Sanctions Compliance. They have recently coauthored a book, Pakistan Tackling FATF: Challenges and Solutions with Huzaima Bukhari.    

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