Huzaima Bukhari, Dr. Ikramul Haq & Abdul Rauf Shakoori
A detailed analysis of International Monetary Fund (IMF) staff report on Pakistan transpires that the lender of last resort is dictating governance and economic policies of Pakistan. This is 22nd programme with IMF that is reflective of our continued economic subjugation—in the near future there appears no end to this servitude. This sad reflection on our sovereignty is highly unfortunate and lamentable. Like its predecessors, the coalition government of Pakistan Tehreek-i-Insaf (PTI) and members in upper and lower house have turned deaf and blind on this continuous economic subjugation leading to political subservience. Their apathy regarding surrender to the IMF and other lenders and donors is serious cause for concern to the public—especially the economically and socially marganalised sections of society.
After a long pause in disbursement of allocated Special Drawing Rights (SDR), the IMF Executive Board recently completed its sixth review under the Extended Fund Facility (EFF) for Pakistan, and allowed drawing SDR 750 million (approximately US$1 billion). This brings total financial support under the programme to SDR 2,144 million (approx. US$3 billion). To set this programme in motion, the PTI government has undertaken aggressive revenue measures by introducing amendments through Finance (Supplementary) Act, 2022 with effect from Janaury 15, 2022 in the Sales Tax Act, 1990 [“the Act”] by moving most goods from zero-rating (5th Schedule) or reduced rates (8th Schedule) to the standard sales tax rate and also by eliminating many exemptions listed under 6th Schedule of the Act. The Finance Minister has also candidly informed imposition of the Petroleum Levy of Rs. 4 per litre per month until reaching the maximum of Rs.30.
Moving further in implementing its agenda, the IMF’s staff report requires Pakistani authorities to draft Personal Income Tax (PIT) legislation for next budget year i.e. fiscal year (FY) 2022-2023, aimed at reducing number of slabs, enhancing rates and withdrawing tax credits and allowances.
IMF’s role in dictating our economic policy is increasing every day—it includes subservience of State Bank of Pakistan (SBP) that is the worst one can think of. We are even scaling down refinancing facilities and reducing interest rates, subsidy vis-à-vis policy interest rate. It is pertinent to mention that, as exchange control measure, Pakistan has imposed 100% cash margin requirement (CMR) on imports of certain goods in 2017. In compliance with IMF directions, this measure was intensified by adding further 114 items in 100% CMR List. However, IMF advocates for non-intensification and removal of such exchange restrictions.
For encouraging exports, SBP offers certain refinancing schemes which were further expanded while coping with challenges arising during pandemic. IMF has warned that this expansion, if not temporary, would undermine SBP’s efforts to credibly implement monetary policy and achieve its primary objective. The report suggests phasing out refinance facilities and also mentions Pakistan’s agreement over designing a plan to establish an appropriate Development Finance Institution by April 2022 as a basis for a plan to transfer refinancing schemes to the government. It will also assess the Export Refinancing Scheme (EFS) by February 2022 and take much needed actions to improve its effectiveness.
On the domestic front, IMF has emphasized on the government to ensure that all banks meet the minimum capital requirements (MCR). It strongly urges that two private sector banks must complete the first-stage recapitalisation by May 2022. One public sector bank should move ahead with privatisation on technical grounds. It calls for implementation of International Financial Reporting Standards (IFRS) 9 which requires commercial banks to consider the possibility of default on government loans while making their loan allocations. Consequently, banks need to significantly increase their general provisioning reserve which will ultimately impact industry non-performing loans ratio.
Recently the PTI government has been aggressively advertising its housing/construction initiatives and strongly believes that this will help in uplifting economy and generating employment. In this regard SBP introduced key measures and in July 2020, mandatory targets of banks for this sector were scaled up to 5% of the share of their domestic private sector lending portfolio. IMF has now demanded unwinding these measures out of concerns for financial stability. IMF’s report also suggested that monetary policy committee must convene eight times per year, as it would help improve communication and monetary policy transmission.
Regarding the energy sector, IMF is pushing for aligning power tariffs with cost recovery levels, for which regular implementation of tariff adjustments in line with established formulas is suggested as it would halt the accumulation of arrears/debt stock. Surrendering to IMF demands, the report notes that the authorities have now implemented pending tariff adjustments in two steps i.e. the FY 2020-Q4 quarterly tariff adjustment (QTA) on October 1, along with NEPRA’s scheduled QTAs covering FY 2021-Q1/2 in October and FY 2021-Q3 in November; and the FY 2021 annual rebasing (AR) in November. The FY 2022 AR is on track to be notified by February 2022, which will help contain monthly fuel price adjustments (FPA).
While suggesting better targeting of power subsidies, IMF requires the government to increase effective tariff of unprotected slabs by at least Rs. 0.5 per kilowatt hour (kwh) and to approve the new tariff structure at earliest. About the gas sector, the IMF’s report suggests that the government is currently working on revising end-user prices. IMF staff has reiterated the importance of parliamentary adoption of the Oil & Gas Regulatory Authority (OGRA) Act, 2002 by June 2022. The PTI government, despite tall claims to the contrary, has obediently complied with this requirement by getting it passed through assembly in February 2022.
Observing the consolidated position, Pakistan remains vulnerable to flashes of global inflation, rise in geopolitical tensions and deteriorating financial position on external front, especially rising energy prices when coupled with depreciating currency causes inflation to touch new heights with each passing day. Pakistan needs to work ambitiously on revenue increasing measures and drastic reduction of wasteful expenditure in order to ensure that debt service is discharged without taking toll on the common man and without cutting down any development spending.
The IMF report states that as compared to regional peers, Pakistan’s ranking in economic and human development, poverty elimination, education and health is not meeting the required level. The PTI government in the remaining tenure needs to work on structural transformation of the economy to ensure productivity, induce investments and also critically identify and address obstacles that have hampered the development of private sector and the creation of employment. A strong and sustainable spell of economic growth is the only way forward in improving incomes, job opportunities, and social outcomes for the common man.
Huzaima Bukhari & Dr. Ikramul Haq, lawyers and partners of Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS), members Advisory Board and Visiting Senior Fellows 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