AFTER long and at times intense negotiations, the deal was finally through with International Monetary Fund mission on a bailout package of $5.3 billion — nearly half of the country’s requirements of about $11.5 billion.
The acceptance of Pakistan’s request for increasing the IMF loan to $7.3 billion (500 per cent of its IMF quota) is just a formality — provided authorities are able to take prior actions on stabilisation, with the ownership extending to Council of Common Interest led by the prime minister and comprising four provincial chief ministers — before the staff mission takes the loan request to the IMF Executive Board for approval.
A determined effort is required to improve medium term growth and move toward a sustainable fiscal and external positions “This requires a strong political consensus, in the central government as well as in the provincial governments, on a medium term programme of fiscal consolidation anchored on an efficient and equitable tax systems… and the government has agreed to complement this with additional steps to achieve a substantial deficit reduction at the beginning of the programme”, said the IMF.
During a video-conference with the IMF management, Finance Minister Ishaq Dar has taken up the case of increased financing with front-loaded disbursement of about $3.2 billion during the current fiscal year to match Pakistan’s debt scheduled repayments.
Pakistan authorities are estimating financing for current account deficit for current year at slightly more than $4 billion, repayments to the IMF at about $3.2 billion and other loan amortisation and repayments at about $4 billion, totalling almost $11.5 billion. On top of that, an unexpected variation in international oil and commodity prices could be one of the unseen vulnerabilities and hence requires a contingency plan.
So the government will need resumption of programme loans from other multilateral lenders like the World Bank and Asian Development Bank and large bilateral lenders to put together another $5-7 billion during the current fiscal depending on the final IMF loan programme. While the government would engage with multilaterals,givn the IMF umbrella programme in coming days and weeks for additional resources, it has received positive signals from friendly states like Japan, China and Saudi Arabia for economic assistance, provided a smooth sailing with IMF.
This was highlighted by head of the IMF staff mission Jeffrey R. Franks. “Broad-based domestic and international support will be crucial for the successful implementation of the authorities’ planned polices and reforms. The IMF remains committed to supporting Pakistan, and its people face up to the challenges by providing financial resources and technical assistance”, he said.
But what if the provincial governments, particularly Imran Khan’s Pakistan Tehrik-ei-Insaf in Khyber Pakhtunkhwa and Pakistan Peoples’ Party in Sindh, take a different position particularly energy plan and fiscal adjustments that require the provinces to provide budget surplus when they have already announced deficit budgets.
The PTI’s stance against external loans and lack of support by the PML-N to recent PPP government over value added tax or reformed general sales tax are crucial political points.
With strong opposition to VAT or RGST, the PML-N government and the IMF have tactfully avoided using these terms this time around even though unimplemented steps of a previous Fund programme are normally treated as ‘prior actions’ under a new programme.
Instead, the IMF and the authorities have “agreed on the need for a sustained improvement in tax collections as well as a significant widening of the tax base and a more equitably shared tax burden, including a phase out of all existing statutory orders (SROs) and other measures which grant special rates and tax exemptions”. Withdrawal of tax exemption on export sectors and increase in GST rate on sugar (from existing eight to 17 per cent) untouched in the recent budget would therefore, be some of the upcoming policy actions.
The two sides have also agreed on the expenditure side to ‘phase out untargeted subsidies’ in power tariffs and gas supply to fertiliser sector which ‘disproportionately benefit the well-off’ while protecting the most vulnerable members of society through targeted assistance. The State Bank of Pakistan will also have to reverse its loose monetary policy before September 4 meeting of the IMF executive board.
The two sides have also agreed to a comprehensive strategy for tackling the country’s long-standing energy problems through measures to permanently address the circular debt accumulated in the sector, tariff rationalisation as part of prime minister’s energy policy to recover full cost recovery from all consumers except poorest of the poor consumers and promotion of investment for energy generation and modernisation.
While this is expected to mitigate the hardship of electricity load shedding, improve fiscal balance and help revive economic growth, energy sector reforms would have to be complemented by significant structural reforms in the areas of import and exports in line with free market mechanism for international trade, coupled with restructuring and privatisation of public sector enterprises eating up resources almost the size of the country’s development programme.
As the IMF mission chief Franks differed with authorities over calculation of fiscal deficit at 6.3 per cent, he believed the authorities would need to make more fiscal adjustment to limit deficit at six per cent. In IMF’s baseline assessment, Pakistan has to make further adjustment of between 0.5-0.8 per cent of GDP to achieve six per cent deficit.
To his advantage being an insider, Dar enjoys the maximum support of his party and the leadership to take more tough decisions required to turn around the economy unlike his technocrat predecessors — Shaukat Tarin who had had to resign finding difficulties in moving forward with reform agenda and Hafeez Shaikh during whose tenure the PPP leadership’s attention was focused more on political gains ahead of elections.
With his past experience and continuous engagement with last PPP government through parliamentary committees and talks on failed reform programme, Dar had already included in the budget speech a set of measures he knew were strongly demanded by the IMF to set the stage for a new programme.
And unlike his predecessors to engage with IMF in silence, he regularly utilised the forums of the parliament and the media to pitch high political stance to propagate a ‘home grown agenda’ and then bargain with the lenders from there. It was not, however, surprising that the agreed programme with the IMF was no different than its long standing wish list and part of the previous loans with the additional requirement of the expressed ownership of the prime minister and four chief ministers — unlike previous routine of economic team’s ownership with background approval of the top leadership.
Whether the authorities are able to change Pakistan’s past image of a ‘one-tranche’ country by introducing long -awaited and deep rooted structural reforms to put the national economy on sound growth trajectory will have to be seen over the next three years, but failure is no longer an option.