IT is not for the first time that we have gone to the IMF for a bailout. Even those who are shouting ‘sellout!’ from the rooftops know full well that it was unavoidable. Whether one likes it or not, the conditionalities are tied to the Fund’s facility and the process of stabilisation is bound to be painful. But do we have any choice in the matter? An economy in a shambles has to be fixed, and for that, tough actions are needed.
A staff-level agreement has been reached between Pakistan and the IMF, though the final nod is still awaited from the stakeholders and the details have not been revealed thus far. But even so, one can say that it is probably going to be the harshest IMF programme that Pakistan has ever embarked upon.
The conditionalities this time are not just economic; there are also strong political overtones. The final approval is conditional on some upfront measures that the government is required to take. There is a suggestion that the programme be linked to clearance by the Financial Action Task Force.
Pakistan has the dubious distinction of going to the Fund more than a dozen times but of completing only a few programmes — and that too partially. Every government over the last three decades entered the IMF’s structural adjustment programme but the state of the economy has gone from bad to worse.
While some of the IMF prescriptions would, indeed, hit us hard, many of the adjustments and reforms that we have agreed to should have been undertaken already. It is worth pondering why we are in a greater financial mess three years after the completion of the last IMF programme. It is obvious that we never stick to our commitments.
Many reforms on which we have reached an agreement with the IMF should have been undertaken earlier.
Now we are supposed to start all over again and under far more adverse conditions. We didn’t need the IMF to tell us to widen our tax base, increase revenues, cut the losses incurred by public-sector enterprises, and reduce public expenditure. The government says it is serious in fulfilling its commitment to carry out structural reforms. Haven’t we heard all this before? The PTI government’s several flip-flops in its rule of nine months so far do not inspire much hope. The new economic team may appear more experienced and professional but it is not enough to deal with hard realities on the ground.
It is more about politics than the economy. It is the extractive institutions of the state and the ruling elite that are the biggest impediment in the way of any meaningful reform. These vested interests are too powerful for any government to take on. As a result, it is mostly the middle class and poorer sections of the population that bear the brunt of economic adjustments.
Making the rich and powerful pay their taxes will be the biggest challenge for the government. The major resistance to any reform is likely to come from the ruling elite that is not willing to give up its privileges. The government that came to power on the promise of widening the tax net has not been able to meet even the revenue target set in the last annual budget let alone increase the size of the kitty. The shortfall is over Rs300 billion.
With the IMF programme, the government is now required to raise Rs700bn more through new taxation and better recovery. Frequent changes at the top are not likely to improve the performance of the Federal Board of Revenue. Even if some steps are taken to reform the department it may not produce immediate results.
After castigating the tax amnesty launched by the previous government as ‘legitimising corruption’, the PTI has now introduced one of its own with more sweeping concessions. This is yet another of many schemes being marketed in the hope to bring the massive black economy into the mainstream. The previous schemes under different governments have not been very successful in getting people to declare their hidden wealth and bring them into the tax net. Let’s see whether or not people respond to the incentive.
Read: IMF deal at last
Perhaps the most daunting challenge for the government is to cut non-development expenditure. Imran Khan’s austerity drive has not been able to make any significant impact on the fiscal situation. While it is important to stop the haemorrhaging of government-controlled enterprises, there is also a need to cut expenditures across the board.
Although defence expenditure, that constitutes almost a fourth of the budget, is a taboo subject, it does need to be discussed and reviewed. Surely security is important — but so is the overall economy. An economy in perpetual crisis presents the biggest security threat. Our sovereignty is already compromised with our increasing external financial dependence. There is always room to cut out the fat without jeopardising the security. Austerity drives must also be extended to the armed forces.
It is apparent that the federal government alone cannot deal with the current financial crisis. The situation has become much more complex after the 18th Amendment gave greater financial and administrative autonomy to the provinces. There is a need to build a political consensus to take the country out of the bog.
Political instability has been a major factor contributing to our economic and financial plight. For a coalition government to take tough and unpopular decisions and implement a reform agenda is extremely difficult. The IMF agreement will give us some financial breathing space to manage the situation, but much more is needed if we are to sail through the crisis and move towards growth.
It is imperative for the PTI government to take the opposition on board not only with regard to the IMF programme but also for starting a consultative process with the provincial governments. The government may not be able to achieve economic stability without political stability. The present atmosphere of confrontation has aggravated political uncertainty that has a direct bearing on the economy.
More importantly, Prime Minister Imran Khan needs to show statesmanship to lower the political temperature. He should take up the offer put forward by former prime minister Shahid Khaqan Abbasi to initiate an inter-party dialogue on a ‘charter of economy’.
The writer is an author and journalist.
Published in Dawn, May 15th, 2019