With the country’s economy trapped in so many imponderables, institutional capacity so limited, and the nation engulfed in political confrontation, the space for structural reforms has been significantly squeezed.
The International Monetary Funds (IMF) reforms agenda earlier endorsed by Pakistan is also politically divisive and tends to impair social cohesion. Owing to its current limited ownership, it has become very difficult to implement it.
And the latest global resurgence of the Covid-19 has added to the mounting uncertainties that have enhanced risks to economic recovery. In this complex situation, one can only look forward to incremental progress in reforms in the calendar year 2021.
In the first place, the economy badly needs structural transformation: to switch over from low productivity low wage to high productivity high wage activities. A rapid switchover from sunset to sunrise industries is needed to realise the huge potential of exports of IT services whose global demand has outstripped that of goods. The shift requires more human intellectual capital and very little tangible capital.
The PTI-government current renegotiations with the IMF stands out in sharp contrast to an earlier approach to accept unconditionally prior-actions to qualify for the bailout and also stiff terms of the final deal.
Entering the second half of its tenure, it can ill-afford to cripple the momentum of nascent recovery with a heavy dose of the stabilisation programme.
Pakistan can draw support on its own reform proposals from a recent statement of IMF Managing Director Christallina Georgieva. Eying the possible devastating effect of the resurgence of the virus on the recovery of global and national economies, IMF Managing Director Christallina Georgieva says “we should try to avoid ‘K-shaped’ recovery where part of the economy recovers and another part is left behind.”
Observing the changing global landscape, the mainstream economists are also talking about the risk of ‘K-shaped’ recovery which, they say, results in the better half reaping most benefits while the bottom half continues to slide. Numerous accumulated, unaddressed cracks in the economy in Pakistan stand as a stubborn barrier to early recovery.
On the positive side, officials are hopeful that Pakistan will successfully negotiate the adjustments which it considers necessary in IMF programme with some give and take.
Their optimism is based on the following factors:
(a) The IMF text models are changing in the wake of the unprecedented health and economic challenges across the globe.
(b) According to the understanding of the Federal Board of Revenue, Pakistan is still technically in the IMF programme and it is not suspended.
(c)The IMF has accepted Pakistan’s plea to a six-month delay in implementation of some changes it stipulated in the sales tax act.
(d) The technical team led by Finance Secretary Naveed Kamran has shared with the Fund all its proposals and final touches on corporate income tax which are expected in January. “We have agreed on a very large area in taxation on the corporate sector,” says an official source. (The Economic Coordination Committee of the cabinet has approved in principle the first phase of rationalisation of surging subsidies to reduce government expenditure. The issue will come up for discussions with the IMF after Christmas holidays.)
(e) After some discussions, the IMF has agreed to take up in June its proposal to reduce personal income tax slabs from 20 to eight with an increase in tax rates.
Apparently, the Fund is now more receptive to domestic intellectual input in formulating priorities, pace and sequence of the reforms. The policymakers have enough time for
renegotiations as agreed proposals will be incorporated in the next budget, effective from July 2021.
On the implementation side, Pakistan needs better governance, enhanced institutional capacity and national consensus to broaden the ownership of the structural reforms.
An IMF report on ‘Social Spending for Inclusive Growth’ in the Middle East and Central Asia observes that Pakistan’s social pending is both inefficient and not enough.
The study suggests that Pakistan needs to give priority to social spending efficiency before increasing its level to maximise impact per dollar.
Having lost much of their relevance in a changed world, the IMF prescriptions, evolved 40 years ago, cannot provide lasting solutions to prevent recurring boom and bust cycles.
Published in Dawn, The Business and Finance Weekly, January 4th, 2021