THE release of the anxiously awaited IMF staff report — completed in early March this year and combining the second to fifth reviews under the Extended Fund Facility to the IMF Board — led to some chilling headlines. ‘Whopping Rs 1.27 tr. hikes in taxes committed to IMF’ read one, adding ‘jack-up in electricity prices by almost Rs 4.97 per unit in remaining three months of current fiscal year’.
The relief that had followed the IMF Board’s approval of the revival of the stalled IMF programme for over a year and release of the second tranche of $500 million was short-lived. There was increasing recognition at the highest echelons of government that this revival had clearly been obtained at too high a cost.
In fairness, the report has repeatedly highlighted the government’s commitment and actions taken to bring about structural economic reforms to open up access to needed funds for accelerating economic development. It had also praised the measures taken in the form of safety nets with supporting fiscal stimuli and monetary easing to provide relief to the suffering caused by Covid-19 to a large number of poor families last year. It acknowledged that growth was showing signs of revival, external balances had improved significantly, and high inflation levels had continued to ease.
It is clear that the revival of and rise in economic growth is becoming a concept alien to the IMF.
The report then outlines the areas where reforms must take precedence and a time frame for their implementation. These cover a 0.5 per cent of GDP increase in revenues by increasing petroleum prices, eliminating GST exemptions, streamlining corporate income tax, reducing personal income tax slabs, and strengthening income tax administration, among other measures. Other areas included improving debt management, focusing on the circular debt — which had reached an unsustainable level, including by granting Nepra automaticity of quarterly tariff adjustments — and state-owned enterprises reforms (as well as granting complete autonomy to the State Bank).
While few would disagree with the thrust of the suggested reforms — especially on increasing revenues, where the absolute increase is misleading given the abysmally low tax-to-GDP ratio — it is because of their pace and timing, amid a third wave of Covid-19 and an unbearable rise in food inflation, that insisting on further rises in energy prices seems to show the IMF as cold-hearted and out of touch with ground realities. It is an image its top leadership is trying hard to change.
But this is not the most depressing part of the IMF report, which is that even after undertaking these painful reforms, the report foresees a growth rate of 1.5pc this year and just 4pc next year, rising to 4.5pc the year after, and that too by accelerating the pace of structural reforms. This growth, which is much lower than that, needed just to absorb the growth in the labour force, will result in further unemployment and escalating poverty levels — and push our GDP per capita even lower as compared to our South Asian neighbours, which is displayed in glowing charts in its report.
It is increasingly clear that the revival of and much-needed rise in economic growth is becoming a concept alien to the IMF! It is not examined seriously in the report, which takes a ‘business-as-usual’ approach, with all emphasis on stabilisation and painful reforms and with little to show the ordinary people that there is a brighter future to look forward to.
While it will be long debated why the government’s negotiating team with the IMF accepted these steep terms and why the IMF insisted on them during the third wave of Covid-19, the ground realities now dictate a change of direction. This has been spelled out clearly by the prime minister and his newly appointed finance minister and made clear to the reconstituted Economic Advisory Council.
The aim now is to take decisive steps to move the economy towards ‘sustainable, inclusive and higher growth with macroeconomic stability’, that is, a shift from ‘growth versus stability’ to ‘growth with stability’.
What must be made clear is that this change in direction does not signal that the government is moving away from its commitments to undertake much-needed structural reforms, including reducing subsidies. What it signals is that, given people’s suffering under the pandemic and its adverse impact in the form of rising unemployment and poverty — as pointed out by the World Bank’s latest update — the pace and sequencing of reforms will be altered to ensure they place a smaller burden on the poor and shift it towards those who are better equipped to bear it.
The IMF country director and its team leader on Pakistan have also publicly acknowledged that the ‘IMF programme objectives and its design could not be changed although sequencing could always be reviewed in the light of changing economic conditions’.
It must also be acknowledged that economic reforms — especially those that result in rising prices of essential goods, including energy — can be best undertaken in a growing economy and not one that is shrinking or stagnant and suffering from already high inflation of between 8pc and 9pc. The immediate task that the government has set for itself in the short run is to concentrate its efforts in the forthcoming budget on providing incentives and deregulation that will spur new investment and growth, and minimise measures that will result in rising prices of essential items.
Even in the energy sector, where the ever-rising circular debt must be curtailed, the emphasis will not be just on rising prices. Indeed, the effort will be to decrease line losses and restructure existing debt and other measures that will minimise the impact on prices.
As the prime minister has repeatedly said, the people of Pakistan have always displayed the necessary resilience to overcome the most challenging of adversities. But they must be shown that there is a better tomorrow at the end of the tunnel.
The change in direction towards inclusive and higher growth is precisely to achieve this.
The writer is a professor at the Lahore School of Economics and former vice chancellor of the Pakistan Institute of Development Economics.
Published in Dawn, May 10th, 2021