Will Pakistan’s Twenty-Second Package from the IMF Really Help?

Pakistan has had more IMF programmes than all other South Asian countries combined, and none of the earlier twenty-one programmes appear to have left a lasting impact on its profligate bureaucracy and political leadership. The country’s budget deficit has remained stretched and there was no reform in increasing the tax base. 

The latest bailout package is worth $6 billion, of which immediate disbursal, upwards of $1 billion, has been completed, while the remaining is due in the next three years.

The IMF’s fiscal programmes have shown remarkable effects on the economies of some countries. Yet in the case of Pakistan, there have mostly been negative effects. One of the main reasons for this is the non-compliance to the conditions agreed to at the time of obtaining the loan. Critical institutional and governance constraints also deter sustained growth.

Pakistan’s macro-economy

Islamabad’s debt and liabilities have peaked to a record 40.2 trillion Pakistan rupees (PKR), dangerously exceeding the size of its economy, equaling 104.3% of the Gross Domestic Product (GDP), a first in two decades. In 2000, the total debt and liabilities were equal to 106% of GDP. 

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Ironically, this dangerous threshold had been crossed during the first year of the government of Prime Minister Imran Khan, who has long remained very critical of the Pakistan People’s Party (PPP) and the Pakistan Muslim League-Nawaz’s (PML-N) economic policies that led to massive piling up of the debt. Exactly a year ago, Imran Khan’s Pakistan Tehreek-e-Insaf (PTI) government – after seeking electoral support on the basis of a new economic strategy of sustained growth through human development – approached the IMF for a bailout package.  

Pakistan’s performance remains weak when compared to the rest of South Asia. Exports have hardly grown and development expenditure has been falling with a growing layer of aid-funded NGOs in a quasi-welfare state. The question is what plagues the Pakistani economy.

Restricted fiscal space

Pakistan suffers from debilitating revenue shortages which stand at PKR 3.8 trillion, hardly sufficient to meet the expenditures estimated at PKR 5.5 trillion in Budget FY2018-19. Government expenditure has been growing at a phenomenal rate, with the consolidated federal and provincial expenditure data indicating that actual government expenditure for FY2018-19 was around PKR 7.1 trillion. FY2019-20 budgeted PKR 7.288 trillion, indicating that growth in fiscal expenditure (BE over AE) is only PKR 188 million (2.6%). Such a small increase, if adhered to would imply near-zero fiscal impetus to a stressed low consumption economy.

State Bank of Pakistan’s latest data indicates that the government borrowed PKR 1.367 trillion from July 1 to Aug 2, 2019, as against net debt retirement of PKR 20.2 billion during the same period last fiscal year. 

With banks parking their money in risk-free government securities in huge sums, the private sector has found no space to borrow from financial institutions since the beginning of this financial year.

Constraints in widening the tax base

The Federal Board of Revenue’s (FBR) tax to GDP ratio has sunk to just 9.9%, which is significantly lower than the 11.1% level that the PML-N government left Pakistan with. Lower taxes portend yet lower GDP rates for Pakistan.

Recently, Pakistan’s FBR attempted to initiate documentation drives to bring small scale traders, shopkeepers and undocumented sectors under the tax net. This un-regularised retail sector’s tax compliance and contribution to Pakistan’s economy is woefully marginal – a mere 0.25%, despite contributing 20% to the country’s total GDP and only 10-15% are legally registered. To widen the tax net, last month, the FBR introduced a simplified tax regime for traders, a fixed tax regime for small shopkeepers and a scheme for issuing business licenses to undocumented sectors.

These proposed measures of formalising the economy have already taken a toll on economic activity, given strong reaction through calls for strikes and shutdowns. At this stage, a settlement between the trade bodies and FBR appears uncertain. 

The All Pakistan Traders Association has called these proposals ‘anti-business’ and have called for a long march in Islamabad on October 28-29. Traders claim that despite being labelled as ‘simplified’, the new tax regime is anything but, with various slabs within each category. They have demanded a simple tax regime with only one annual return. 

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The revenues earned by the PTI government’s tax amnesty called the ‘Assets Declaration Scheme’ earned roughly PKR 55 billion ($350 mn) was far below expectations, even though the number of tax returns increased to two million, the highest ever in Pakistan.

What is more troubling for the PTI government is that those holding undeclared assets held under false names categorised as ‘benami’ availed of this tax amnesty in large numbers. Now the government claims to be initiating a belated crackdown against benami assets.

The large-scale misuse of ‘Iqama’, work permit based residential status, by many Pakistani nationals from the United Arab Emirates (UAE) has also surfaced. Pakistan’s Geo News made a startling revelation that 7,000 super-rich Pakistanis had acquired properties in the UAE by violating national law in the past eight years.

Attempts to raise dollar reserves

Khan’s PTI government is using an old, oft-used, developing-nation, method to raise savings by issuing a ‘dollar-based saving scheme’. The idea, floated by the State Bank of Pakistan (SBP) proposes to lower pressure on the dollar buying by issuing US dollar denominated certificates for deposits in rupees, on prevailing exchange rates. People’s trust in the local currency has already been shaken due to over 50% devaluation of local currency against the US dollar since January 2018 (PKR 146 from PKR 110 to $1). 

Response to the scheme is lukewarm as yet, but if it takes off, it would strain Pakistan’s dollar reserves more when interest payments are made.

Foreign reserves of Pakistan are supported not by exports but by loans from friendly nations. Earlier this year, China provided $2.5 billion in loans to Pakistan to boost its foreign exchange reserves, which at $8.12 billion (as on March 1, 2019) was below the minimum level that the International Monetary Fund (IMF) and the World Bank (WB) prescribe. Pakistan has struggled to maintain reserves that are not currently sufficient to provide cover for even two months of imports, despite receiving $4 billion in loans from Saudi Arabia and the UAE.

Attempted reform in the public sector

In the practical beginning of an end to fiscal federalism, one of the structural reforms that the Pakistani government has initiated is giving the heads of federal ministries full autonomy to independently utilise development and non-development funds of all departments and projects under their control, and in effect disbanding the Financial Advisers’ Organisation (FAO). This should ideally reduce the red tape in the implementation of public sector development projects and schemes.

In an effort to improve the productivity and potential of state-owned enterprises, the PTI government has established the ‘Sarmaya-e-Pakistan Limited’ (SPL), a holding company to turn PSUs around by eliminating losses. 

In FY 2017-18, cumulative losses of these state-owned enterprises crossed PKR 1.1 trillion (14% of AE). SPL is expected to gradually take over the management of these enterprises and would fast-track the restructuring of 20 loss-making public sector entities, apart from placing ten new companies in the fast-track privatisation list. 

Power sector companies, particularly distribution companies and even large profit-making entities, like the National Bank of Pakistan (NBP) and State Life Insurance Corporation of Pakistan (SLIC), are also in the consideration zone for privatisation.

However, these grand schemes soon lost steam when some members of the SPL Board tendered their resignations, alleging lack of interest from the top level of the government to undertake any serious efforts to revive loss-making state-owned entities.

Serious threat from FATF 

Pakistan currently figures on the FATF ‘grey list’ and is up for a final review of its status at the FATF plenary meeting in Paris next week. The alarming prospect of being blacklisted by the OECD-based FATF has spurred action on part of the SBP, which is trying hard to ensure compliance with international banking regulations. The SBP imposed over PKR 184 million worth of penalties on four commercial banks in July 2019 for compromising rules related to anti-money laundering and foreign currency exchange operations. 

Pakistan’s National Counter Terrorism Centre has seized several properties of UN-designated terror organisations, like the Lashkar-e-Toiba (LeT) and Jaish-e-Mohammad (JeM). However, as The Wire reported, FATF’s global reviewers are quite unsatisfied with progress.

IMF’s past facilities have failed to reform

The PTI government has been attributing the privations faced by the people of Pakistan to harsh IMF conditions.

Previous IMF programmes for Pakistan have consistently failed, even in achieving their claimed objectives of growth combined with reduced inflation through financial ‘stabilisation’. Some theorists have assessed that evidence shows that IMF programmes harm human development, they not only fail to bring reform, but act as a shield protecting Pakistan’s ruling class from the need to reform. Experts concur that investment by, and future expectations of, the private sector are determined not just by stable exchange rates and low inflation, but more fundamentally by the institutional structure of a country, particularly contract enforcement institutions and the control of violence in society. 

Inflation is unlikely to be resolved through IMF conditionalities like high interest rates, reduced public expenditure and exchange rate depreciation, as past experience shows, because in developing countries inflation is triggered by cost-push factors such as the prices of fuel, electricity and food. In Pakistan’s case, there are additional physical constraints to growth beyond the financial sphere, such as a shortage of electricity, gas and water. Prices will, in fact, increase as exchange-rate depreciation will increase the rupee prices of imported industrial inputs and in the attempt to cut down the fiscal deficit.

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The Pakistani state has always managed to obtain waivers for structural slippages during its implementation of IMF bailout packages. This should be understood in combination of unilateral US, Chinese, Saudi aid plus IMF and World Bank programmes, which provide Pakistan with what can be called “geo-political rent”. Unlike in other cases, the bailout package for Pakistan is not based solely on economics but has ‘implicit geo-political/security deliverables’ or implications based on the understanding of Pakistan and USA, its main donor and ‘explicit economic conditionalities’ of the IMF.

These unstated geo-political conditionalities have in the past diverted the economic reform substance of the bailout, resulting in no restructuring of the economy. 

Unhappiness is spreading?

Meanwhile, resentment amongst common people is rising. Clamour against runaway inflation, lack of employment, shortage of essential commodities and higher utility prices, has reached the streets of Pakistan. This unhappiness, within just one year of a new government, is sure to explode as soon as the opposition manages to overcome its recent reverses, with most of its leaders in prison for various allegations (true and false) in money laundering cases.

To his credit, Khan has tried to address all that plagues the economy; be it the need to widen the tax base, the need to regulate benami assets, the reform of sick PSUs, the fact remains that the pace and intensity of a reformer’s zeal are missing. And, Pakistan’s historical environment of inept governance, unaddressed structural weaknesses, a chronically weak tax administration, lack of fiscal consolidation, large public debt and rising number of loss-making state-owned enterprises, amid a large informal economy, remain. 

Vaishali Basu Sharma is a consultant with the Policy Perspectives Foundation.