To go to IMF or not?

To go to the IMF or not is the question? Initially the PTI government’s position was that going to the IMF would be the last resort. Finance Minister Asad Umar also declared a few weeks ago that the government had secured enough funding to meet the country’s needs for the next fiscal year without the IMF’s help.

But lately several measures have been taken by the government which are in line with the IMF’s requirements. The sudden weakening of the rupee, the increase in interest rate by the State Bank of Pakistan and the raise in gas and electricity tariffs, all imply following the IMF line, even though these measures are detrimental to Pakistan’s industrial growth and are not likely to spur export growth, which is essential for bringing Pakistan’s balance of payments in order.



With the SBP rate at 10.5%, the commercial bank lending rates will range from 12% to 13.5% which is extremely expensive for any industry. Instead of making goods competitive for exports, the increase in gas and electricity tariffs will increase the cost of production. Depreciating the rupee to increase exports has not worked in the last 12 months even though the rupee has been depreciated at various stages. It is a fallacy to think that 32% depreciation in one year will help jump exports while increasing the cost of production at the same time. High rupee value is only a partial reason for the failure of export growth, major structural problems are the root cause of this failure. Major changes are required to produce goods exportable at competitive prices.

The textile industry had been the backbone of Pakistan’s exports for many years. But in the last few years, the government seems to have deliberately run the industry aground, resulting in major decline in textile exports. Also, due to lack of entrepreneurial imagination, the industry has remained stuck in basic exports ie yarn, grey cloth, etc and never went into a large-scale production of garments to penetrate the international market. Meanwhile, Bangladesh and Vietnam, the two countries that came from behind and which hardly produce any cotton, are exporting $50 billion a year in finished garments. There is an urgent need to revive the industry and substantial incentives need to be given to producers. Export of yarn and grey cloth should be limited so as to ensure the industry utilises these for manufacture of finished cloth and readymade garments for export. If Bangladesh and Vietnam can export $50 billion between them, Pakistan alone has the potential to achieve that level. However, higher interest rates and high electricity and gas tariffs will not help achieve that goal.

The government should realise that the IMF may be dragging its feet due to US interference. Nominating Pakistan as a country that does not protect its minorities and the extremely negative propaganda against Pakistan the US ambassador to UN are tell-tale signs. A letter from President Donald Trump may have been received positively in Pakistan, but it can be a double-edged sword. Seeking Pakistan’s help to settle the Afghan imbroglio may be seen positively in Pakistan, but in Washington it may be seen as a requirement of Pakistan and a diktat to follow, otherwise the two recent negative steps would not have been taken by the Trump administration.

The Fitch report indicates a delay in the IMF decision-making. This may be no accident, but an attempt by Washington to corner Pakistan even further to ‘do more’ for them in Afghanistan. It is not beyond the realm of possibility that the IMF declines Pakistan’s funding request. It would probably not say ‘no’ outright, but may delay the decision or add further stringent conditions that are not acceptable to Pakistan. The finance minister and the government should be ready for such an eventuality — just in case. If the IMF were to delay approval inordinately or make excuses that are tantamount to refusal, the government should be ready with a Plan B ie revalue the rupee and bring down the interest rates as well as gas and electricity tariffs in order to reduce the cost to the industry.

If, as the finance minister claimed earlier, the balance-of-payments situation is resolved, it may be worth considering dropping the IMF option altogether. The solution to what ails Pakistan’s economy lies in our own hands and not with the mediocre bureaucrats of the IMF. The FBR is the biggest hindrance to reducing the budget deficit. Sending letters to those who are already paying taxes and not going after several million people who do not file tax returns or pay no taxes is outrageous and an oxymoron. It is alleged that the FBR is probably the most corrupt organisation in Pakistan and that its officials probably collect as much for their pockets (if not more), than they collect for the state. Had the FBR done its job properly over the last several years, today Pakistan would have five to ten million filers and not a mere one million.



With the help of the NADRA database, non-filers can be detected from the use of CNIC cards in multi-billion-rupee property transactions that take place each year on which hardly any tax is paid. A complete restructuring of the FBR is required with the use of iron fist against corrupt officials and decent incentives for honest officers who increase filers and collection. Revenue collection by the FBR can be tripled in five years if there is reward and punishment. In that event, there will be no need to increase gas and electricity tariffs and there will be an opportunity to reduce GST and income tax rates to encourage individuals and corporations to pay taxes honestly.

Funding from the IMF will do no more than provide a band aid, so ideally such a treatment should be avoided. This government’s efforts are already under way to curb money laundering and increase home remittances through legal channels. All solutions lie within, what is required is a serious effort to lift the economy by increasing revenue collection, productivity and exports; reviving the struggling industries; and diversifying exports from traditional goods. China imports substantial quantities of food products each year. Pakistan being an agricultural country has hardly any share in it. Encouraging Chinese, local and other foreign investors to invest in food- and fruit-processing industries in the newly-created SEZs under CPEC could generate several billion dollars in exports to China each year. This is a low-hanging fruit that can start generating export revenues in a short time.

Published in The Express Tribune, December 19^th, 2018.

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