Successful completion of the International Monetary Fund (IMF) First Review for the 9-Month Stand-By Arrangement (SBA) stands in stark contrast to the protracted reviews of the previous $6 billion 39-month Extended Fund Facility (EFF) during 2019 to 2022. Despite consuming six finance ministers and multiple mini-budgets, the ill-fated EFF programme remained half-finished even after availing extension of several months after the due date.
Why did past reviews breed acrimony while this one sailed through smoothly? The answer likely lies in the government’s decision not to evade challenging issues but rather to confront them head-on this time. Thankfully, a capable team, led by the finance minister and comprising crucial ministries, particularly those pivotal for IMF-directed reforms like energy and privatisation, played a key role. Importantly, they diligently did their homework.
The issues were almost the same where the previous governments dithered. These included: a) allowing the domestic currency to float at the market-determined exchange rate; b) taking necessary steps towards making the energy sector financially sustainable by recovering costs and bringing circular debt under control; c) reducing public debt through constraints on government spending; d) improving revenue mobilisation; e) minimising the losses of state-owned enterprises f) maintaining a stringent monetary policy to curb inflation; and g) ensuring the timely disbursement of committed external bilateral financial support.
How did the interim government bring about significant change in a short time? The pivotal factor was adopting a comprehensive “whole of government approach” and using the clout of the Special Investment Facilitation Council (SIFC). This approach considerably streamlined bureaucratic processes and reduced the apprehension of potential harassment by the National Accountability Bureau (NAB). Other significant factors include easing fiscal and external pressures thanks to favourable weather, which enhanced agricultural output, particularly for crops like cotton, wheat, and rice. The stability of crude oil prices, hovering around $80 per barrel, in contrast to the previous year’s quarter when they exceeded $100 per barrel, offered substantial relief. Additionally, a gradual rise in official remittances, peaking at $2.5 billion over the past six months, played an important role in bridging economic gaps.
Recent governmental initiatives to combat smuggling and illegal foreign exchange trading have considerably curtailed currency speculation and played a pivotal role in stabilising the exchange rate. Concurrently, the implementation of earlier tax rate hikes enacted through the budget, combined with stricter enforcement measures, resulted in much higher tax collection, amounting to Rs2.023 trillion during the initial quarter (July-September) of the fiscal year 2023-24, which surpassed the IMF’s target of Rs1.977 trillion. Adding to these commendable developments is the nearly balanced current account, with a nominal deficit of $8 million recorded for September 2023. Closing this gap also helped the economy move in a positive direction.
These developments have led the IMF team to conclude that a recovery is underway. It is recommended that this momentum be continued in all areas already indicated in the agreement. These include the reduction of circular debt in energy, reducing the losses of state enterprises, and increasing tax collection to achieve a tax-to-GDP ratio of 15%. Other key recommendations relate to controlling public debt and exercising prudence in spending while ensuring that the needs of the vulnerable segments of society are given due importance.
The contrast between the last IMF programme’s final review and the current programme’s initial assessment imparts valuable lessons for future governments. Instead of delaying action on the agreed-upon benchmarks as happened previously, it is better to make full efforts to complete them as soon as possible. Seeking assistance from influential IMF members, like the United States, may not be the most beneficial approach for getting around the conditionalities. Additionally, steering clear of engaging in conspiracy theories is advisable for a smoother programme completion.
Given the economic recovery is still very fragile, Pakistan will likely need to seek another 3-4 years loan from the IMF. The conditions on which IMF insists are well-known. Initiating work on the next package immediately is also advisable. A team led by an experienced figure like Jehanzeb Khan, Special Assistant to the Prime Minister on Government Effectiveness, who possesses extensive experience in energy, taxation, and negotiations, could be tasked with leading the process. Hopefully, any such loan would be the final one, and incoming governments would exercise caution to avoid nearing a default situation, learning to live within their means.
The writer is a member of the Task Force on Tax and FBR Reforms. He has previously served as Pakistan’s ambassador to WTO and FAO’s representative to the United Nations in Geneva
Published in The Express Tribune, November 20th, 2023.