Harsh measures are in question

KARACHI:

The International Monetary Fund (IMF) team did its homework and provided some policy prescriptions for the government. On June 7, banker-turned-financial czar Muhammad Aurangzeb will deliver the first speech of the coalition government headed by Prime Minister Shehbaz Sharif. While non-cabinet political parties may not support the tough fiscal measures to be announced, Pakistan has little or no choice but to start working from the first year. An upfront set of conditions is apparently a prerequisite for an IMF bailout.

The matter may be discussed at the IMF Executive Board level to decide Pakistan’s debt sustainability, delaying the Staff Level Agreement until certain events are met. Previously, Pakistan had to secure commitments from bilateral friends to continue their aid, without which debt repayment was impossible. Now, a tougher budget aimed at broadening the tax base, penalizing non-filers, removing exemptions, burdening the salaried class, targeting the real estate and retail sectors and curbing discretionary spending is on the cards. street

Likewise, rising gas and electricity tariffs, getting parliamentary approval for the budget, possible currency devaluation, continued tight monetary policy and some support from China for debt restructuring of independent power producers (IPPs) and bilateral loans are justified as prerequisites. Secret trips by top Pakistan Muslim League-Nawaz (PML-N) leaders, followed by ministerial-level engagements and a possible prime ministerial visit, are needed to convey Pakistan’s inability to repay Chinese debt using IMF/Western lender dollars. Some commitments require quiet diplomacy without upsetting friends and making public headlines about the impact of Belt and Road Initiative (BRI) lending on emerging markets.

While a CPI reading of 13-14% in May could increase the likelihood of a rate cut, fears of second inflation following tariff hikes, currency devaluation and fiscal fiscal measures could delay a cut in the policy rate from state. Bank of Pakistan (SBP). The authorities had different views on the cost of servicing the debt in the outgoing financial year.

So the fiscal deficit target of 6.8% next year, together with a primary surplus of 1%, means that almost 8% of GDP (nearly 70-80% of tax revenue) goes to debt service. To grow the economy and reduce the impact of debt, long-term interest rates must fall to single digits. Money supply control, government borrowing, increasing tax to GDP ratio, increasing exports, curbing imports and demonetisation of Rs 1000/5000 notes should be done to help private and public accounts.

In the past, the IMF has been lenient in offering programs with softer targets, without preconditions and waivers from missing benchmarks. This time, Aurangze’s team has clear objectives to comply with: reducing cyclical debt, privatizing DICO, increasing tax revenue, attracting mutually beneficial foreign investment and strengthening the export base. Not a single day should be lost in achieving these strategic objectives which are vital for the economic survival of the country. There has been a strong push by the Special Investment Facilitation Council (SIFC) and the cabinet to restructure the Federal Board of Revenue (FBR), use diplomatic contacts to attract Gulf Cooperation Council (GCC) investment and privatize Pakistan International Airlines (PIA).

This is the beginning of a turnaround if executed wisely. This government has 18 quarters of economic policy making that can be used to accelerate tax expansion, develop export-oriented industries, improve law and order to provide ease of doing business for investors, cut red tape and digitize of government intervention in economic generation. Recruiting top talent to overhaul the skills of policymakers and continually reinvest in the next leg of growth – startups, technology, artificial intelligence, research and development and top-notch primary and secondary education – along with redesigning the railways and getting rid of DISCOs are vital.

We have seen numerous changes in the management and boards of DISCOs that have failed to reverse the losses that are now eating a significant portion of taxes from the honest and poorer lower and middle class. The real tax contributors in Pakistan are the lower to middle class as most taxes are raised indirectly on consumption. The government needs to reduce taxes for employees and Small and Medium Enterprises (SMEs) to ensure compliance and create jobs, while targeting the retail, agriculture and real estate sectors. Taxes should be progressively increased on second, third and subsequent purchases or possessions of real estate to keep land prices low and incentivize construction.

As always, the first and second years of government are likely to be difficult in terms of relief, but this is the time to steer the boat in different directions to address the financial shortfalls. In my opinion outright privatization of DISCOs and steel mills should be the next objective instead of offering projects with 25-40% Internal Rates of Return (IRR) to foreign investors. Better to do it yourself or offer structured notes at 10-12% dollarized returns to overseas Pakistanis who end up keeping 80% of their wealth in rupees anyway. Unfortunately, leading global investors from Western economies have not spent much money in Pakistan in the last decade. We have already tapped the Chinese appetite and now we are looking to tap the Arab countries. One more episode of bad governance, and all hell will break loose.

THE AUTHOR IS AN INDEPENDENT FINANCIAL ANALYST

Published in The Express Tribune, June 3^rd2024.

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