The successful completion of the International Monetary Fund’s (IMF) first review of the 9-month Stand-By Arrangement (SBA) is in stark contrast to the protracted assessments of the previous 39-month Extended Fund (EFF) of $6 billion during 2019 to 2022 Despite consuming six finance ministers and multiple micro-budgets, the ill-fated EFF program remained half-finished even after being extended several months past the end date.
Why did previous reviews cause outrage while this one went smoothly? The answer probably lies in the government’s decision not to shy away from difficult issues but rather to face them head-on this time. Fortunately, a capable team, led by the finance minister and comprising critical ministries, particularly those vital to IMF-led reforms such as energy and privatisation, played a key role. The important thing is that they did their homework diligently.
The issues were almost the same where the previous governments were ousted. These included: a) allowing the domestic currency to fluctuate with the exchange rate determined by the market. b) taking the necessary measures to make the energy sector economically viable by recovering costs and controlling cyclical debt; c) reducing public debt through restrictions on government spending. d) improving revenue mobilization. e) minimizing the losses of state-owned enterprises f) maintaining a tight monetary policy to curb inflation. and g) ensuring timely disbursement of committed external bilateral financial support.
How did the transitional government bring about significant changes in a short period of time? The key factor was the adoption of a comprehensive ‘whole of government approach’ and the use of the influence of the Special Investment Facilitation Council (SIFC). This approach significantly streamlined bureaucratic processes and reduced the perception of potential harassment by the National Accountability Bureau (NAB). Other important factors include the easing of fiscal and external pressures thanks to favorable weather conditions, which boosted agricultural production, particularly for crops such as cotton, wheat and rice. The stability of crude oil prices, hovering around $80 a barrel, in contrast to the previous quarter when they exceeded $100 a barrel, provided substantial relief. In addition, the gradual increase in official remittances, which peaked at $2.5 billion in the last six months, played an important role in bridging the financial gaps.
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Recent government initiatives to combat smuggling and illegal foreign exchange trading have significantly curbed currency speculation and played a key role in stabilizing the exchange rate. At the same time, the implementation of earlier tax rate hikes enacted through the budget, coupled with stricter enforcement measures, led to a much higher tax collection of Rs 2.023 trillion in the first quarter (July-September) of the 2023-24 financial year. which exceeded the IMF target of Rs 1.977 trillion. Adding to these laudable developments is the near-balanced current account, with a nominal deficit of $8 million recorded in September 2023. Closing this gap has also helped the economy move in a positive direction.
These developments led the IMF team to conclude that the recovery is underway. It is recommended that this momentum continues in all areas already mentioned in the agreement. These include reducing the cyclical debt in energy, reducing the losses of state-owned 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 due consideration is given to the needs of vulnerable sections of society.
The contrast between the final review of the latest IMF program and the initial assessment of the current program provides valuable lessons for future governments. Instead of delaying action on agreed benchmarks, as was the case previously, it is better to make full efforts to complete them as soon as possible. Seeking help from influential IMF members such as the United States may not be the most beneficial approach to bypass conditionality. In addition, it is recommended to avoid getting involved in conspiracy theories for the smooth completion of the program.
Since the economic recovery is still very fragile, Pakistan will likely need to seek another 3-4 years of IMF loan. The conditions that the IMF insists on are well known. It is also recommended that you immediately start work on the next package. A team led by an experienced personality like Jehanzeb Khan, Special Assistant to the Prime Minister on Government Efficiency, who has extensive experience in energy, taxation and negotiations, could be tasked with leading the process. Hopefully, any such loan will be final and incoming governments will be careful to avoid approaching a state of default by learning to live within their means.
The author is a member of the Task Force on Tax Reforms and the FBR. He has previously served as Pakistan’s Ambassador to the WTO and FAO Representative to the United Nations in Geneva
Published in The Express Tribune, November 20u2023.
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