Adherence to IMF deal is an imperative
Prime Minister Shehbaz Sharif while addressing a press conference stated that Pakistan has no other option but to implement the International Monetary Fund (IMF) programme as has become the norm, he criticised the Khan administration for breaching its agreement with the Fund. Three observations are critical.
First, the premier would be well advised to acknowledge that his appointed Finance Minister took two policy decisions in October 2022 that were at odds with the thrust of the Fund's reform agenda under the ongoing programme: (i) the approval of 19.99 rupee per unit of electricity to exporters that would cost the exchequer an additional 100 billion rupee unfunded subsidy; it must be borne in mind that the previous administration's 28 February relief package that envisaged unfunded subsidy on petroleum and products as well as electricity was a source of delay in the success of the seventh/eighth review; and (ii) the 1.8 trillion rupees agricultural package, a provincial subject after the 18th Amendment, that envisages loans to farmers that, if past precedence is anything to go by, is likely to be hijacked by the rich who have collateral rather than the flood-hit poor and subsistence farmers who have not.
The additional about 300 billion rupees was not itemized and one would assume that it is unlikely to be disbursed by either the federal government with extremely limited fiscal space or the provinces, especially Punjab and Khyber Pakhtunkhwa, where the government is held by the opposing party; and (iii) the widening gap between the interbank rate and the open market rate may be understating the external debt servicing/payment of principal as and when due costs; however, the economic team leaders apparently have undertaken no homework as to the cost of this policy that is reducing remittance inflows, a desired form of foreign exchange earnings, which in turn are contributing to shrinking foreign exchange reserves.
Secondly, it must be acknowledged that while a successful ninth IMF review with its accompanying tight monetary and fiscal policies would unleash inflation through raising electricity/gas prices as well as petroleum prices for starters (by raising the levy to the maximum allowed of 50 rupees per litre though the levy on petrol is already maxed out) and reversal or cessation of the above (i), (ii) and (iii) policy decisions yet the reforms are not only in Pakistan's economic interests but without the Fund package the rate of inflation would be at least 20 to 30 percent higher. In other words, the medicine (reforms prescribed by the Fund) are not worse than the disease that besets the economy today.
And finally, some in-house reforms that require out of the box thinking are urgently required. One would hope that the economic team leaders are considering measures to increase some leverage with the Fund to ease some harsh upfront conditions as well as in state-owned entities, pension reforms to reduce the bill in years to come which would without doubt gain some leverage with the Fund, sacrifice from all recipients of current expenditure (civilian and military) for at least two years through freezing pays and procurement though the ongoing military operations against terrorism must be fully financed, and last but not least, a gradual shift in the appallingly inequitable tax structure towards more direct taxes based on the ability to pay principal and not levying withholding taxes in the sales tax mode (a regressive indirect tax) and dishonestly crediting it to direct taxes.