Daily Times

Pakistan’s current account deficit lies exposed: the country earns less and spends more. The double-whammy is that domestic expenditure is higher than domestic earnings and that the import bill is higher than export earnings. The current account deficit is now a perennial problem to reckon with.

On January 31, the mission of the International Monetary Fund (IMF) reached Pakistan to offer a $7 billion support package which was agreed upon in 2019 and signed by the then Finance Minister, Abdul Hafeez Sheikh. Currently, Pakistan is in dire need of cash, as the country has to service public debt of $270 billion, which is around 79 per cent of its Gross Domestic Product. The country’s foreign exchange reserves have scaled down to $3.5 billion, sufficient for just three weeks of import. If this were not enough, one dollar trades at 275 rupees. The irony is that, with devaluing local currency, debt in dollars increases proportionately.

The IMF’s main focus is on two targets: first, float the currency freely to let the rupee find its rightful place a vis-à-vis dollar in the market; and second, reduce expenses (or the current account deficit). So far, the bilateral talks have met the first target, which was a pre-requisite for opening the talks. Regarding the second target, the IMF is not coming soft on Pakistan either.

The import bill can be reduced by taking two measures: first, by banning the import of certain items abutting on luxury; and second, by increasing the import duty on certain other items to indirectly discourage their import. The next challenge is how to reduce the budgetary deficit. The IMF demands two main things: first, minimize or exclude subsidy (and even exemption), especially on utility items such as gas, oil and electricity, because subsidy tends to raise consumption; and second, raise the level of indirect taxes on these items, to collect revenue and depress consumption.

Pakistan is in dire need of cash, as the country has to service public debt of $270 billion.

In contrast to Pakistan’s economy growing below five per cent annually, the high serviceable debt means that Pakistan has to endure this state of agony for several years to come. Contrary to the past practice (say, before 2019), this is the second time when even friendly countries such as China and Saudi Arabia have advised Pakistan to deal with the IMF first and ask for their financial help later. Perhaps, they know that, without introducing reforms into the economy, Pakistan cannot repay loans. Just for seeking the disbursement of a $1.3 billion tranche in cash, Pakistan is now at the mercy of the IMF, which is pressing for economic reforms – to enable Pakistan to service the debt and seek other bilateral and multilateral financial help. With that, Pakistan’s past practice of seeking loans from one party to service the debt of the other party has ended. It also means that, in the future, Pakistan will have to interact with the IMF first before seeking any bilateral financial assistance from friendly countries.

Though reforms are a panacea to stave off the impending default, Pakistan is incapable of introducing requisite reforms on its own. This time, the IMF has provided the country with the required compulsion from outside to introduce the pending, long-awaited reforms. Pakistan has to reduce non-developmental expenditures. The problem is not that expenditures are rigid, but that certain vested interests surround these expenditures. To elaborate, over the years, some institutions have erected their supra-structures on these expenditures. Pakistan’s political system is weaker than the vested interests of these institutions. No political government dares annoy the perpetrators and protectors of vested interests.

In this age, social media is a blessing, as it presents what the mainstream media hesitates to present. For instance, on February 6, in his vlog, “Insight,” Moazzam Fakhar reports that the IMF mission has put four demands before Pakistan’s negotiating team. First, instead of using multiple accounts for transactions with the military (through the Ministry of Defence), Pakistan should use one account for ease of audit. Multiple accounts are used to run divergent projects such as numerous cadet colleges, besides medical and engineering colleges. This point is understandable because, as per the Higher Education Commission, in both public and private sectors of Pakistan, there are currently more than 130 colleges and universities offering BSc Engineering (mechanical and electrical) courses, and there are more than 110 medical colleges and universities which can meet the recruitment need of the military, instead of permitting it to run separate colleges on its own. By so doing, the military has not only overburdened itself with more responsibilities, but it has also overloaded the national exchequer needlessly. Nevertheless, the IMF permits that some time can be taken to convert multiple accounts into a single national account. It also means that audit of the military accounts would become the IMF’s future practice. With that, the maze of multiple accounts may disappear.

Second, contrary to the prevalent practice of paying pensions of retired military personnel from the civilian pension pool, pensions must be paid from yearly allocated defence expenditures. This point makes sense because defence expenditures are meant for meeting the expenses of defence including pensions. Over the years, the military has stretched its reach to run multiple businesses and various organizations, which employ retired military personnel, who draw a salary from the source, but they also seek pension from the civilian pension pool.

Third, contrary to the prevalent practice of exempting military-run businesses from taxation, all such businesses must pay due taxes. This point also makes sense because high inflation is making the lives of civilians miserable. The existence of any lopsided tax regime is an injustice to civilian taxpayers. Tax should be paid by all.

Fourth, reduce the defence budget by one-third – in Pakistani rupees, the current defence budget is Rs 1800 billion, which has to be reduced to Rs 1200 billion for the next fiscal year in June – to spare Rs 600 billion to reduce the current circulatory debt of electricity.

In short, the whole of Pakistan has been paying the cost of dilly-dallying reforms, whether the delay was done to appease the masses (the voters) or to soothe the military.

The writer can be reached at qaisarrashid @yahoo.com.