We have been on the IMF path 22 times and every time, the country’s economic managers were stoned by the critics of the IMF programme’sconditionalities.
This time, IMF has made it clear that the staff-level agreement of $6 billion is subject to “timely implementation of prior actionsand confirmation of international partners’ financial commitments.” That means that FBR will have to show how it wants to increase the revenue in the next budget. The State Bank will have to ensure that the rupee-dollar parity is now being set on the basis of the free market float and increase the primary lending rates. This also explains the hurry in letting the freefall of the rupee against the dollar and the rise in the already high lending rates by the State Bank.
What does IMF tell us or, as a critic would say, force down our throats:
That the country should spend as much revenue as it collects, that the country should try to balance its current accounts so that it stops living beyond its means and the deficit should be bridgeable through its own resources.
To achieve these ends, the IMF wants us to raise our revenue income by Rs700 billion in the first year of the 39-month-long programme. The IMF will closely monitor the implementation of these reforms on a quarterly basis. In a situation of default in the implementation process, the IMF can stop the next tranche of the loan to Pakistan. This means that the promised $6 billion would not flow as a lump sum amount. It will be paid in several installments.
If we go by the IMF’s recipe, bit by bit it wants us to raise the primary interest rates and also to let the dollar-rupee parity be determined by the market forces. All this is likely to result in the contraction of the economy – signs of which are already showing
According to Finance Adviser DrHafeez Shaikh, Pakistan has to bridge a financing gap of $12 billion to meet its debt obligations for next year. But at present, the $6 billion will come from the IMF but that is in installments spread over three years. To bridge the additional gap, Pakistan will have to raise money through World Bank and ADB and Islamic Development Bank. The problem, however, is that these institutions lend for development and not to bridge the current account deficit. What Hafeez Shaikh did not explain is how he would bridge the yawning gap.
If we go by the IMF’s recipe, bit by bit it wants us to raise the primary interest rates and also to let the dollar-rupee parity be determined by the market forces. All this is likely to result in the contraction of the economy – signs of which are already showing.
According to the latest available figures, economic growth is expected to remain at 3.3% of the GDP during the current fiscal year (2018-19) – the lowest in eight years. Now the question is, how can Pakistan collectrevenues of at least over rupees one trillion by the end of the programme, particularly, in a shrinking economy?
The shrewd new FBR chairperson says that he will create a culture in which the taxpayers are respected and new taxpayers are not afraid to come into the tax net. First we have to understand why people do not pay taxes in Pakistan. The problem is that most of them don’t find the state meeting their basic needs. Hence, they want to save money for their illness, children’s education, their period of unemployment and old age expenditure.
He wants people to collect receipts when they go to a doctor or restaurant to create a culture of documentation of the economy. This is only possible if they can claim a small portion as expenditure when they file their returns. People’s vested interests have to be created in documenting the economy. The size of the undocumented economy has rose manifold and is now estimated to be almost 100% of the GDP. The parallel or undocumented economy grows at a faster rate than the real economy because it is not fettered with any government controls.
Another major factor why people don’t pay taxes is the instability of the country. People are always at the quandary on what will happen next.
Although the IMF press release rightly points out that “Pakistan is facing a challenging economic environment, with lackluster growth, elevated inflation, high indebtedness, and a weak external position”, growth is likely to remain stunted if we follow the IMF path without getting any relief.
The press release states that “this reflects the legacy of uneven and procyclical economic policies in recent years aiming to boost growth, but at the expense of rising vulnerabilities and lingering structural and institutional weaknesses.” (emphasis added)
Another major difference in this package is that it will also monitor Pakistan’s adherence to the FATF’s conditions.
Whatever IMF has suggested, amounts to saying that Pakistan should curtail its development and non-development budget as it is not possible for Pakistan to default on the debt servicing. After debt servicing, which is the single major head in the non-developmental budget, Pakistan’s establishment will not let its selected government cut back on the defence budget (which is almost over 21% of the total budget outlay) because of its adversarial relations with India and Afghanistan.
In this whole story, what is missing is how much Pakistan would get as foreign direct investment from the much-hyped CPEC package as it is not shown separately by the State Bank or government accounts. The question remains open as there is no transparency regarding the CPEC inflow of FDI.
The writer is the author of What’s wrong with Pakistan?
He can be reached at: [email protected]