Finally Pakistan is going to seek another bailout package from IMF (International Monetary Fund). The current government is facing a lot of criticism due to this decision. One way or another the PTI led federal government has provided a valid ground to the political and economic critics. Since, last year everyone has been anticipating a bailout package. The increasing current account deficit and trade gap in the last one and a half year, has given a very strong foundation for the bailout package. But luckily or unluckily, Pakistan’s political leaders love to do politics everywhere except in the parliament.
There are two aspects to this criticism. Firstly, PTI built its election campaign on an anti IMF slogan. The current Prime Minister, Imran Khan, often said in his speeches that he would prefer suicide over going to IMF, and we will restructure the whole economy in the first 100 days. These are some very tough statements.
Practically it was impossible to avoid IMF. Imran Khan and PTI should explain these facts to the people during their election campaign, so that people can get themselves ready for hard times. Secondly, the decision has been taken after wasting almost a month. Fast friends of Pakistan like Kingdom of Saudi Arabia and China can invest, but bailing out an economy is something different. Due to this late decision making the stock market has been crashed and eventually the forex market also faced some serious shocks as the dollar to rupee exchange rate depreciated 9.30 rupee overnight.
Pakistan joined IMF in 1950, and since 1959, it has been doing short and long term financing agreements with IMF. In Ayub Khan’s era, Pakistan went to IMF for first time but didn’t use the loan. Then in Bhutto’s era Pakistan approached IMF for a short term financial management. The first long term arrangement was done in the name of structural adjustment program in the year 1988. However since then every government one way or another has approached IMF to cover up the gap between revenues and expenditures. Interestingly, none of these programs were completed in their true spirit. The loan was drawn and dollars were used inefficiently.
In Pakistan we always criticize IMF, but rarely focus on our own micro and macroeconomic mismanagement. With every bailout package the monetary fund gives a structural adjustment program. The basic purpose behind this structural adjustment program is to rectify the economic problem within the economic system of the nation, so that after the completion of the program, the country can survive on its own. For instance in the case of Pakistan, the basic aim of the structural adjustment program is to increase the tax revenue and decrease the trade gap. Now if we come towards tax revenue, we know that Pakistan is a nation with a very low tax to GDP ratio of around 10 percent. IMF suggests an increase in taxes, in response to this the governments instead of increasing the tax net, imposes indirect taxes with the help of GST (general sales tax) and VAT (value added tax) systems. This does increase the tax revenue but with this step the inflation also starts rising.
In the case of Pakistan, the basic aim of the structural adjustment program is to increase the tax revenue and decrease the trade gap. Now if we come towards tax revenue, we know that Pakistan is a nation with a very low tax to GDP ratio of around 10 percent. IMF suggests an increase in taxes, in response to this the governments instead of increasing the tax net, imposes indirect taxes with the help of GST (general sales tax) and VAT (value added tax) systems
IMF didn’t suggest increase in gas and electricity prices or removal of subsidies. The basic issue is the weakness of tax system due to which the almost 60 to 70 percent of revenue has been collected through indirect GST and gas or electricity bills are an easy way to impose GST efficiently. Privatization of state owned enterprises is also a suggestion from IMF. Because most of these state owned organizations are incurring losses, and every year federal government has to intervene with billion of rupees to run them. This does effects the expenditures and they rise.
The IMF gives loan in terms of SDR. Special drawing rights (SDR) are supplementary foreign-exchange reserve assets defined and maintained by the International Monetary Fund (IMF). Currently, one SDR is equal to 182 Pakistani rupees. This does explain the weakness of the economy. The total amount of borrowing in the last 50 plus years is 4273 million SDR. It looks like once again, a structural adjustment program will be signed to repay the previous loans. Almost two years ago, the ex-prime minister Nawaz Sharif and the finance minister Mr Daar very proudly said we have completed the program and now in the near future Pakistan will not be required any kind of financial assistance from IMF. But it was nothing more than a political statement. The status quo has prevailed. Program was completed successfully but nothing concrete has been done to restructure the loop holes in the economy to avoid the ever increasing current account deficit and trade gap. Now it’s the need of the hour that the current government should work on the implementation of these structural transformations. Tax reforms and privatization of the state owned organization which are incurring massive losses should be done on priority basis. The political leadership from the treasury and opposition benches must remember the fact that now it’s difficult for Pakistan to survive the politics in economics. We have heard that democracy is the best revenge, don’t let us say that politics has become a curse for the economy.
The writer can be reached at [email protected]
Published in Daily Times, October 17th 2018.