Pakistan is currently under a Standby Arrangement (SBA) programme with the International Monetary Fund, which was negotiated in July 2023. As per a press release issued on March 20, ‘“The IMF team has reached a staff-level agreement with the Pakistani authorities on the second and final review of Pakistan’s stabilization program supported by the IMF’s US$3 billion (SDR2,250 million) SBA approved in January 2024… This agreement is subject to approval by the IMF’s Executive Board, upon which the remaining access under the SBA, US$1.1 billion (SDR 828 million), will become available.’”
While an SBA programme of the IMF is basically concerned with macroeconomic stabilization of the recipient country, Pakistan is likely to hold talks with the Fund for a more long-term natured extended fund facility (EFF) programme, which focuses on both stabilization, and economic growth aspects. The same press release by the IMF pointed out in this regard ‘The authorities also expressed interest in a successor medium-term Fund-supported program with the aim of permanently resolving Pakistan’s fiscal and external sustainability weaknesses, strengthening its economic recovery, and laying the foundations for strong, sustainable, and inclusive growth. While these discussions are expected to start in the coming months, key objectives are expected to include: (i) strengthening public finances, including through gradual fiscal consolidation and broadening the tax base (especially in undertaxed sectors) and improving tax administration to improve debt sustainability and create space for higher priority development and social assistance spending to protect the vulnerable; (ii) restoring the energy sector’s viability… (iii) returning inflation to target, with a deeper and more transparent flexible FX market supporting external rebalancing and the rebuilding of foreign reserves; and (iv) promoting private-led activity through the above mentioned actions as well as the removal of distortionary protection, advancement of SOE reforms to improve the sector’s performance, and the scaling-up of investment in human capital, to make growth more resilient and inclusive and enable Pakistan to reach its economic potential.’
Moreover, IMF’s mission chief Nathan Porter’s upbeat tone with regard to likely economic consequences for Pakistan of an expected new IMF programme were indicated in a March 20 Bloomberg published article ‘Pakistan gets initial approval for $1.1 billion IMF payout’ as ‘The new loan program will aim to permanently resolve Pakistan’s fiscal and external sustainability weaknesses and lay the foundations for sustainable growth, Porter said after discussions in Islamabad. While talks are expected to start in the coming months, the IMF said the key objectives may include broadening the tax base, improving debt sustainability and restoring the energy sector’s viability.’
Although the press release indicates ‘gradual’ fiscal consolidation, the problem with fiscal consolidation or austerity is that given a low strength of political voice in the country not allowing for adequate push for enhancing tax base, and the lack of political will historically, in general, to bring economic sectors into meaningful level of taxation given that these sectors form the voter base of one political party or the other, which they wish to appease, has meant rise in indirect, or consumption, taxes to meet the overall revenue targets.
The other reason why political parties have not significantly taxed for instance, sectors like agriculture, finance, property, or the retail sector is the presence of collusion of moneyed interests in these sectors, and their financial contribution towards political parties, especially in terms of election campaign funding of political parties, which in turn, when in power make compromised policymaking to perpetuate this extractive politico-economic institutional design. On the other hand, increase in consumption taxes basically burdens the middle- and lower-income groups the most since they spend most of their incomes on consumption.
In addition, lack of investment is likely to diminish overall economic resilience, especially in the much-needed areas of environment, and public health sectors, given the fast-unfolding existential threat of the climate change crisis, and the presence of the ‘Pandemicene’ phenomenon. So, while entering a new IMF programme is essential for the country, especially given the external financing needs of the country– especially when the credit rating, which although has improved noticeably recently, is still quite a long way to produce any meaningful interest for investors– it is important that the programme takes a non-austerity, counter-cyclical route
Hence, when IMF intends to see tax base increase in Pakistan, it will have to provide greater special drawing rights (SDRs) to the country in addition to those received under a programme, so that the country can adopt a non-austerity, counter-cyclical policy approach that will allow spending on economic empowerment of the citizens, so that over time this strengthens the political voice of the demos, which in turn push for needed reform policies that weakens the elite capture, established under extractive institutional design created by the collusion of the politico-economic elites.
Moreover, the goal of inclusive, resilient economy as aspired as an objective under a likely EFF programme requires taking a non-austerity based policy, whereby instead of primarily seeing inflation as mainly a monetary phenomenon, and therefore, adopting monetary austerity policies– that is increasing the policy rate– to squeeze aggregate demand, when inflation has clearly a strong aggregate supply determination, not only perpetuate high inflationary headwinds through buildup of the cost-push inflationary channel, but also hurts economic growth, which is needed for another programme goal of reaching greater debt sustainability; since, even as per the IMF’s own research, economic growth plays an important role in enhancing capacity to repay debt.
The same Bloomberg article highlighted the immense challenge facing the country in the shape of huge financing needs, as follows: ‘The South Asian country succeeded in averting a sovereign default last year, but it remains heavily reliant on IMF aid with $24 billion in external financing needs in the fiscal year starting July, about three times its foreign exchange reserves.’ Hence, there is a difficult debt sustainability issue facing the country, which requires greater economic growth so that higher levels of domestic production, and exports can bring ease towards the fiscal, and current account in terms lesser cost-push inflation from greater aggregate supply, and more inflow of dollars, while a higher policy rate negatively contributes to both economic growth, and debt sustainability consequences.
Also, a higher interest rate influences lack of economic inclusivity, since it is difficult to engage loanable funds at high cost of capital, and only the already well-established segments of the private sector mostly afford capital at higher costs; of the elevated magnitudes that the country is seeing over many months now.
In addition, lack of investment is likely to diminish overall economic resilience, especially in the much-needed areas of environment, and public health sectors, given the fast-unfolding existential threat of the climate change crisis, and the presence of the ‘Pandemicene’ phenomenon. So, while entering a new IMF programme is essential for the country, especially given the external financing needs of the country– especially when the credit rating, which although has improved noticeably recently, is still quite a long way to produce any meaningful interest for investors– it is important that the programme takes a non-austerity, counter-cyclical route.
