Implementing the IMF-supported programme

Jihad Azour

July 5, 2019

FOLLOWING several boom-and-bust cycles over the last 25 years, Pakistan’s economy is once again in a challenging situation. Public-sector deficits and losses in state-owned companies ballooned in recent years as successive governments have been unable to increase revenues.

Government borrowing — both domestic and international — to cover the fiscal gaps gave rise to a heavy debt and a growing share of the budget for servicing debt. Interest payments alone now absorb around 25 per cent of the government revenue, leaving the government with little money for much-needed spending on development, like public health, education or infrastructure.

The budget deficits together with the central bank’s focus on keeping a constant exchange rate and the lack of structural reforms, led to a steady loss of competitiveness and a surge in the trade deficit. Despite the foreign borrowing, the central bank had to dip into its reserves to finance imports, dropping to precariously low levels. Weak and unbalanced policies skewed growth towards consumption, while the difficult business environment continued to discourage productive investment and job creation while fostering a large informal economy.

Without a substantial change of direction, financial and economic stability was at risk, causing higher unemployment, higher inflation and debt-servicing problems.

The government’s programme is the right response to Pakistan’s urgent economic needs.

To address these challenges, the government has developed a comprehensive three-year programme to stabilise the economy and lay the foundation for robust and balanced growth. If the programme is implemented with full determination, it will help put the economy on the path to stability and prosperity.

The government’s programme focuses on three priorities. First, significantly improve revenues at federal and provincial levels to reduce the budget deficit, by broadening the tax base while maintaining the current tax rates. This necessitates the elimination of exemptions and preferential tax treatment for many industries, and individuals since only 1pc of Pakistanis pay income tax.

In addition, a major effort is needed to fight tax evasion and improve compliance, in particular to document the economy. The additional revenue generated from these policies will enable greater social and infrastructure investment critical for Pakistan’s development.

Second, allow the exchange rate to be market-determined, as has been done by so many emerging markets, rather than continue borrowing resources to maintain a certain level that only benefited imports and not local industry. A flexible and competitive exchange rate will support domestic producers and exporters by giving them fairer price for their goods — it will also help rebuild central bank reserves to provide a buffer against external shocks. The new regime will also help develop the financial markets, which is critical to supporting growth. A strengthened and more independent central bank will guide monetary policy to contain inflation, which hurts disproportionately the poor, and reduce uncertainty.

Third, protect vulnerable groups by increasing spending on social safety nets. The government’s programme strengthens the Benazir Income Support Programme by increasing allocations by 80pc, finalising the updates on the National Socio-Economic Registry and expanding coverage of beneficiaries. The Conditional Cash Transfer programme will also be expanded — as will be support to insulate the poorest households from any adverse impact of these necessary reforms. The government has factored in continual reassessment (and upscaling, if needed) of social spending levels as policies take hold.

In parallel with these policy priorities, the government will make a concerted push to address long-standing structural issues that perennially hold back economic growth. This includes reforms to strengthen government institutions and increase the trust Pakistanis have in them over time.

A key element to this much-needed trust is creating a more transparent business and investment climate, including by: (a) streamlining regulations; (b) simplifying the process to pay taxes; (c) bringing greater transparency and accountability in public spending; (d) reforming the energy sector including the automatic implementation of regulatory decisions; and (e) improving governance at state-owned enterprises.

The IMF, together with other international partners, is working closely with the government to implement these policies and reforms, sending a strong signal to the international community that underlying issues can be resolved and economic prospects can be improved. It is very welcome that along with the Fund and other IFIs, key bilateral lenders, including China, Saudi Arabia and the UAE are also committed to providing financing to support the authorities’ efforts in reforming the economy, amounting to over $38 billion during 2019-22. This level of support should also encourage additional financing and investment from the private sector.

The people of Pakistan might understandably retain scepticism about the programme. Several past IMF-supported programmes were not completed in the past or when completed the policies were quickly reversed. Which is why, a determined implementation to overcome entrenched resistance to reforms will be so critical to rebuilding public trust. The government recognises this; it has developed a plan that is adapted to the unique circumstances of Pakistan and has already begun implementing many of the policies. We, too, recognise this. The government’s commitment gives us optimism that this time it will be different.

Jihad Azour is director of the Middle East and Central Asia Department, International Monetary Fund.

Originally published in Dawn, July 5th, 2019:

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