Implementing the IMF-supported programme

IMF Blog, July 5, 2019

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Implementing the IMF-supported programme

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Bibliographic details

• Authors: Jihad Azour
• Published: July 5, 2019

Economic situation and challenges

• Following several boom-and-bust cycles over the last 25 years, Pakistan’s economy is described as being in a challenging situation.
• Public-sector deficits and losses in state-owned companies ballooned in recent years as successive governments were unable to increase revenues.
• Government borrowing — both domestic and international — to cover fiscal gaps produced a heavy debt burden and a growing share of the budget for servicing debt.
• Interest payments alone now absorb around 25 per cent of the government revenue, leaving little for development spending (public health, education, infrastructure).
• The budget deficits, central bank focus on keeping a constant exchange rate, and lack of structural reforms led to:
  • a steady loss of competitiveness;
  • a surge in the trade deficit;
  • depletion of central bank reserves to precariously low levels to finance imports;
  • skewed growth toward consumption rather than productive investment;
  • a difficult business environment that discouraged investment and job creation and fostered a large informal economy.
• Without substantial policy change, risks cited include higher unemployment, higher inflation, and debt-servicing problems.

Government programme: objectives and design

• The government developed a comprehensive three-year programme to stabilise the economy and lay the foundation for robust and balanced growth.
• If implemented with full determination, the programme is intended to put the economy on a path to stability and prosperity.

Key priorities (three):

• First: Significantly improve revenues at federal and provincial levels to reduce the budget deficit by broadening the tax base while maintaining current tax rates.
  • Actions include elimination of exemptions and preferential tax treatment for many industries and individuals.
  • Noted fact: only 1pc of Pakistanis pay income tax.
  • Major effort planned to fight tax evasion and improve compliance, particularly to document the economy.
  • Additional revenue is intended to enable greater social and infrastructure investment.
• Second: Allow the exchange rate to be market-determined rather than continue borrowing resources to maintain a certain level that benefited imports and not local industry.
  • A flexible and competitive exchange rate is expected to support domestic producers and exporters by giving them fairer prices for their goods.
  • A market-determined exchange rate should help rebuild central bank reserves to provide a buffer against external shocks.
  • The new regime is expected to help develop financial markets, critical to supporting growth.
  • A strengthened and more independent central bank will guide monetary policy to contain inflation and reduce uncertainty.
• Third: Protect vulnerable groups by increasing spending on social safety nets.
  • The programme strengthens the Benazir Income Support Programme by increasing allocations by 80pc.
  • Finalise updates to the National Socio-Economic Registry and expand coverage of beneficiaries.
  • Expand the Conditional Cash Transfer programme and support to insulate the poorest households from adverse impacts of reforms.
  • The government has factored in continual reassessment (and upscaling, if needed) of social spending levels as policies take hold.

Structural reforms and institutional measures

• Parallel to the three priorities, the government will address long-standing structural issues that hinder growth, including reforms to strengthen government institutions and increase public trust over time.
• Measures to create a more transparent business and investment climate include:
  • streamlining regulations;
  • simplifying the process to pay taxes;
  • bringing greater transparency and accountability in public spending;
  • reforming the energy sector including the automatic implementation of regulatory decisions;
  • improving governance at state-owned enterprises.

External financing and international support

• The IMF, together with other international partners, is working closely with the government to implement policies and reforms.
• Key bilateral lenders, including China, Saudi Arabia and the UAE, are committed to providing financing to support the authorities’ efforts, amounting to over $38 billion during 2019-22.
• This level of support is intended to encourage additional financing and investment from the private sector.

Implementation risks, public trust, and outlook

• Public scepticism is acknowledged due to past IMF-supported programmes that were not completed or where policies were quickly reversed.
• Determined implementation to overcome entrenched resistance to reforms is considered critical to rebuilding public trust.
• The government has developed a plan adapted to Pakistan’s circumstances and has already begun implementing many policies.
• IMF assessment: the government’s commitment gives optimism that this time it will be different.

Jihad Azour, July 5, 2019. Originally published in Dawn, July 5th, 2019.