## Implementing the IMF-supported programme

_IMF Blog, July 5, 2019_

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## Bibliographic details
- Authors: Jihad Azour
- Published: July 5, 2019

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### 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.*

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_Source: https://www.imf.org/en/blogs/articles/2019/07/05/vc070519-implementing-the-imf-supported-programme_