By Tirthankar Mitra
It is no secret that Pakistan economy is in doldrums and International Monetary Fund (IMF) has approved $ 7 billion Extended Fund Facility (EFF) for the beleaguered country following a staff level meeting with Islamabad. A United Nations report stated that Pakistan’s economy is to face global challenges this year, with a modest GDP growth expected.
The situation in Pakistan remains chaotic after 2024 elections. Economic data shows that the crisis will continue. Inflation stood at 29 per cent in January, according to Pakistan Bureau of Statistics. As the country’s foreign currency reserves continues to fluctuate, it needs $ 30 billion in annual external debt obligations.
The Pakistan government has predicted that inflation rate will remain between 12.5-11 per cent in June-July. Inflation rate of Pakistan was 9.8 per cent in August. The EFF is a 37-month long loan programme. It is the 25th such programme in Pakistan’s history.
Under the current borrowing programme, the latest IMF facility is the sixth. The facts do not paint a rosy picture of Pakistan economy even as Prime Minister Shehbaz Sharief said “God willing, this will be Pakistan’s last IMF programme”.
What the prime minister chose to overlook was that poor governance and imprudent fiscal management have long plagued Pakistan. But it was not a human factor but Covid-19 which struck Pakistan in 2022 leading to worsening of economic crisis when the country was still receiving funds under 2019 EFF.
There were other factors too whose combination sent the Pakistan economy on a downward spiral. They were Russia’s war with Ukraine and the devastating floods that rocked Pakistan in August that year.
The IMF decided in November 2022 to stop the disbursement of a pending $ 1.18 billion under the 2019 EFF due to the government’s unwillingness to meet certain demands. These included assurances on increasing energy rates, imposing more taxes and stopping artificial control on exchange rates.
It led to disastrous results. An already cash strapped Pakistan economy was pushed to the brink. Food and oil prices shot up, with Pakistan’s inflation peaking at 38 per cent in May 2023. The Pakistani rupee (PKR) fell about 20 per cent against the US dollar while the country’s foreign exchange reserves dwindled to under $ 3 billion in 2023.
In 2023, Pakistan secured a nine month $ 3 billion Stand By Agreement (SBA) from the IMF. Even as the interim government worked to ensure fiscal discipline, as of September 2024, Pakistan’s inflation rate stands at 7.5 per cent, its lowest in five years.
Supported by aid inflows of its allies like China, Saudi Arabia and UAE, Pakistan’s foreign exchange reserves stand at $ 9 billion. But it still has an external debt of $ 130 billion of which it needs to pay $ 90 billion over the next three years.
A look at the current financial aid package reveal that an EFF is a financial assistance package offered by IMF to countries facing severe balance of payments issues. These are due to structural weakness that cannot be resolved in the short term.
It is to help implement medium term structural reforms. In Pakistan’s case, these include strengthening monetary and fiscal policies including tax reforms, bolstering competition and rebuilding forex reserves. The package does not include servicing Pakistan’s internal and external debts. It equals 81 per cent of last year’s tax revenue.
There being no free lunches Pakistan has to undertake making sweeping tax reforms to widen its tax base. The government is committed to this in its budget for the current fiscal year. It hopes to collect up to $6.5 billion in additional taxes. Electricity prices have been increased by 51 per cent. It is expected to generate 64 per cent more revenue than through non-tax sources. These include petroleum levies and electricity tariffs.
The IMF also mandated balance in spending between Pakistan’s federal and provincial governments. Taxes would be imposed on agriculture and no new subsidies would be introduced.
The conditions imposed are harsh. There is concern about lack of political support to meet the requirements of the programmes which cannot be said to be popular which makes one wonder whether the sweeping tax reforms that the move will require, will indeed work. (IPA
Follow our WhatsApp channel
