The IMF reviews are pending. In April, based on exceptional global economic circumstances, IMF gave $1.4 billion under Rapid Finance Instrument (RFI). Staff review report was published mid-April. Now covid-related economic issues are subsiding in Pakistan, and the validity of the IMF staff report is expiring after six months. In absence of fresh review, other multilateral flows may dry up too.
The talks with the IMF team and authorities are ongoing. Both parties are confident that the case would be put up to the IMF board after review. The question is when, and what is on the to-do-list. Earliest could be now in December and it will depend upon a few steps to be taken by the government.
There are issues pertaining to tax reforms (and workable plan for attaining targets), power tariffs (and workable plan to reduce unabated energy circular debt), and autonomy of key regulators – SBP and NEPRA. The issue for the authorities in Islamabad is that new taxes (or ending exemptions) and/or increase in power/gas tariffs would not be welcomed by population at large (surprise, surprise!). Already, high inflation is breaking the camel’s back. With political temperature heating up for other reasons, any unpopulous measures can add fuel to the fire.
Having said that, what the IMF is demanding is in not unreasonable. In fact, all matters raised by the Fund are challenging desired sustainable economic recovery path. But since, some are benefiting for one reason or the other at the expense of the economy at large, these would create noise against much needed reforms. Not to mention, disgruntled opposition would not miss this opportunity to criticize government.
What this government is missing for the past two years is a proper communication strategy. A narrative to sell these reforms as imperative for long term sustainability of the economy. The government needs to clarify the timings – as delaying reforms would increase the cost of these. The more we delay, the worse it is for the country.
For example, aggregated energy sector subsidies in the past thirteen years are Rs3.5 trillion and since it is part of fiscal deficit, there is approximately an additional cost of Rs2.5 trillion paid on debt servicing. Had the tariffs being increased in time, the fiscal saving would have been higher. The fiscal risk and borrowing costs would have been lower. This is just one example, there are many others which are relatable.
The argument holds true for taxation as well. There is additional cost of tax expenditure in terms of debt servicing for incremental debt acquired in opportunity loss. More the reforms are delayed, higher is the cost to pay. This energy circular debt issue is building up for over a decade. Now it is reaching at a point of inflection. This could break the financial and fiscal systems of the country. The story of growing fiscal deficit is not different.
Government has to work on it. But at this point, government may not opt for immediate energy price increase or in terms of slashing tax exemptions or introducing new taxes. Some say a workable plan may be sufficient for the IMF at this point, given the government works on autonomy of SBP and NEPRA. By these, the regulators’ powers will increase, and much needed economic steps could be depoliticized. There would be never a good time to do it, and there is never a better time than today. Just do it.