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Some day our cheerfulness in adversity will come to colour. Pakistan has been a member of the International Monetary Fund (IMF) since 1950. We have been getting loans from the lender of last resort for over 73 years.

But the problems or challenges have remained unchanged. Due to consumption-driven instead of production-driven model of Pakistan’s economy and the consequent heavy dependence on imports, the IMF has been approached to provide loans to Pakistan 22 times, with its most recent programme being in 2019.

On July 2, 2023 a $ 3 billion Stand-by Arrangement (SBA) has been agreed and a staff level agreement reached amid general rejoicing.

The IMF works under a system. They have general principles applicable for all members. Their Articles of Association provide that:

“In particular, each member shall:

(i) endeavour to direct its economic and financial policies toward the objective of fostering orderly economic growth with reasonable price stability, with due regard to its circumstances;

(ii) seek to promote stability by fostering orderly underlying economic and financial conditions and a monetary system that does not tend to produce erratic disruptions;

(iii) avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members; and

(iv) follow exchange policies compatible with the undertakings under this Section” .

These are ‘principles’, not conditions, decided by them. If a country wants to be a member of the club, which requires a suit and tie at a dinner table, the member does not have the option for a ‘sherwani’ or a ‘dhoti’. However, we want to be around the dinner table in ‘dhoti’.

From Pakistan’s perspective the primary prescriptions laid down by IMF in almost all the programs are:

• Increase tax collection and bring the same to around 15% of GDP;

• Maintain policy rate in a manner that inflation is curbed;

• Keep exchange rate unhindered without any intervention by the Central Bank and ensure independence of Central Bank on policy matters;

• Reduce subsidy on power sector; and

In the following paragraphs it will be explained with examples how prescriptions were termed as conditions which had been leading to punishment to this nation for the 22nd time. It is feared that this misinterpretation of principles shall continue, unless we change.

Tax Collection
Prescription                  Application
Increase tax to GDP ratio     1.Retailers,
to 15% by bringing all        Arthritis, Real Estate and
sectors to the tax system     Agriculture Production and
and introduce an across       trade sector remains out of tax
the board consumption         system by way of clearly
tax by the name of            designed policy of the
Sales Tax.                    respective governments;
                              2.VAT does not operate and
                              it becomes a tax, effectively a
                              duty only on import and
                              manufacturing not achieving
                              the desired economic
                              3.The shortfall in the desired
                              ratio of 15% is attempted to be
                              filled by taxing those already
                              taxed. The result is that at
                              present the person investing
                              through a holding company
                              is subject to a tax to the
                              extent of 70% of income.
                              4.The government is happy to
                              collect 22% sales tax on sales
                              to unregistered person
                              knowing well that such person
                              are to be registered.
Policy rate
Prescription                  Application
Policy rate to be             1.The composition of the
maintained in the manner      cash economy leading to food
that there is no inflation.   price inflation is over 90% of
Money supply to be            the market. Resultantly there
curtained. Present rate       is no effect of increase in the
is 22% which is the           policy rate on inflation. In
highest in the world.         effect the result is in the
                              opposite order. The cost of
                              financing increases the price
                              therefore as discount rate
                              increases the prices of
                              agro-food items increases;
                              2.Banks who lend to the
                              government make more
                              money and government have
                              to incur more fiscal deficit
                              adding to problems not
Market Exchange Rate and Independence of Central Bank
Prescription                  Application
1. Market based               1. A self nurtured animal by
exchange rate;                the name of 'exchange
2. Independent                companies' have been allowed
Central Bank.                 to operate that facilitate a
                              large number of off-market
                              transactions of
                              'Hundi/Hawala' that distorts
                              the market equilibrium.
                              2. Lack of transparency in the
                              exchange market and non
                              traditional management of
                              demand for foreign exchange
                              such as that being applied
                              nowadays for Letters
                              3. All the appointees to the
                              Board of Central Bank are
                              nominees of the federal
                              government on political basis
                              without any parliamentary or
                              any other kind of nominaton
                              process or scrutiny;
                              4. Independence of Central
                              Bank is only in theory as one
                              Central Bank Governor whose
                              term was not completed was
                              effectively asked to leave on
                              the change of government.
Energy Subsidy
Prescription                  Application
1. Reduce subsidy in the      1.No reduction in line losses.
power sector and settle       In fact there is an increase;
the circular debt             2. No privatisation of Discos.
(circular subsidy). This      In fact chances of
effectively required:         reacquisition of KE by
a. Decrease in line losses;   the government;
b. Privatisation of Discos;   3. No settlement for
c.?Handling IPPs              subsidy on natural gas for
                              fertiliser industry;
                              4. IPPs continue to enjoy
                              17% return on fixed
                              investment in $ .

In the aforesaid paragraphs an effort has been made to explain a very complicated and mostly misunderstood subject in simple language. It is apparent that the mantra of IMF conditions will continue to be used in future as well to transfer blame and make people suffer.

The real issue is to understand that a prescription can only provide positive results when it is used for the purpose that it is meant for.

It increasingly appears that both the IMF and Pakistan (the latter whether under military or civilian governments) know each other well. The multilaterals support us for the reason that they do not want a country of 240 million with nuclear arms to fail. However, in this tacit understanding, we the people of Pakistan are facing consequences of the profligacy of our ruling elite and the criminal insistence on living beyond means again and again.

Do we have a choice? Yes, we do.

We have to quit our habit of living beyond means as a nation, recognise and address the fault lines besetting our country, substantially improve our work ethics, participate in regional trade for economic benefit while maintaining our principled position on territorial disputes and maintain consistency in our economic and related policies.

Copyright Business Recorder, 2023


Comments are closed.

Abdullah Jul 14, 2023 08:27am
How about we tax the rich more and tax the luxuries provided for the rich.
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Ahsan Kamal Jul 14, 2023 10:46am
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Syed Arsalan Ali Jul 14, 2023 12:23pm
4. Independence of Central Bank is only in theory as one Central Bank Governor whose term was not completed was effectively asked to leave on the change of government. This point is wrong. Reza Baqir's term of 3 years was completed. The 5 Year Term came into effect from the next appointment which is Jameel Ahmed. Moreover, it seems there's no proof reading of the published content as there are frequent spelling mistakes. In the tax to GDP Portion in the table above, Arthis (middlemen) is spelled as Arthritis.
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Nadeem A Jul 14, 2023 02:41pm
@Syed Arsalan Ali, I don't think it is a typo, the word is deliberately put in there emphasizing the pain they perpetrate on poor peasants. They are rightly termed as a disease (Arthritis).
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Shahzad Ahmed Jul 14, 2023 10:02pm
Self explnatory article explaining the Pakistan economic situation trajectory from strong to worst level, we remain responsible for the self destruction of our economy and we can recover to the best level provided if we sincere to do.
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Naseer Chaudary Jul 15, 2023 12:42am
Thank you very much for writing a good advice to us. Your efforts are commendable.
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Naseer Chaudary Jul 15, 2023 12:43am
Good work.
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Awami Jul 15, 2023 08:59pm
@Ahsan Kamal , Taxing real estate can lead to nosediving of foreign investments by nonresident Pakistanis. Do any body want to damage foreign investment coming to the nation ?
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Abdul Jul 16, 2023 07:56am
Real Estate and Agriculture should be required to create investment accounts that invest in industry (especially export oriented) and infrastructure....or pay an equivalent amount in property tax and penalty. These sectors make up a large portion of static wealth that does little to create future growth in the economy.....only drive consumption through the wealth effect. With out these structural reforms, the bailout cycle cannot be broken.
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Fatima Jul 16, 2023 09:06pm
22% is not highest in the world, instant loss of credibility, shame as message is goid
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