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.
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 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
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
'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.
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
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