As the general elections are just around the corner, the economic battleground takes center stage with the International Monetary Fund (IMF) at the forefront of challenges awaiting the next government.
The initial task for the incoming government involves navigating the next review and securing the last tranche of the ongoing Stand-By Arrangement (SBA), followed by negotiations for a potential three-year programme. The complexity arises as the required actions diverge from the public claims made by both major parties, PMLN and PPP.
Despite caretakers’ persistent efforts, the third IMF review is unlikely to commence before the elections. The IMF mission is expected in late February or early March after the formation of the new government, with a staff-level agreement (SLA) projected by mid-March and the IMF tranche targeted for mid-April.
A critical point of contention in the upcoming review revolves around another revision of energy prices, encompassing both electricity and gas. Despite successive tariff hikes, the relentless growth of circular debt in power and petroleum sectors demands intervention to stem the flow. The SLA is likely to include a condition for an upward revision in gas and/or electricity prices before board approval.
The situation becomes intriguing as political leaders announce reduced or free electricity for consumers up to 300 units. Passing the increase onto other consumers or industries is challenging, given the already burdensome bills; industries cannot afford further cross-subsidization. This poses a political risk for a government lacking a genuine public mandate.
Despite these immediate challenges, negotiations for the next programme are inevitable. The previous government obtained the SLA as a transition, providing a temporary reprieve before tackling more intricate reforms.
Primary among the concerns for the new government is ensuring debt sustainability, a prerequisite for the programme’s board approval. Geopolitical factors that deemed debt sustainability with high risk at the time of signing the SBA must align with similar support from IMF board members to navigate this challenge.
Once debt sustainability is addressed, the next programme necessitates the removal of import restrictions that have now been in place for over eighteen months. This shift from explicit directives by the State Bank of Pakistan (SBP) to implicit instructions for banks managing forex inflows and outflows must conclude in the next programme, potentially impacting currency parity.
Furthermore, the overall trade regime is expected to liberalize. Conditions favouring protection (higher import duties) for select industries catering to domestic demand may be phased out. This move may pose challenges for industries perpetually in infancy, prompting the IMF to discuss the viability of those industries without protection. The Fund may also advocate for the removal of tax relaxations/subsidies for certain exporting industries.
The IMF is likely to push for an increase in the tax-to-GDP ratio to 14 percent in the next programme, urging a broader tax base including real estate, land, agriculture, and retailers/traders. The Fund may propose linking the NFC award with provincial taxation collections, particularly in areas with low collections under provincial jurisdiction.
On the expenditure front, the duplication of development spending between provinces and the federal level would be targeted for rationalization, alongside expediting State-Owned Enterprises (SOEs) reforms.
A contentious area for the IMF is the growing role of SIFC (Special Investment Facilitation Council), viewed as contrary to the principles of a level playing field. Questions arise about the disparity in rules governing various entities, prompting scrutiny from the Fund.
The path ahead for the next government is far from easy. Doubts regarding the fairness of upcoming elections, coupled with the perceived lack of public support for major parties add complexity. Potential rifts between federal and provincial governments on the conditions of the next programme further complicate the landscape. Successfully managing public sentiments while concurrently implementing necessary economic reforms presents a formidable challenge.
Copyright Business Recorder, 2024
Ali Khizar is the Head of Research at Business Recorder. His Twitter handle is @AliKhizar
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