PBC calls for ‘5-year’ IMF programme in letter to lender

Pakistan Business Council (PBC), the country’s largest private sector advocacy platform, has called for “a longer, five-year term” programme with the International Monetary Fund (IMF), as the current programme is scheduled to expire in April.

In a letter dated March 1, 2024 and addressed to Esther Perez Ruiz, Resident Representative in Pakistan for the IMF, PBC said it believes that the front-loading of targets given by IMF stems from the relatively short-term programmes that have been offered to Pakistan.

“For this reason, we suggest that the 24th programme be of a longer, five-year term,” it said.

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Pakistan averted default last summer thanks to a short-term IMF programme.

Ahead of the bailout, the South Asian nation had to undertake a slew of measures demanded by the IMF, including revising its budget, a hike in its benchmark interest rate, and increases in electricity and natural gas prices.

In its letter, the PBC said: “As the new government takes shape, its major objective on the economy will be to negotiate a fresh, 24th IMF Programme.”

PBC was of the view that the reason why the previous 23 programmes failed to lead to sustainable reforms was a lack of political will and determination of various governments.

“However, IMF too needs to reflect on the design of its assistance package,” it added.

The council said that the flaws in Pakistan’s economy have worsened over the years and the new programme will need to take this into account.

PBC shared that the IMF demands on raising tax collection targets “have been met by raising the tax burden on those that are already bearing a disproportionate load”.

“Much of retail, wholesale, services, informal transporters, as well as the undocumented real estate sector, either go untaxed or are under-taxed.

“(Therefore) A target such as ‘tax from new tax payers’ would be one way to ensure that tax revenue is increased equitably and sustainably.

“Moreover, this would also prompt significant restructuring of the FBR,” it said.

PBC highlighted that IMF’s tariff-driven measures “fail to cure the fundamental defects” in Pakistan’s energy sector.

“High electricity tariffs incentivize theft and increase the reluctance of domestic users to switch out of less efficient, underpriced but fast depleting local gas reserves.

“To make matters worse, there is substantial reliance on imported fuel for power generation and the transmission system is inadequate to maximize the use of cheaper renewable and coal power from the South,” it said.

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PBC was of the view that market dynamics should be allowed to determine tariffs for industry and the state’s role should be to remove bottlenecks in the power transmission infrastructure and ensuring merit order in generation.

The country’s business council said that aside from stemming the leakage from the energy sector, bleeding of the fiscal account by state-owned enterprises needs to be arrested.

Thus “a longer, five-year programme will allow IMF to make tranche releases conditional on progress on fundamental reforms of the energy sector and the privatization or closure of lossmaking state enterprises,” it said.

PBC said that the federal government will need to renegotiate the National Finance Award to incentivize provinces to meet a greater share of their needs from agriculture and property taxes. “This will allow the federal government to control its deficit, limit borrowing, bring down inflation, which should lead to lower interest rates,” it said.

Moreover, IMF will require the mounting debts to be reprofiled to restore confidence in the economy. “A larger as well as a longer IMF programme would provide creditors the necessary comfort,” it said.