What does 24th IMF programme mean?

It has been argued by many political and economic analysts that the 24th IMF programme could usher in a tsunami of inflation in the country with severe political and social consequences. In this author’s view, however, this may turn out to be true if the essence and spirit of the IMF programme is not sincerely recognised and if the programme continues to be seen more as a demon than a saviour and is held responsible for all the misery of the state and its people and the political leadership hide behind this narrative as an excuse to cover up its own short comings and helplessness.

Seeking IMF programmes can have both positive and negative consequences for a country like Pakistan. The level of implementation on ground makes all the difference between the two extremes.

The foremost positive consequence is that Pakistan would receive the financial assistance, on strength of which it can address balance of payment issues and stabilize its economy. By entering an IMF program, Pakistan will be able to send a strong message to international investors and lenders that it is committed to fiscal discipline and economic stability. Today, the IMF is the need of Pakistan as never before.

IMF programmes come with conditions that require the country to implement economic reforms, which can help improve governance and address structural weaknesses in the economy, leading systemically to a better tomorrow. Its downside is that it makes life difficult for the public at large. The programme is all about striking a skillful balance between the two sides for an ultimate success.

The fault line, in the case of Pakistan, lies in the fact that the government does not sincerely implement the reform part while leaving behind the downside hardship part of the programme to be borne by the public at large.

The 24th MF programme shall come with severe challenges.

Increased lending from the IMF would increase Pakistan’s external debt burden, especially when the country struggles to meet its repayment obligations on account of its inability to enhance revenue and generate enough funds to systemically pay off IMF loans. Already, a good 70 percent of the country’s revenue is diverted to make payments against the loans. The loan liabilities of the 24th programme will constitute a debt add-on.

IMF programmes require implementing austerity measures; notably, cuts in government spending, reductions in social welfare programmes and public sector jobs.

These measures and economic reforms can trigger social unrest and protests as citizens bear the brunt of these policies.

This can lead to increased poverty and unemployment.

Economic policies under IMF programmes may exacerbate income inequality as the burden of economic reforms falls disproportionately on the lower and middle classes.

Budget cuts as part of austerity measures could result in reduced funding for essential services like healthcare and education, impacting the quality and accessibility of these services for the general population.

IMF-mandated policies can lead to fuelling inflation and price hikes, making it harder for ordinary citizens to afford basic necessities.

It is important for policymakers to consider these potential social consequences and work towards mitigating their impacts on the most vulnerable segments of society.

So far, the state managers do not appear to have recognised the gravity of the challenges nor the consequences.

There are a number of critical issues which are a carry-forward from the previous IMF programme and many more will be added to the list in the new programme. Drain of revenue to sustain loss- making public sector enterprises (SOEs), the crumbling power sector and the rising circular debt are a carry-forward from the previous IMF programmes.

So far, only PIA has been notified to be privatised. The government appears to be clueless insofar as the fate of Pakistan Steel Mills and other loss-making SOEs is concerned. Restructuring or privatisation is a long-drawn and time-consuming process. If the process is not rolled out shortly it may not be resolved within the tenure or duration of the 24th programme.

The efforts towards the resolution of issues in the power sector, which are related to losses incurred in power generation and transmission sector, are hamstrung by lack of clarity and the vision. The sector is stuck in resolving the basics. The Federal Minister for Power, while addressing the executives of the sector this week, has termed power theft “economic terrorism” and directed Discos to take a decisive action against the electricity thieves. He encouraged officials of Discos to leverage technology and innovation in their efforts to eradicate power theft. Its news that the power distribution companies in the public sector have still not installed automation to manage theft, whereas, K-Electric in the private sector automated their processes a decade back and did away with power theft for good.

IMF appears to have stepped in to micro-manage the power sector but at arm’s length. It has proposed measures to lower the power tariff for various consumer categories, suggesting an enhancement of the energy mix and a reduction in capacity charges by fully utilizing new power plants.

Consumers currently bear an annual burden of around Rs2 trillion due to capacity charges resulting from the underutilization of new power plants. The IMF underscores the necessity of decreasing capacity charges to lower industrial tariffs. Utilizing power plants at full capacity by incorporating alternative fuels could potentially slash capacity charges in electricity prices by Rs13 to Rs16 per unit.

Circular debt has spun out of control, and the energy and the financial managers of the state are clueless as to how to resolve the issue. Circular debt retirement plan, based on a patch work, earlier prepared and submitted by the ministry, has been rejected by the IMF. Circular debt is looked upon and addressed as a financial issue; it is in fact more of a governance issue riddled with incompetence and lack of transparency all along the multi-layered supply chain of the energy sector.

Enhancement of the revenue is the key condition under the IMF programme. There is a limit to extract revenue through taxes when the industry, businesses and money transactions in the market are witnessing a slowdown. Fresh investments and business enabling environment have to be mobilised.

The Special Investment Facilitation Council (SIFC) has been entrusted to inject investment into the economy, notably, the foreign investment. While recognizing the skills and good intentions of the experts in SIFC the fact remains that their delivery is dependent on the executing entities of the state like Board of Investment, Trade Development Authority of Pakistan and the abundance of commercial counselors positioned across the globe. These institutions, the processes adapted by them and their mindset have outlived their relevance. The competing emerging global economies have moved on from public sector facilitation structure to business-to-business private sector facilitation structure to mobilize foreign investment.

A very recent publication in the print media says it all - Quote: “ The Special Investment Facilitation Council (SIFC), in a letter to all the relevant ministries, enclosed a self-explanatory copy of a letter of Ministry of Foreign Affairs (MoFA) written on the basis of communication from Pakistan’s ambassador to the UAE. According to sources, the Foreign Office noted that its ambassador in Abu Dhabi held a meeting with Abu Dhabi Development Holding Company (ADQ) focal person, to get an update on the seven bilateral investment MoUs signed with the UAE in November 2023. The ADQ stated that they have established initial informal contacts with all the focal persons in relevant Ministries and to open formal channels of communication they sent emails to all focal persons about a month ago. However, despite a reminder, response from them is awaited, till date. Furthermore, ADQ is waiting for the Pakistan side to send its list of priorities and bankable projects” Unquote.

Foreign investment mobilisation regime in Pakistan needs a dramatic paradigm shift and an equally dramatic change in ways of doing business.

Plans to cut government expenditure are not in public knowledge. There are 37 federal ministries, many with superfluous multiple functions and many redundant on account of 18th Constitutional amendment.

IMF programme, if sincerely owned, could help stabilize Pakistan’s economy, strengthen its currency, and improve investor confidence.

There are conditions attached to it; notably, implementing structural reforms, austerity measures, and improving transparency in government spending. While these reforms can lead to long-term economic stability, they may also be politically unpopular and lead to social unrest. This is where the government leadership has to come forward and rise to the occasion.

Copyright Business Recorder, 2024