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 andsectors to the tax system Agriculture Production andand introduce an across trade sector remains out of taxthe board consumption system by way of clearlytax by the name of designed policy of theSales 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 objective; 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 themaintained in the manner cash economy leading to foodthat there is no inflation. price inflation is over 90% ofMoney supply to be the market. Resultantly therecurtained. Present rate is no effect of increase in theis 22% which is the policy rate on inflation. Inhighest 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 solution.==============================================================Market Exchange Rate and Independence of Central Bank==============================================================Prescription Application==============================================================1. Market based 1. A self nurtured animal byexchange rate; the name of 'exchange2. Independent companies' have been allowedCentral 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 of/Credits; 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 ofeffectively required: reacquisition of KE bya. Decrease in line losses; the government;b. Privatisation of Discos; 3. No settlement forc.?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