Pakistan is looking to resume the IMF’s $6 billion programme to bring in some much-needed foreign exchange. The programme was earlier suspended due to the government’s unwillingness to increase power tariffs and bring in a mini-budget. The negotiations for programme resumption were further delayed due to COVID-19 but IMF came to the government’s rescue with $1.4 billion emergency financing, which helped the country sail through tough times.
But now we are back to square one, and it’s time to take some hard decisions.
Reportedly, IMF is expecting Pakistan to significantly increase electricity prices, bring in additional revenue measures and introduce a few legal amendments. Pakistan was expecting an IMF mission in December to negotiate the conditions, but it seems that IMF is expecting some solid prior actions by the government, before it plans a review mission.
There is no doubt that an electricity price increase is inevitable to reduce the mounting circular debt, and new tax measures are critical to help the government reach the ambitious Rs4.9 trillion revenue target. But the government is worried on two counts: not only will these measures be unpopular and further strengthen the opposition’s narrative around inflation but will also make a dent in government’s efforts to stimulate the economy. The prime minister has already given a nod to the electricity price increase; however, it is not clear if this increase is enough and how soon the government will be able to pass this on to consumers.
However, irrespective of whether the government ends up taking these unpopular yet necessary measures or if the IMF ends up showing some flexibility, it remains to be seen if we can keep on relying on these ad hoc measures, pushing electricity tariffs up for the paying consumers and squeezing the existing taxpayers to meet the ever-increasing targets.
Pakistan has availed 21 IMF programmes over the past 60 years; however, these programmes failed to bring in any sustainable improvement in Pakistan’s worsening conditions. Pakistan’s repeated boom-bust episodes are now a characterising feature of its economy, where sprouts of growth are inevitably followed by prolonged slumps.
All political governments start in the midst of a balance-of-payment crisis, necessitating going for an IMF programme. IMF brings in foreign exchange to avoid a default but also fiscal and monetary tightening, which slows down growth. As soon as the IMF goes away, the country takes no time in coming back to its expansionary fiscal and monetary policies, owing to political reasons and mostly to win the next election. This in turn increases the demand for imports, increasing the trade deficit, and the country is pushed into yet another balance-of-payments crisis and the cycle starts all over again.
But every time, Pakistan’s economic indicators sink a bit further than the previous episode. It is clear that we are on an unsustainable economic trajectory, but our political shortsightedness prevents us from seeing what’s written on the wall.
What can break this vicious cycle? The answer is actually not that difficult. What we need is a serious dose of structural reforms, where we expand the tax net, do away with the exemptions enjoyed by powerful lobbies, control power thefts and line losses, stop the bleeding by state-owned enterprises, rationalise the ever-growing subsidies and strengthen and diversify our exports base. But these reforms require paying high political costs and compromising on short-term gains for the longer-term future.
IMF is also no stranger to these solutions. Almost all recent IMF programmes have stressed these reform areas, but every time they end up being content on short-term corrective measures rather than the so-called structural benchmarks.
A research paper by Harvard Kennedy School in 2015 highlighted that IMF ironically adopts a serial lending pattern. More than one-fourth of IMF member countries were part of an IMF programme for fifty percent of the duration since they became a member. Another 37 per cent have been on IMF programmes for 40 per cent of the time or more. This makes it quite evident that Pakistan, like many other developing economies, has ended up being addicted to this repeated dose of IMF money, without ever fixing the underlying problems.
Recent months, however, have shown some positive signs, with the government mulling over restructuring plans for SOEs like Pakistan Steel Mills and PIA, announcing ambitious and futuristic power sector reforms, re-negotiating contracts with Independent Power Producers (IPPs), stimulating export industries, and even taking stock of the massive subsidy stock.
The market-based exchange rate regime adopted by the government has already put in place an auto-corrective measure, whereby any significant current account imbalance will lead to currency devaluation, making imports expensive, reducing demand and narrowing the trade deficit. However, the government needs to follow through on its plans and build further on this groundwork.
These measures will undoubtedly be hard to put in place, but sooner or later someone has to go this road. If the present government pushes through on these reforms, it can help the country break out of this vicious cycle and can create a name for itself in Pakistan’s economic history. If not, we’ll be knocking on IMF’s doors yet again in another 4-5 years, but in a much worse condition.