At the IMF crossroads


Pakistan got off the track with $6 billion Extended Fund Facility (EFF) of the International Monetary Fund (IMF) in February after securing about $1.5bn disbursements.

The government’s decision to delay until June 2020 a further increase in energy prices and additional tax measures to make up for the slippages in the first half of the fiscal year led the IMF to put on hold the next tranche.

The Covid-19 outbreak soon after the IMF talks ended changed almost everything not only in Pakistan but also globally. Instead of increasing tariffs and coming up with tax measures, the government had to delay bill collections, inject funds into the power sector to support consumers and provide cash to businesses along with tax breaks — all out of the budget to minimise financial and job losses.

Like his earlier stint in the PPP government, Dr Abdul Hafeez Shaikh, adviser to the prime minister on finance, sustained his own tradition of keeping the Fund engaged. He secured about $1.4bn in emergency funding outside the programme to fight the pandemic. This helped other lending agencies come in aid of Pakistan as did the G20 debt relief.

The economic team and the Fund staff have been in virtual discussions to revive the programme where it was left almost nine months ago. The outstanding issues remain unchanged: bridging the power sector black-hole that has increased since then and generating more taxes. A bankable way forward on reforming the power and revenue sectors within the remaining two and a half years of the PTI term remains the key.

The missed benchmarks involving legislation for independence of SBP and Nepra are expected to become ‘prior actions’ for the IMF programme’s revival

To meet the traditional IMF demand on recovering the full cost of energy supply requires an over Rs6 per unit increase in the electricity tariff. This is out of the question at the moment for two reasons. One, the government has just offered heavily discounted electricity rates to industry and small and medium enterprises to encourage maximum consumption. It can’t politically afford to shift the entire burden to domestic and commercial consumers although high-consumption consumers may have to face the brunt.

Two, the government has been keeping a supportive stance towards businesses and is reluctant to add to their tax burden when they are already struggling. It becomes even more difficult politically when opposition parties are up in arms against the government. Here and there, the government has resorted to retrenchments in some public-sector organisations. The problem is that the government would soon be on the last part of its five-year constitutional term when generally it becomes difficult for any political government to go for deep-rooted structural reforms.

In fact, the government now wants to extend the tax exemption and incentive package for the construction industry from the end of December to June next year to take maximum benefit from the prevailing feel-good factor — better large-scale manufacturing (LSM), current account surplus, positive primary balance and relatively stable exchange rate and foreign exchange reserves.

Meanwhile, the missed structural benchmarks on legislation for the independence of two major regulators — the State Bank of Pakistan (SBP) and the National Electric Power Regulatory Authority (Nepra) — are expected to become “prior actions” for the Fund programme to be formally revived.

A couple of public appearances by members of the economic team in recent days after a long gap suggest a degree of their guarded confidence about an uptick from a bottomed-out economy (4pc GDP contraction) even though it may take years to get back to the 2017-18 level.

Finance Special Secretary Kamran Ali Afzal agrees that the approval of two key bills relating to Nepra and the SBP would become “prior actions” and a way forward on power sector reforms and revenue generation would be necessary for the “restoration of the programme in a formal way”.

His understanding was the two laws would become prior actions because these were not related to or should not have been affected by Covid-19. But power sector reforms and revenue side items could be readjusted as they were affected by the pandemic and remained key challenges. However, the fact is that the Nepra bill currently remains stuck at the level of parliamentary committees while the SBP law still has to cross the ministry of finance — SBP divide over the “level of independence”. Both bills have to be ultimately passed by both houses of parliament to become law.

Dr Shaikh, however, builds a rather optimistic narrative. Last week, he claimed “positive news on the economic front from all four sides” and added that an IMF staff mission would be arriving in a few weeks.

Dr Shaikh, however, insists that Pakistan had very good relations with the IMF for the basic reason that the government remained committed to the programme and all matters were progressing strictly the way these were agreed to, including better tax collection, strong reduction in government expenditures and paying debts in a better way. As a result, he said, the government availed certain relaxations that were not part of the original agreement in order to give incentives to the construction sector and tax discounts to businesses to avoid a contraction in the economy.

The government expects that a commitment directly by Prime Minister Imran Khan to the IMF — a departure from past traditions — to strictly abide by the revised power sector reform programme for its turnaround over more than 30 remaining months of the current administration would make the IMF take a fresh bet. After all, textbook models of the IMF are also changing in the wake of unprecedented health and economic challenges across the globe.