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February 26, 2019

Bailing out the ocean with a bucket


February 26, 2019

Seeking another ‘Standby Arrangement’ – more commonly known as a ‘bailout package’ – from the IMF seems inevitable for Pakistan. The current PTI government is facing a lot of criticism for this decision, having built much of its election campaign on an anti-IMF slogan.

In his speeches, PM Imran Khan had often said that he would prefer suicide over going to the IMF and that he would restructure the whole economy in the first 100 days. Well, neither happened.

At present, Pakistan’s foreign currency reserves have reached $8.1 billion. According to some reports, a few international creditors have given loans of approximately $2.3 billion, 60 percent less than what was received ($5.8 billion) during the same period last year. But there’s more concern: according to the State Bank of Pakistan, the country’s external debt in the third quarter of FY 2018-2019 has arisen to $96.7 billion. The stock market has crashed, and the dollar-to-rupee exchange rate is continuously depreciating. Since December 2017, the dollar has become approximately 18 percent more expensive.

The immediate reason for the current crisis is a set of policies that has encouraged investments in real estate, guaranteed profit projects, and industries enjoying unfair tax exemptions. This has discouraged industrialisation and development on a broader scale and contributed to Pakistan’s failure to achieve high growth rates, as well as led to its poor exports record. Since 1980, exports from India and Bangladesh have grown at a rate that is more than five times the growth of Pakistani exports during the same time.

Removal of all such policy distortions and deregulation of all sectors of the economy from unnecessary government controls must be among the top priorities for the new government. If it cannot offer meaningful incentives, it ought to at least remove some of the disincentives confronted by entrepreneurs and industrialists. This may need a comprehensive review and doable renegotiation of the terms of all projects, including projects under CPEC, where a rate of return is guaranteed, and elimination of tax exemptions granted through ad-hoc administrative measures.

However, the entrenched elites have misled the new government into wild-goose chases like looted wealth abroad rather than reforming a system loosely built on patronage under the protection of a military and civil bureaucracy. No genuine effort has been made to address the multifaceted challenges Pakistan has to deal with day in and day out.

Given the desolate situation in Pakistan, it remains to be seen whether the IMF will once again provide a standby arrangement package to Pakistan. In all probability, the IMF, before offering any new loan programme to Pakistan, will ask for several reforms. The reason is simple: since the late 1980s every government has, one way or another, approached the IMF to cover up the gap between revenues and expenditures. Interestingly, on every occasion the loan was drawn but used with extreme ineptitude.

In Pakistan, the IMF is always criticised but has any government at least tried to focus on micro and macroeconomic derelictions? With every standby arrangement package, the IMF also provides a structural adjustment programme. The basic purpose behind this structural adjustment programme is to repair the problem within the economic system of a country, so that after the completion of the programme, the country can survive on its own.

In the case of Pakistan, the basic aim of the structural adjustment programme is to increase the tax revenue regime and decrease the trade deficit. In response to this, Pakistani governments – instead of increasing the tax net – impose indirect taxes with the help of the general sales tax (GST) and value added tax (VAT) systems. This does increase the tax revenue, but it also raises inflation and unemployment.

Privatisation of state-owned enterprises is also a suggestion from the IMF. This is because most of these SOEs are incurring losses, and every year the federal government is compelled to intervene with billions of rupees to run them. For instance, the Economic Coordination Committee of the federal cabinet in a recent meeting approved Rs5.6 billion to address the catastrophic situation of PIA. But will that revive the national airline?

The IMF gives loan in terms of ‘Special Drawing Rights’ (SDR) which are supplementary foreign-exchange reserve assets defined and maintained by the IMF. The last borrowing in 2013 was for a 36 month, SDR4,393 million Extended Arrangement under the Extended Fund Facility. Although the 2013 programme was completed successfully, nothing material was done to restructure the loopholes in the economy to stand off the ever-increasing current account deficit and trade gap. This entire situation has put Pakistan’s financial stability in jeopardy.

Now that the PTI government intends to go to the IMF, it should – unlike previous governments – first take the people of Pakistan into confidence and explain the facts and reasons for going to the IMF so that they can get themselves ready for hard times. Secondly, the current government should work on the implementation of structural transformations ie introduction of tax reforms and privatisation of state-owned enterprises which are incurring massive losses to the public exchequer.

Pakistan is undoubtedly a curious case of Dutch Disease without oil and its economic woes are repeated ad nauseum. But this does not mean that there is no room left for improvement. The political leadership from the treasury and opposition benches must work together to avoid making politics a curse for the economy.

The writerr is an advocate of the high court and is based in Lahore.

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