There was a wave of optimism and sigh of relief when Pak authorities got an assurance from the International Monetary Fund (IMF) about restoration and extension of the Extended Fund Facility (EFF), which was scuttled due to Islamabad’s failure to meet conditionality of the bailout package. But now it is becoming increasingly difficult, amid double digit inflation, to eliminate fuel subsidies, stop tax exemption and levy new taxes, and meet the IMF conditionality. The recent suggestion from the IMF to Pak government in the Doha talks (May 18-25) to renegotiate the China-Pakistan Economic Corridor (CPEC) before making a payment worth USD 149 million to the Chinese power plants due to allegations of suspected overcharging, adds another dilemma for Islamabad and its tethering economy.
The IMF reportedly asked Islamabad to treat the Chinese CPEC power plants at par with the power plants established under the 1994 and 2002 power policies. The IMF’s demand came after China’s refusal in the past to renegotiate the terms of agreements with the independent power producers (IPP). However, this may not be easy for Pakistan as Beijing has obliged it financially in the past and recently agreed to Pak’s request for roll over of loans worth USD 4.2 billion maturing by the end of March 2022 consisting of USD 2 billion loan by China’s State Administration of Foreign Exchange (SAFE) and USD 2.2 billion Chinese commercial loans.
Although the IMF reached an understanding (April) with Pakistani authorities to extend the stalled bailout package through EFF by another nine months to one year and increase its existing size of USD 6 billion to USD 8 billion, it noted that this was “subject to final modalities”. The understanding was reached after a talk between Pakistan’s newly-appointed Finance Minister Miftah Ismail and IMF Deputy Managing Director Antoinette Sayeh in Washington.
Among the several modalities to be fulfilled before the new re-negotiated EFF is submitted to the IMF Board for approval, Islamabad would have to agree on budgetary strategy for the next fiscal year 2022-23. The new Pak government would also be required to demonstrate its political will and intent to undo the economic policies and measures of the previous government in violation to the commitments given to the IMF for availing the 39-month EFF worth USD 6 billion extending from July 2019 to September 2022.
One of the conditions put forth by the IMF to restore and extend the scuttled EFF to Pakistan is withdrawal of unsustainable and mammoth subsidies. According to Pak Finance Minister, government was giving PKR 21 per litre on petrol and PKR 51.54 per litre on high-speed diesel in the month of April, alone costing PKR 68 billion to government exchequer. It would be a tough and politically unpopular call for PM Shehbaz Sharif government to remove subsidies when inflation is soaring at 12.7%. The spiraling inflation has led to unprecedented hike in price of essentials and cost of living on one hand and massive and continued depreciation in Pak currency on the other.
Besides fuel subsidies, the IMF has also put other conditionalities like stopping tax amnesty scheme, increasing power tariff and imposing additional taxation measures. By far, Islamabad received only USD 3 billion of EFF as the IMF stopped releasing the subsequent tranches of the package because former PM Imran Khan’s government failed to comply with the IMF’s conditionality to end subsidies, expand the tax net and improve collection.
There is no quick fix to Islamabad’s economic woes, pointed out political economist Yousuf Nazar, a former Chief Strategist at Citygroup’s emerging markets division, adding that the country needed a fundamental reform. He noted that “Pakistan has continued to follow an import substitution protectionist trade policy and remains highly vulnerable to energy crisis as it relies heavily on remittances. Its tax to GDP (Gross Domestic Product) ratio fell to 9 percent in 2022 from about 12 percent in 2016 due to dominance of military and special interests in policy making.” He added that Pakistan needs at least USD 5 billion immediately to calm the markets and stop the slide in its currency, which dropped by 6 percent in May 2022 only. The situation is precarious because Pak Central Bank’s foreign exchange reserves have dropped 51 percent since February 2022 to just USD 6.3 billion – barely enough to cover a few weeks of imports.
If Islamabad’s budget for FY 2022-23 presented on June 11 by Finance Minister is any indication, the economy would have no immediate respite from the woes it is facing. The budget aims at 5% growth, less than 5.9% estimated for current year (2021-22) with a fiscal deficit of 4.9% as compared to 7.1% in 2021-22 and an estimated expenditure of PKR 699 billion on targeted subsidies. The budget for FY 2022-23 has targeted a marginally higher tax-GDP ratio of 9.2% in FY 2022-23. It is indicative of faulty resource allocation and priority of the Pak government to reduce budget for health drastically from PKR 154.49 billion in FY 2021-22 to a meagre PKR 19.03 billion as against an increase in allocation for defence sector from PKR 1.48 trillion in the previous year to PKR 1.52 trillion. The education budget has also been slashed.
As Islamabad looks up to restoration and extension of the IMF’s bailout package, the negotiations with the global institutions are likely to be complex due to the political challenges around economic reforms. The budgetary allocation pattern and policy measures are still far from meeting IMF conditionalities. Islamabad has now come to a blind (economic) alley and it has no option but to set its priorities right and take hard decisions based on economic rationality rather than political and military influence and expediency.