Making IMF loans a game changer

Making IMF loans a game changer

The government is preparing to negotiate a new Extended Fund Facility (EFF) loan from the International Monetary Fund (IMF) and aims to reach staff-level agreement in the next two to three months.

The IMF insists that the primary responsibility for selecting, designing and implementing policies lies with borrowing from member countries, not the IMF itself. It also claims that the overall goal of the IMF program is to set the stage for sustained high-quality growth and poverty reduction.

However, there is a widespread belief that borrowers often feel forced to sign agreements without much choice and the longer a country is in an IMF program, the more it fails to stand on its own two feet.

This time let’s aim to develop our program to list our most serious problems and how we intend to address them within the timeline of the IMF program. By taking ownership of the reform agenda, the government will be forced to communicate the importance of these changes rather than attributing them solely to the IMF.

Let’s examine the main economic challenges that continue to push us to seek help from the IMF. While opinions may vary, most agree that any comprehensive list would highlight state-owned enterprises (SOEs), the energy sector, trade policy, low tax collection rates and high spending relative to our income.

Overcoming our current difficulties will remain elusive unless we proactively address these issues.

The magnitude of the losses caused by some SOEs to the economy is alarming, and our failure to act borders on criminal negligence. Between 2018 and 2022, Rs2.542 trillion has been allocated to our SOEs.

The government has identified 25 public sector enterprises for privatization, however, progress has been slow due to political instability, sluggish decision-making processes and increased judicial activism.

Every day of delay in making decisions adds to our debt. Taxpayers foot a daily bill of Rs50 million to keep PIA running, with total losses reaching Rs713 billion by June 2023.

Pakistan Steel Mills has remained closed since 2015, yet taxpayers have borne maintenance costs for a decade.

Similarly, power sector losses remain a pressing concern, with power distribution companies (DISCOs) facing annual losses of about Rs376 billion. Energy circular debt has soared to Rs5.5 trillion, increasing by an average of Rs135 billion every month.

Other critical issues include increased capacity payments, underutilization of power plants, operational inefficiencies and abandonment of high voltage transmission lines. Without radical changes to the governance of the power sector, we risk shutting down potential industries and imposing unmanageable electricity charges on consumers.

Reforming our trade policy must be essential to the next IMF program. While the IMF has previously emphasized trade policy reform in certain lending programs, it has overlooked the reversal of earlier reforms implemented between 1997 and 2002.

The reforms contributed to export growth at a rate of 12% annually. However, exports stagnated from 2008 onwards as these reforms were gradually withdrawn. Over the past 15 years, we have lost our share of global exports by 1.45% annually.

It is important to recognize that our main trade policy tool is our customs tariffs, which show a significant anti-export bias. Without rationalizing our customs tariffs, achieving export-led growth will remain elusive.

Another important point to include in the upcoming IMF program is an increase in tax collection from the current low of around 10% of GDP to the developing country average of 15%.

The World Bank estimates that Pakistan captures only half of its tax potential, with nearly two-thirds of the GST liability and more than half of the income tax uncollected. Implementing FBR’s digitization program can significantly close this gap.

Furthermore, domestic think tanks, academics and the World Bank have done extensive work on tax and tariff reform. We need to take advantage of their work.

In a recent thought-provoking article, Professor Stefan Dercon, former chief economist at the UK’s Department for International Development, sees the current crisis as an opportunity for significant economic reform, emphasizing the need for ownership and clear communication of reforms to the public.

He pointed out that the country must make a decision between maintaining the status quo by relying on external resources or embarking on genuine reforms to attract foreign investment.

He advised against shielding supporters from reform efforts, urging the government to take necessary but challenging steps, such as bringing retailers and large landowners into the tax system and removing sectoral policy priorities such as protecting carmakers.

By including a comprehensive reform package in the upcoming IMF extension program and then sticking to its implementation, the current government has a great opportunity to break the cycle of dependence on repeated IMF loans and move towards sustainable development.

Similar reforms have enabled many developing countries to lift millions of people out of poverty. There is no reason why we cannot achieve the same if we sincerely and transparently implement these reforms.

The author is a Senior Fellow at the Pakistan Institute of Development Economics, having served as Pakistan’s ambassador to the WTO and as the FAO representative to the United Nations in Geneva.

About Kepala Bergetar

Kepala Bergetar Kbergetar Live dfm2u Melayu Tonton dan Download Video Drama, Rindu Awak Separuh Nyawa, Pencuri Movie, Layan Drama Online.

Leave a Reply

Your email address will not be published. Required fields are marked *