No analysts maintain that the current chaotic economic situation is partly due to institutional interventions. It is heartening that the command of the army changed smoothly with a clear assurance not to get involved in politics. General Asim Munir took over as Chief of Army Staff after being nominated to the office by Prime Minister Shahbaz Sharif on November 24, putting to rest all the speculation in the media.
Earlier, politics surrounding the appointment of the COAS had created anger in the country. The PTI leadership has tried to pressure the government by demanding an extension in service for General Bajwa or calling elections before his retirement. The undue importance given to this issue, despite the fact that a third of the country was inundated by flood waters, inflation hovered around 26 percent, the policy rate rose to 16 percent, stock market witnessed continuous slide and foreign exchange reserves were down to 16 percent. A level that is not enough to meet the imports for one month.
Pakistan is currently in an International Monetary Fund (IMF) program. The eighth review is over. An IMF delegation is expected to visit Pakistan in the month of November. According to Reuters, the IMF has resumed negotiations with Pakistan for the upcoming ninth review of the ongoing Extended Fund Facility (EFF) program.
Pakistan has already shared financial data with the IMF team, including details of flood-related expenditure. The IMF is currently reviewing ahead of the delegation’s visit to Pakistan. An exact date for the completion of the review and release of the next tranche has not been announced.
Recent writings by Miftah Ismail, the former federal minister, have appeared to support the view that Pakistan is close to an external default. He also raised concerns about the successful completion of the IMF program. Despite facing severe challenges on the fiscal front, including the risk of default, the PDM government is unwilling to undertake fiscal reforms.
Successive governments in Pakistan have failed to implement the reform agenda agreed with the global lender, which talks about undertaking fundamental structural reforms related to governance, judiciary, agriculture and land use. The IMF has extended the EFF program until June 30, 2023 with an increase of access by SDR 720 million subject to implementation of corrective measures and policy commitments.
In its country report, released on September 1, the IMF specifically mentions that the overall program performance has remained weak since the completion of the last review and until recently. Some quantitative criteria were not met and there were gaps in implementing the agenda of financial and structural reforms.
The report specifically shed light on Pakistan missing four indicative targets: (i) targeted spending under Benazir Income Support Program (BISP) due to slower than envisaged enrollment in the unconditional cash transfer (UCT); (ii) inadequate allocations for health and education due to lower expenditure on both Covid-19 vaccine procurement in FY22 (Q3) and education due to the implementation of Covid restrictions; (iii) net accumulation of tax refund arrears due to administrative delays; and (iv) power sector payment arrears due to delayed tariff adjustments and higher-than-expected generation and financial costs. The report also notes that the targets were missed in March 2022 due to the same reasons.
Successive governments in Pakistan have failed to implement the reform agenda agreed with global lenders, not to mention undertaking fundamental structural reforms related to governance, judiciary, agriculture and land use..
Our political elite have ignored reforms in the state-owned enterprises (SOEs) to improve their governance, ensure transparency to limit financial risks and increase efficiency. Although the National Assembly passed the State Owned Enterprises (Governance and Operations) Act 2021, on June 6, 2022, it is still pending in the Senate for approval. This fact is highlighted in various international reports, including those of the World Bank which show that the profitability of the SOEs is rapidly declining.
The World Bank, in its report Hidden Debt: Solutions to Avoid the Next Financial Crisis in South Asia, specifically mentioned that the income-dropping rate was recorded at approximately 57 percent on average from 2014-2017. It further highlights that 95 percent of the SOE revenue in Pakistan came from the energy and transport sectors.
The report reveals that the SOE sector in both Pakistan and India is larger than the international benchmark. No government in Pakistan is interested in reforming it to avoid heavy losses to the national treasury on their account. This money could be invested in the social sector to raise the living standards of the citizens.
Apart from the SOE reforms, Pakistan needs basic structural reforms to improve inefficient and outdated governance through a comprehensive control system so that all the institutions should operate in their defined domains and are subject to meaningful and effective accountability.
The real estate sector is another area that requires immediate reforms. The PDM government tried to impose taxes on non-productive assets under Finance Act, 2022 but the quality of the legislation is poor and in disregard of the provisions of the constitution. These measures are without enforcing documentation.
The government should develop a transparent system of electronic titles to property, using identification and monitoring tools. The government should also introduce reforms in the agricultural sector. A considerable part of our population is dependent on agricultural income. We should provide facilities to them for increasing production. At the same time, the provincial governments must introduce a fair taxation for the high earners, especially remaining land owners.
It is an undeniable fact that the purchase of petroleum products and the production of electricity consume a major part of revenues. The huge circular debt for both electricity and gas is another daunting challenge. We have the opportunity to minimize losses by introducing alternative sources of energy, for example, Solar and wind but import restrictions limit the options.
The government must realize that we cannot get rid of the financial mess until we take pragmatic measures to reduce the waste. The sooner they realize this, the better it will be. It is clear that seeking funds from the IMF or bilateral arrangements to meet fiscal targets will not help us much. We are a country of over 220 million people; We cannot survive on one billion dollar tranches from the IMF or promises made by China and Saudi Arabia.
Dr. Ikramul Haque, a Supreme Court lawyer and writer, is an adjunct faculty at Lahore University of Management Sciences (LUMS)
Abdul Rauf Shakoori is a corporate lawyer based in the USA