A close watch

THE IMF’s new set of demands from Pakistan as part of its $7bn rescue package is tough, but in line with expectations.
The government has to swallow this bitter pill to keep the economy afloat. The details of the targets released on Friday show that the programme seeks to help Pakistan rebuild its forex reserves, improve tax-to-GDP ratio, and ensure debt sustainability.
The roadmap outlined by the lender in the document, which also contains firm commitments by the government to execute the agenda, will be implemented through the overhaul of the tax system, energy reforms, privatisation and deregulation, and the rollback of the Special Investment Facilitation Council, the Sovereign Wealth Fund and the Special Economic Zones to “promote investment, and ensure competitive neutrality, and a level playing field” for investors.
The government has further promised to not offer regulatory, spending, tax-based incentives, or any guaranteed returns to a particular set of investors that could distort the investment landscape. It has agreed to increase and impose additional indirect taxes in case of a shortfall of 1pc in tax collection on a three-month rolling basis to cover the gap. Moreover, the authorities have consented to governance reforms and to cut off gas supplies to captive power owned by the rich textile millers. The provinces have committed to undertake reforms to boost tax collection, end interventions in agricultural markets, and take over several spending responsibilities in line with the 18th Amendment.
The IMF document acknowledges the macroeconomic stability achieved in recent months. However, this stability is unlikely to translate into growth in the near to medium term unless Pakistan is able to attract significant investor interest, something that does not appear likely anytime soon. In fact, the conditions related to elimination of incentives to foreign companies, especially from China, is going to hit hard the government’s plans to woo Chinese manufacturers here under CPEC. How the authorities will deal with it remains to be seen.
While the IMF may ignore some minor deviations from the loan agenda, it is not going to condone any major divergence that might lead the programme off-track since, according to a news report, the Fund remains concerned about the country’s commitment to execute the suggested reforms going forward. Its worry that “reputational risks would arise for it if the Fund were perceived as treating Pakistan differently from other members that ostensibly enjoy less support” means that it would be monitoring progress on targets more diligently.
Unlike most previous occasions, the 25th rescue loan does not offer Pakistan much of a margin of error. The authorities will be required to prove every six months that they are steadfastly pursuing the IMF-mandated targets to secure the lender’s dollars and blessings.
Published in Dawn, October 13th, 2024