IMF misses the mark yet again

THE 24th IMF programme has been approved by the Fund’s Board.
As per the Fund’s traditional approach, the programme is grounded in a basic accounting and meaningless framework that relies on a cash-based system to achieve a magical number for primary surplus (or deficit), all the while ignoring the structural problems of the country.
At best, lip service is paid to reforms. Despite all the celebrations, let us not forget that we are in a low-investment, low-growth, and low-export trap. Sadly, the IMF has once again missed the opportunity to address Pakistan’s structural problems.
The programme essentially rolls over existing liabilities to the IMF and other creditors without any real reform. Most programmes have been doing so without addressing the real issues. How Chinese lenders are treated also appears to be out of the ordinary, with the finance ministry still looking for ‘re-profiling’ — essentially restructuring bilateral debt.

The programme does not care how the desired primary surplus is to be achieved. For example, the revenue numbers it uses to estimate this surplus includes the profits of the State Bank, which are largely driven by its injections of over Rs12 trillion into commercial banks to essentially lend to government. The interest on these loans is not being considered in the determination of the primary surplus.
Overly ambitious, it also underestimates the economic complexity of reform. We can take the example of two cases. For the last 30 years or so, the final income tax liability on exports has been a sum of one per cent deducted at source by banks on receipts, with no requirement for documentation. Similarly, agriculture has hardly been made liable for income tax, and now farmers with limited capabilities are required to maintain formal documentation — in a cash-based system — and pay regular income tax. Instead of taking a pragmatic, phased approach, the programme demands that, literally overnight, documentation by exporters and farmers should be at a level and of a quality acceptable to the FBR.
Little has been learned from previous programmes; this one, too, is littered with several benchmarks and performance criteria targets to be delivered over the duration of the programme by a limited-capability system, which is overwhelmed by the confines of the political economy, the undertaking made more formidable by prevailing conditions.
There is a misplaced focus on numbers, with an overwhelming emphasis on revenue generation instead of the fiscal structure — especially on the expenditure side of the equation and the nature of instruments to achieve the objectives. Whereas the IMF’s core competence is supposedly fiscal structures, our erratic tax policies at the behest of the Fund’s single-minded aim of raising revenues, have destabilised the business environment, driving many towards informal economic activities and a culture of tax evasion.
This misplaced objective has resulted in a convoluted and unjust tax regime that is heavily reliant on import tariffs, arbitrary taxes — turnover tax, super tax, CVT, deemed income, etc — presumptive and multiple-rate withholding GST and income taxes. This has led to repeated changes in taxes through ‘mini budgets’, creating huge uncertainty in the market. Forty years of revenue chasing in this manner has led to the labelling of all Pakistanis tax cheats and burdening them with huge documentation. We now have a most distorted tax structure, along with complete lack of trust between the government and the people — rather like the Sheriff of Nottingham, with the informal sector playing Robin Hood.

Meanwhile, expenditures have continued to run wild, with several expansionary agendas at play, resulting in the government performing numerous functions beyond its staple role. There is an unending drive to increase the number of agencies in the government from all sides. All stakeholders — political, bureaucratic and international partners — want an increase in the number of agencies, infrastructure, social support as well as government employment — all without decent data on the huge paid and growing liabilities and the future operational costs of these structures. The trend has been for structures to grow despite many tasks having become redundant.
Adding to this dilemma is the politicised and expanded PSDP portfolio, with unknown cost overruns and no accountability. These misplaced expenditure priorities are being executed by a bloated and poorly equipped workforce absorbing a significant percentage of the budget, without even fully factoring in the opportunity cost of perks and privileges, including housing, vehicles, etc.
Compounding these problems is Pakistan’s heavily regulated market with the government fixing prices and controlling markets. The Pakistan Institute of Development Economics estimates the government’s footprint — through price controls or direct intervention — on 70pc of the economy, distorting markets, blocking opportunities and raising the cost of doing business by excessive, obsolete, discretion-laden policy and regulatory frameworks.

The estimated cost of government regulation in some 50 activities is seen in well over 75pc of the economy. No wonder capital flight persists, investor uncertainty prevails, and the economic environment remains stifled.
Although the IMF charter calls for an open exchange system with a market-determined rate, each Fund programme has led to an appreciated exchange rate, distorting price signals and resource allocations, and making Pakistani exports less competitive, while lowering the cost of imports and further straining balance-of-payments. Despite claims of liberalisation, the exchange rate remains under tight government control, with artificial price and non-price mechanisms preventing the natural market dynamics from playing out. This is facilitated by the delay in the discharge of external obligations.
Excessive reliance on tariffs for revenue purpose as well as excessive non-tariff practices have adversely affected exports. It appears that the IMF has not even scanned the World Bank’s work showing how excessive protection and poor tariff policy is reducing exports. Note that the economy had been significantly liberalised in 2005, and successive IMF programmes, for revenue reasons and to protect the exchange rate, rapidly increased tariffs and created non-tariff barriers and exchange restrictions to support an appreciated exchange rate.
Nadeem Ul Haque is former VC PIDE and deputy chair of the Planning Commission. He is currently director at the think tank Socioeconomic Insights and Analytics. Shahid Kardar is a former governor of the State Bank of Pakistan.
Published in Dawn, October 18th, 2024