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The government is celebrating the successful completion of the International Monetary Fund (IMF) loan deal as it enters into the fourth of its five year term.
The government leaders are touting the successful conclusion of the three-year Extended Fund Facility as endorsement of their economic policies, and believe that the economy of the country was now ready to go alone after they averted an imminent balance of payment crisis Pakistan was facing when they took power three years ago.
Prime Minister Nawaz Sharif echoed this sentiment as the IMF mission was giving clearance for the payment of the final $102 billion of the $6.4 billion programme signed in 2013.
"It is now my desire... that we say goodbye to the IMF," he told the PML-N lawmakers as talks between the government and the IMF teams ended in Dubai.
The government should no doubt be credited for seeing the loan facility through, but it would be naïve to boast of an economic turnaround when many challenges are still lurking on the horizon.
Moreover, it is not the first time that Pakistan has successfully completed the loan programme with the IMF. The EFF was the sixth bailout package that was successfully seen through the end by Pakistan.
The biggest achievement of the programme was the building of the foreign exchange reserves which were precariously low and were hardly able to meet imports of few weeks when this government took over.
The government is now sitting on foreign exchange reserves close to 23 billion dollars - enough to meet imports of four months. When the government took over, the reserves were just around 8 billion dollars.
Overall economic situation was also greatly helped by the sharp decline in the international oil prices, which drastically brought down inflation, thus easing public pressure on the government.
“In the course of the IMF-supported programme, Pakistan’s economy has made significant progress towards strengthening macroeconomic and financial stability and resilience, and laying foundations for higher, more sustainable, and inclusive growth,” the Fund said in the statement after the final review.
“Growth gradually accelerated, international reserve buffers have been rebuilt, and the budget deficit narrowed significantly, helped by sizeable growth in tax revenue,” it said. “Inflation declined, helped by lower oil prices and improved monetary and fiscal policies.”
But these achievements do not constitute a sound foundation for a solid economy.
The IMF in the final review itself pointed out the challenges faced by the economy in the coming years and months.
“To consolidate and reinforce the gains achieved in the last three years, the economic reform agenda needs to continue after the programme ends,” the Fund said.
Energy sector reforms are one of the major challenges faced by the government.
Pakistan has been gripped by a grave economic crisis for more than a decade. In the face of tremendous public pressure, the government has taken measures to increase power generation, but it has done little to address the long-running problems afflicting this vital sector.
After coming into power, the government paid out circular debt worth 480 billion dollars, raising hope that it would take appropriate measures for re-emergence, but it has failed to do so.
Former Finance Minister Salman Shah says high tariffs for the electricity produced from the new power plants is also a major cause of concern.
He said at the time when tariffs were going down in the region, as well as around the world, because of decline in oil and gas prices, these are showing an upward trend in Pakistan.
“If we did not review the tariffs then we in fact will be piling up more debt,” he said. “If this trend continued then we would be losing the gains made during the IMF programme within two to three years.”
The cost of electricity produced from Nandipur, Tharcoal, Bahawalpur, and Sukkur power plant range between nine to 12 rupees per unit. “Unless these tariffs are reduced up to three to four rupees per unit, we can’t expect our economy to take off,” he added.
Falling exports should be another cause of concern for the government.
Despite securing GSP Plus status from the European Union and reduction in the power shortages, exports in Pakistan have shown a downward trend.
The exports dropped nearly seven percent in July to 1.479 billion dollars as against 1.588 billion dollars recorded in the corresponding period in the last fiscal year.
Analysts say persistent decline in exports can put pressure on the government to devalue rupee to boost exports.
“Our exports lack competiveness and that’s why they are losing the market,” Shah said.
Exporters say government’s persistent refusal to refund capital gain taxes has also resulted in the decline. Some exporters say the refunds owed by the government are almost equal to the total annual exports of the country.
The private sector investment in the country has also shown a downward decline in recent years.
Though the law and order situation has considerably improved because of the military operations in the bordering areas with Afghanistan as well as in Karachi, the commercial capital of the country, and the energy supply situation has also improved, the private sector is still reluctant to put in its money for investment in Pakistan.
Analysts say high cost of production, fuelled by exorbitantly high power tariff, and government’s failure to cut down red-tapism is the main reason behind low private sector investment in the country.
Pakistan’s lenders as well as donor countries have persistently been pressing the government to expand its tax base, but like its predecessors, the government has done little to address this issue.
Though according to official figures, the Federal Board of Revenue (FBR) collected more than Rs3,130 billion in the tax year 2015/16, surpassing the set target of Rs3,104 billion, the bulk of them were indirect taxes. No serious effort was made to bring the untaxed segments of the society into the next net.
Privatisation of public sector entities, particularly loss-making ones, was one of the salient features of the bailout programme with the IMF.
The government began the privatisation programme with the sale of small, profit making entities, but it faced stiff resistance when it tried to sell big ticket loss making entities like the Pakistan International Airlines.
The privatisation of the power distribution companies has also been put on the back burner reportedly on the personal desire of the prime minister in view of the political risks.
Fall in foreign remittances constitutes a major emerging challenge for Pakistan. The remittances from overseas Pakistanis have been a major source of foreign exchange, but they have shown a decline in recent months, particularly from the Gulf countries because of declining oil prices which have resulted in cost cutting and job losses in those countries.
Overseas Pakistanis sent 1.3 billion dollars in remittances in July, down 20.2 percent from those remitted during the corresponding period of 2015. On a month-on-month basis, the drop in remittances clocked up almost 36 percent in July.
Saudi Arabia has been a favourite destination for Pakistani labour for more than four decades. However, now, as many as 8,000 jobless Pakistani workers are stranded there due to the slowing economy, which has forced companies to fire their employees, particularly foreigners.
A robust and well-thought response from the government is required to meet these challenges but many analysts believe the government is more interested in short-term gains instead of taking long-term measures to put the economy on sound footing.
The writer is a senior journalist based in Islamabad
