‘IMF revival, followed by debt reprofiling and spending cuts must for Pakistan’

KARACHI: With efforts to secure the IMF bailout programme Pakistan needs some more urgent measures such as debt reprofiling and cut in expenditures, with a political consensus on economic reforms to restore the country’s economic stability, a report has stated.

Commodity headwinds and supply chain disruptions, acerbated by Ukraine crises, devastating floods, and significant political uncertainty have put the country into a severe crisis. Global recession, on the other hand, is impacting demand for a limited basket of exports, according to the Pakistan Business Council (PBC).

The council presented a report titled ‘Minimum Consensus on Key Economic Reforms’ on Monday, suggesting immediate priorities to the government for ensuing the country’s solvency as well as long-term reforms to achieve a bright economic future.

“A crisis is wasted if some good does not come from it. There is hope that political parties may put the country over party interests and resolve to fix the economy,” the report stated, mentioning, “the current account deficit for the FY’23, even after administratively compressing imports, runs at $7-8 billion. All but about $10 billion of our $100 billion foreign debts are due for repayment in the next three years, and foreign exchange reserves stand at under a month’s imports.”

With a narrow tax base and unchecked public expenditures, the country has failed to address fundamental flaws in the economy, according to the council. “As a result, the people of Pakistan rank at the bottom in most socio-economic measures in South Asia.”

The report stated that even China and other friendly countries which are Pakistan’s traditional patrons, were suffering from donor fatigue. “They are hesitant to assist without the comfort of an IMF programme, which assures prudent policies.”

IMF’s preconditions – market determined exchange rates, revision in price of petrol and diesel, and increase in energy tariffs are being implemented belatedly causing inflation in January ‘23 to clock at 27.6 percent, the highest in 47 years. It will push more into poverty, which with lay-offs by businesses affected by import restrictions, and will threaten street agitation, according to the report.

“There is good reason to believe that consistent policies and their continuity benefit the country. Examples of recent successes of policy continuity include the war on terror, the BISP/Ehsaas Programme, expansion in power generation, managing the fallout from the Covid pandemic and moving out of the FATF grey list. All benefited from consensus.”

The report suggested some immediate key reforms such as augmenting and extending the IMF support and buying time for fundamental reforms by reprofiling debt through assistance from sovereign debt advisors.

Maintaining a narrow exchange rate spread between interbank and open market, reducing the use of imported fuel for energy, cutting the public expenditure by adopting austerity measures were also highlighted in the report.

PBC also proposed to widen the tax base by including the untaxed wholesale, retail, and real estate sectors. The long-term reforms it mentioning included food security and affordability, security to power supplies at a competitive cost, and reducing the burden of state-owned enterprises through restructuring and privatisation. It also urged to boost exports by broadening the export basket and widening the geographical reach.

“With global recession and compression of demand for goods like textiles, sharpen the focus on export of services. Provide incentive in the form of rebates to services similar to those for export of goods,” it proposed.

The fixed rates of return on NPC had recently been revised but after significant lag from changes in global interest rates, the report said. “To avoid this in the future and to maintain continued attractiveness of NPCs, it is recommended that LIBOR-linked floating rates be announced.”

PBC emphasised that there was no alternative to limiting imports to essential items: fuel, food, drugs, agricultural inputs, export inputs. However, transparency should be provided to importers of other items to enable them to plan, it added.

The council stated that fuel tariffs should be in line with global rates and commitments made to the IMF be implemented. It also proposed to provide direct subsidies to low income users and tax the wholesale/retail with an estimated Rs234 billion untaxed potential.

Regarding inflation and availability, the report said cross-party recognition that shielding the public from the havoc of inflation by fighting the root causes was a collective responsibility rather than an opportunity to divide for greater political capital.