Between first and last resort

As the month of June progresses, Pakistan’s ‘one-tranche stand’ with the International Monetary Fund (IMF) is nearing its end. The most likely scenario is that the two sides will not reach an agreement on completing the ninth review of the ongoing programme. In that case, Pakistan will not receive any tranche of the remaining amount and will have to renegotiate a new program whenever both sides are ready for it. The likelihood of this scenario is further increased by the heated debate on Budget 2023-24 between the two.

The IMF has expressed its serious reservations over the proposed budget. One of the main issues raised by the IMF is that the budget does not adequately address structural reforms, which are essential for sustainable economic growth. It argues that the budget missed a chance to implement these reforms, such as broadening the tax base, improving tax administration, and strengthening public financial management. The Fund also believes that these reforms could have helped Pakistan achieve its economic goals, such as reducing the fiscal deficit, increasing public investment, and enhancing social spending.

Another issue raised by the IMF is that Pakistan’s budget does not tax the wealthy enough, offers too many tax exemptions, and reduces the equity of the tax system. It has also criticized the budget for encouraging tax evasion by offering an amnesty scheme for bringing up to $100,000 to Pakistan without revealing the source of income.

The IMF claims that the new tax expenditures reduce the resources available for social protection and targeted subsidies. It cites examples of tax expenditures such as reduced sales tax rates for certain sectors, and exemption of income and withholding tax for certain other sectors. The IMF argues that these tax concessions could have been used to improve health, education, and social safety nets. The IMF also urges the budget to address the liquidity problems of the energy sector, which pose a major risk to fiscal stability. It offers to assist the government in improving the budget before it is passed by providing technical assistance and policy advice.

In response to the IMF’s comments, the government of Pakistan maintains that it is committed to completing the IMF programme but also has the right to give some tax concessions to stimulate growth and employment. It defends tax concessions, such as reducing customs duty on raw materials and IT equipment, which will help to revive the industry and boost IT-enabled services. It also highlights an increase in the number of taxpayers by 26 per cent in the last eleven months and an increased tax target by 24 per cent for the next fiscal year as proof that Pakistan is committed to improving its revenue stream.

The government also claims that the budget’s 37 per cent higher allocation for federal PSDP reflects that it is not ignoring public-sector development. Defending the amnesty, the Ministry of Finance has clarified that it was merely dollarizing an existing provision of the income tax ordinance.

Let’s examine the reasoning of both parties carefully.

It is obvious that the draft federal budget is not very realistic. The finance minister rightly says that the budget aims to increase tax and non-tax revenues, but the IMF doubts that Pakistan can achieve an astonishing 88 per cent increase in its non-FBR revenue, reaching Rs2.9 trillion, as claimed in the budget document.

The IMF would not object to tax concessions and expenditures if the government could raise sufficient revenue. However, all expenditures, including debt payments, depend on borrowing. Here the IMF thinks that the government’s external borrowing plan is too ambitious and may not materialize.

In the outgoing fiscal year (2022-23), Pakistan planned to borrow Rs5.5 trillion from external sources (multilateral and bilateral) to finance its deficit, but it could only secure Rs3.2 trillion. For the next fiscal year, the government has planned to borrow Rs6.8 trillion ($23.44 billion at the rate of 290 rupees a dollar) from external lenders, more than double what it could borrow in the outgoing fiscal year.

The budget document relies on the assumption that Saudi Arabia and the UAE will provide new commercial deposits of Rs580 billion ($2 billion) and Rs290 billion ($1 billion), respectively. It also assumes that China would more than double its deposits compared to the current fiscal year, and that commercial banks would increase their lending to Pakistan by nearly three times, taking it to $4.6 billion. It also assumes that Pakistan can raise Rs435 billion ($1.5 billion) through international sukuk and bonds, and most importantly, that the IMF will lend Rs696 billion ($2.4 billion) in the next fiscal year.

It is ironic to assume that Pakistan will easily receive $2.4 billion from the IMF in the next fiscal year when it has been unable to conclude its current program. To move on to the next programme, it would have to complete all the outstanding tasks from the current programme first. This process can be quite time-consuming and require much political will.

Similarly, it is unlikely that Pakistan will be able to secure affordable market financing anytime soon, whether through Eurobonds or commercial banks, due to its credit rating challenges.

There is no denying that Pakistan is a sovereign country and cannot be dictated by the IMF regarding the contents of the draft budget. However, there is also no denying that if Pakistan wants to borrow $2.4 billion from the IMF in the next fiscal year, as proposed in the budget documents, then it needs to take the IMF seriously.

The quick refinancing of $1 billion by China that Pakistan recently paid to retire its commercial loan suggests that the finance minister is indeed working on a ‘Plan B’ without the IMF. However, that plan seems as overly ambitious as the proposed budget is. The people and economy of Pakistan are finding themselves caught between the lender of first resort (China) and the lender of last resort (IMF).

The writer heads the Sustainable Development Policy Institute. He tweets @abidsuleri