Breathing space

PAKISTAN’S last-gasp $7bn IMF bailout approved by the multilateral lender more than two months after an agreement was reached between the two sides sets a massive and difficult agenda for the government. The approval of the 37-month package will kick the ‘default can’ further down the road, providing the authorities some space to address the structural economic issues that have brought the country to the IMF’s doors for a record 25 rescues since 1958.
The new programme targets debt sustainability and macroeconomic stability through consolidation of public finances, build-up of foreign exchange reserves, restoration of a debt-ridden energy sector, and an improved business clime to encourage private sector-led growth. In addition, the loan stipulates an expansion in social spending and protection, the imposition of an effective agriculture income tax, transfer of several fiscal responsibilities to the provinces and the curtailment of subsidies.
The funding programme, which makes Pakistan the most frequent borrower of IMF funds besides being its fifth largest debtor, also envisages a substantial increase in tax revenues to boost the tax-to-GDP ratio by three percentage points to 13.5pc in three years. The politically and economically beleaguered Shehbaz Sharif government has already implemented additional taxes of nearly Rs1.8tr, and heftily increased electricity and gas prices to get access to fresh IMF funds. As is evident from this year’s budget, the wealthy classes have again evaded the extreme pain of fiscal and economic adjustments with the working classes shouldering most of this burden.
In spite of delays, the loan’s approval was never in doubt. The question is: will this programme help Pakistan emerge from its economic crisis? Or, more importantly, will the government be able to meet the stringent loan conditions? This question becomes even more crucial because lenders like ADB believe that rising political and institutional tensions may make it difficult to implement the reforms that Pakistan has committed to delivering. Struggling with boom-and-bust economic cycles for decades, the country has been facing anaemic economic growth, high inflation and a balance-of-payments crisis for over two years now.
So far Islamabad has warded off a default and accessed IMF funds, with generous support from China, Saudi Arabia and the UAE. With debt payments totalling $90bn over the next three years, this support will not be enough for the country to come out of the crisis. No doubt the programme is crucial to end the uncertainty around Pakistan’s ability to pay its debts. But the government needs to go beyond the stipulations of the bailout to drive long-term economic growth and break out of endless IMF rescue cycles. Is it prepared to execute the IMF-mandated reforms and also look beyond for longer-term stability? Its actions so far, especially its taxation measures, inspire little hope.
Published in Dawn, September 27th, 2024