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Pakistan, IMF & SBP

The expected dividends of Shehbaz Sharif, Prime Minister of Pakistan’s maiden visit to the Gulf are still awaited. These are delayed because of some “procedural matters”. During his tour, he met with the leadership of Saudi Arabia and the United Arab Emirates (UAE). According to media reports, Saudi Arabia promises to extend a US$ 8 billion economic package that includes deposits in the State Bank of Pakistan (SBP) to facilitate the balance of payments crisis and a deferred oil payment facility. Similarly, Pakistan is looking forward to receiving an economic stimulus package along with investments from the UAE as well—a high-powered delegation visited Pakistan to explore investment opportunities and formalise Memorandums of Understanding (MoUs). The UAE has already rolled over the amount of US$ 2 billion as a deposit with the SBP.

Apart from securing financial support from the Gulf countries, the biggest task for the incumbent government is handling negotiations with the team of the International Monetary Fund (IMF), expected to meet in Doha on 18th of this month, to finalise the modalities of Pakistan’s request for extension and enhancement of Extended Fund Facility (EFF). It is obvious that the IMF team will discuss implementation of the conditions agreed upon by the previous coalition Government of Pakistan Tehreek-e-Insaf (PTI) under the IMF Country Report NO. 22/27, issued in February 2022.

Till date, the above initiatives have not crystalised. The government attributes this delay to procedural matters and expects to achieve its goals soon. However, the experts and independent observers equivocally believe that the government’s indecisiveness to take bold economic decisions is shattering the confidence of IMF and the same is adversely affecting negotiations with the Gulf States. Moreover, it is not clear who is in charge on the economic end. Is it the de jure Finance Minister Miftah Ismail or the de facto Finance Minister Muhammad Ishaq Dar? While giving interviews to different media outlets, Ishaq Dar has been very vocal against IMF programmes. He has been casting his doubt over proposed terms. This dichotomy of thought and approach has given rise to a complex situation. Resultantly, the economic challenges are widening and becoming tougher.

Earlier, the economic decision-making of the PTI government was completely subservient to IMF’s policies. All key steps were taken to facilitate the objectives of the global lender. As per the commitment, the PTI government approved the Finance (Supplementary) Act, 2022. It withdrew zero-rating and reduced rate treatment under the Sales Tax Act, 1990 by omitting most goods from the Fifth Schedule, Sixth Schedule, and Eighth Schedule to bring these within the ambit of a standard sales tax rate of 17%. This ignited a new inflationary cycle. However, the PTI government defended this action in the name of fulfilling the conditions agreed with the IMF, disregarding interest of the public at large.

The PTI government also committed to revising Personal Income Tax (PIT) in the upcoming budget for fiscal year 2022-23 to reduce income tax brackets, raise tax rates, withdraw tax credits/allowances, and bring more persons into the tax net. The PTI government also reaffirmed its commitment to not granting further tax amnesties and giving up the practice of issuing new preferential tax treatments and/or concessions/exemptions.

In order to facilitate local and export-oriented business and to combat COVID-related challenges, the SBP offered multiple refinancing schemes. The IMF’s report warned against their expansion and opined that these would undermine SBP’s efforts to implement the monetary policy credibly—as well as these were bound to hamper achievement of its primary objectives. It called for the eventual phasing out of the refinance facilities. The IMF’s report mentions that the authorities agreed that the Ministry of Finance and SBP would jointly design a plan, in consultation with other stakeholders, to establish an appropriate Development Finance Institution—it shall provide the basis to transfer refinancing schemes to the government. Further, after adoption of the State Bank of Pakistan (Amendment) Act, 2021, refinancing facilities could only be allowed only where these complement SBP’s mandate and without compromising its primary objective.

In the energy sector, the IMF emphasised the regular implementation of tariff adjustments in line with established formulas, as it believed it was an important measure to avoid further accumulation of arrears/circular debt stock. The IMF further required better targeting of power subsidies and subsidy reforms to reduce the number of subsidised consumers and a more progressive tariff structure. The PTI government also accorded its written approval for raising the petroleum development levy (PDL) by Rs 4/liter/per month for the remaining fiscal year (FY) 2022 until the maximum of Rs 30/liter was achieved.

Interestingly, Dr Reza Baqir, one of the signatories of the letter of intent and the main player in negotiating a deal with IMF, relinquished his charge on May 4, 2022 after completion of a three-year term. During his tenure, he was criticised by politicians and independent financial experts due to his previous affiliation with the IMF. The present government, faced with the challenge to find his replacement, temporarily appointed Dr. Murtaza Syed, senior most Deputy Governor, as Acting Governor of SBP on May 6, 2022. The vital question is: will the new Governor SBP be able to revise the actions of his predecessor that created problems like double-digit inflation, depleting reserves, and worst-performing currency? One of the most objectionable actions by Dr Reza Baqir was generating foreign liquidity through “hot money” where funds were raised from the international market at exuberantly high rates.

It may be noted that the Pakistan Muslim League (Nawaz) and other partners of the current coalition government criticised the terms of loans agreed upon between the IMF and the previous government. Legislation regarding SBP was also termed a ‘conspiracy’ to undermine the supremacy of Parliament—a move to compromise the financial independence of the country. The then opposition and currently the government told the public in media that these changes would be reversed, and no compromise would be made on the autonomy of SBP.

As per the State Bank of Pakistan (Amendment) Act, 2022 [“the Act’)], SBP will ensure domestic price stability. However, the law does not define ‘price stability. In Pakistan, managing prices is the domain of federal as well as the provincial governments—expecting SBP to work for domestic price stability is misplaced. Likewise, SBP has a limited role to play regarding food and energy inflation that is based on tariffs, duties, domestic and international market prices, demand, and supply factors.

Further, this Act increases the functional and administrative autonomy of SBP, which bars the role of the government in managing policy and exchange rates. Delegation of this power was a long-awaited objective of the IMF and independent lenders as they underscored the need for driving the exchange rate through market forces.

The Act was expected to ease pressure on foreign exchange reserves especially when the government starts pumping dollars into the market to artificially maintain rupee parity. However, for economies like Pakistan, the regulator, and other government institutions must be cognizant of the fact that certain market forces can manipulate the exchange rate, and in such circumstances, SBP cannot simply alienate itself. Pakistan is an import-based country, and a slight devaluation can have a multiplier effect on the overall import bill. To avoid this vicious cycle, the oversight role is crucial. The new government should assess whether, by extending functional autonomy to SBP, we have been able to achieve the desired results or not. Similarly, amendments related to borrowing facility and imposition of the condition that at the end of each quarter, it must be returned leading to zero net borrowings need reconsideration.

All state institutions must be held accountable for their decisions and actions. No institution or department should have privileges of immunity or special relaxation. The law must be applied equally and equitably to uphold the spirit of accountability envisaged under the Constitution of the Islamic Republic of Pakistan.

All the written commitments made by the PTI government with the IMF are binding on the new coalition government. Therefore, while renewing the EFF facility terms, the focus should be on revenue-generation and structural reforms in all areas.

Catch-22 for the new government is to maintain equilibrium between protecting the socio-economic status of citizens, especially the less-privileged, as well as addressing concerns of global lenders. Any assurance to remove subsidies or imposition of additional taxes will badly affect lives of ordinary citizens. Therefore, the government should undertake structural reforms, control leakages, privatise loss-making entities or make them profitable through structural reforms, cut wasteful expenditure and mobilise revenues to bridge the fiscal gap.

Huzaima Bukhari, Dr Ikramul Haq and Abdul Rauf Shakoori, "Pakistan, IMF & SBP," Business recorder. 2022-05-13.
Keywords: Economics , Political sciences , Political issues , State Bank , Media reports , Monetary fund , Economic , Political , Shehbaz Sharif , Miftah Ismail , Ishaq Dar , Dr. Murtaza , Pakistan , Saudi Arabia , IMF , US , SBP , USE , PDL , PTI , COVID

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