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Rescue Pakistan?

An IMF-led rescue of Pakistan has averted a likely default on the country’s foreign debt repayments — but only for now. As Pakistan’s ruling elite this week eagerly celebrated a short-term lift to economic prospects driven by the Washington-based lender’s expected promise to lend another $3 billion over the next nine months, there is a real life danger of the country’s many slippages continuing as before.

On Monday, the proverbial ‘bhangra’ exhibited through a spectacular surge in Pakistan’s stock prices and an appreciation of the rupee, nevertheless failed to prove that the latest IMF deal will also be the last such bailout.

Beyond the flow of precious dollars to boost Pakistan’s depleting foreign exchange reserves, the country’s average households are saddled with the worst economic pressures witnessed in their history, thanks to historically high inflation touching close to 40 per cent just two months ago.

For many businesses and industries across Pakistan, the writing on the wall is hardly encouraging. It is possible that in the short term the imports already piled up on Karachi port and waiting for clearance will find the financial room to be finally released.

Under Pakistan’s latest promises to the IMF, the build-up of reserves will require the State Bank of Pakistan to clear the letters of credit [LCs] that have been held up for several months.

This will consequently allow some of Pakistan’s badly stalled industries notably local assemblers of automobiles, textile units and other import dependent units to return to productivity. Yet, this will hardly mark a return to normalcy.

Several months of an ill-advised delay under the leadership of Finance Minister Ishaq Dar in securing an IMF deal have already caused incalculable harm to the economy. With the new lifeline of three billion US dollars replacing the $6.5 billion Extended Fund Facility whose completion ended in failure at the end of June, the way forward will come with tough choices.

Another jump in electricity tariff in July under the guise of ‘rebasing’ of tariff will further raise already high productivity costs for many industries, while eating further into already shrunk household budgets. And higher indirect taxes slapped in last month’s annual budget have forced many businesses to lose their already stressed competitive edge against their peers from other countries.

Should Pakistan with its powerful reality of having an increasingly weak governance structure now fear further inroads by smuggled products from countries with a competitive advantage? That is a compelling question which must trigger sleepless nights for some of the country’s highest placed policymakers.

Eventually, solving Pakistan’s economic crises requires an unprecedented push in three areas: first, deep cuts in government expenditure must not only be made unlike any before. This must also be very visible, exemplified by actions of the ruling elite. Amidst the worst inflation in Pakistan’s history, the gap between the ruling class and the ruled in their spending habits remains high. An IMF enforced belt-tightening is now a necessary evil.

But making that bitter pill more palatable requires the elite to step forward and embrace a series of steps that strike down their very own privileges. Ultimately such an exercise must prove that the nation stands together in sacrificing personal privileges irrespective of status in society. Eventually, a much greater push to demonstrate a ‘shared pain’ is the only way to rebuild the public’s confidence.

Second, a robust attack on privileges will remain unimpressive unless backed by a brutal attack on the very powerful reality of tackling visibly widespread tax evasion. Despite Prime Minister Shehbaz Sharif’s public promise to clamp down on tax dodgers across the board, his words need to be backed by tough action. For instance, the space given to ‘non-filers’ marks a convenient way for those who are not registered as income tax payers, to also afford items of high cost symbolizing affluence. Meanwhile, in Pakistan’s history it is hard to recall a year when tax evaders were caught, put on trial and eventually sentenced harshly for not paying their dues. Unless this powerful reality changes radically, the promise of Pakistan’s economic reforms will mean nothing more than mere lip service.

Finally, Pakistan’s much too visible compromise on rule of law has shattered the country’s stability and knocked down prospects for vital areas including the economy. Large-scale investment initiatives include examples of those pushed back simply due to failures on the legal front. It is commonplace to find examples of companies facing non compliance by local collaborators around already agreed terms. And cases of outright financial fraud have been many. Unless Pakistan can successfully instill the fear of law across the board, the future of its economy will become periodically bleak.

And that’s where a short-term relief such as the IMF’s latest loan to Pakistan will become no more than another band aid to rid the country of its long-term economic challenges.

Email: farhanbokhari@gmail.com

Farhan Bokhari, "Rescue Pakistan?," The News. 2023-07-05.
Keywords: Economics , Economic crises , Economic reforms , Taxation , Industries , PM Shehbaz Sharif , Pakistan , IMF