Pakistan Business Council asks IMF for five-year funding plan to fix economy

Our Correspondent
Tuesday, Mar 05, 2024

KARACHI: The Pakistan Business Council (PBC) has urged the International Monetary Fund to offer the country a longer-term funding program as the new government faces a daunting economic crisis.

The PBC said in a letter to the IMF’s resident representative, Esther Perez Ruiz, that front loading of targets by the IMF stems from the relatively short-term programmes that have hitherto been offered to Pakistan.

“For this reason, we suggest that the 24th programme should be of a longer, five-year term,” Ehsan Malik, PBC chief executive, said in the letter. “Aside from stemming the leakage from the energy sector, bleeding of the fiscal account by state-owned enterprises needs to be arrested. A longer, five-year programme will allow the IMF to make tranche releases conditional on progress on fundamental reforms of the energy sector and the privatisation or closure of loss-making state enterprises.”

The PBC’s appeal comes as the new government led by Prime Minister Shehbaz Sharif is expected to negotiate a fresh bailout from the IMF after the expiry of the current $3 billion standby programme in April to cope with dwindling foreign reserves, and a looming debt crisis.

The council said that besides the financial burden, inefficiently run state-owned enterprises that operate in the commercial space, provide unfair competition to the private sector, impeding scale and competitiveness.

“The government should be encouraged to get out of business. The federal government will need to renegotiate the National Finance Award to incentivize provinces to meet a greater share of their needs from agriculture and property taxes.”

This will allow the federal government to control its deficit, limit borrowing, bring down inflation, which should lead to lower interest rates, it noted. "No doubt, IMF will require the mounting debts to be reprofiled to restore confidence in the economy. A larger as well as a longer IMF programme would provide creditors with the necessary comfort."

The PBC said as the new government takes shape, its major objective on the economy will be to negotiate a fresh, 24th IMF Programme. “We would like to share the contours that should differentiate the new programme from the previous twenty-three,” it said.

“That said, the primary reason why the previous programmes failed to lead to sustainable reforms was the lack of political will and determination of various governments.”

However, IMF too needs to reflect on the design of its assistance package. The flaws in the economy have worsened over the years and the new programme would need to take account of this.

“In our meetings with you and Mr. Nathan Porter, we have been stressing the need for IMF to move away from purely short-term and quantitative targets to a mix of medium term quantitative and qualitative targets.”

In the absence of the FBR’s capability and capacity, as also the weak political will of governments to disturb vote banks by broadening the tax base, IMF’s frontended tax collection targets have been met by raising the tax burden on those that are already bearing a disproportionate load, it added. The levy ofsuper tax is a case in point. Much of retail, wholesale, services, informal transporters, as well as the undocumented real estate sector, either go untaxed or are under-taxed. A target such as “tax from new tax payers” would be one way to ensure that tax revenue is increased in an equitable and sustainable way. Moreover, this would also prompt significant restructuring of the FBR.

"IMF’s tariff driven measures address the symptoms but fail to cure the fundamental defects in the energy sector. Pakistan suffers from the highest electricity costs in the region. The competitiveness of industry, its capacity to create employment, reduce import reliance and generate exports is impeded by the burden of unutilized generation capacity, inefficiencies in transmission, theft, non-recovery of dues and cross-subsidies to residential consumers."