Paying the heavy toll

ISLAMABAD: Finally, the government has met all the conditions of the International Monetary Fund (IMF) for the review of the $6 billion programme, and the entire nation is already bearing its repercussions in the form high inflation, an economic slowdown and increase in the cost of doing business.

For Finance Minister Shaukat Tarin the current IMF programme remains the most difficult one for any country in which “harshest-ever conditions” have been imposed on Pakistan.

“In 2008, after my negotiations with the IMF as the finance adviser, 40 per cent of the tranche was released upfront without negotiating the terms and conditions; however, this time around, the IMF gave a tough time to the government and put very tough clauses…,” he told reporters.

Analysts say that the geopolitical situation, especially the estranged relations between Pakistan and the United States is the major reason for IMF’s harsh conditions.

The Finance Minister agrees to this albeit cautiously.

The rise of the Taliban in Afghanistan and the China-Pakistan Economic Corridor (CPEC) are not being welcomed by Washington, he said. As a result, Pakistan is facing serious fallout in the current IMF programme, he added.

Industrialist and leader of the Karachi business community Zubair Motiwala also endorsed the views of the finance minister.

“This IMF programme is totally anti-people and anti-investment and it seems that the US and other Western countries want to keep Pakistan’s economy under their influence so it can’t become self-sufficient and take decisions on its own,” he said.

In Pakistan, the energy cost was already high but since the IMF programme started, the government increased the electricity and the gas tariffs, Motiwala said.

The government increased the power tariff by Rs5.17 in the last two years, taking the cost of electricity to Rs17 to Rs18/unit on an average.

“With the rising input cost, I don’t think exporters will be able to meet the export target of $31 billion set by the Ministry of Commerce. I guess we’ll end up somewhere in between $26 billion to $27 billion,” Motiwala said.

Pakistan’s exports are finally showing signs of recovery, which is a good omen. But, at the same time, if the government imposed new taxes or withdraw exemptions, then it can have serious repercussions on the economy, especially on exports, he added.

Senior economist and former finance minister Dr Abdul Hafeez Pasha said that through the withdrawal of tax exemptions, the government will be able to collect additional revenue of around Rs200 billion to Rs220 billion against the target of Rs343 billion set by the government.

“The government, which offsets the shortfall of over Rs300 billion on account of petroleum development levy, has to take measures to enhance the revenue collection,” he added.

During a meeting of the Senate Standing Committee, FBR Chairman Muhammad Ashfaq Ahmed said that the government will impose more taxes or withdraw further tax exemptions next year, if the current measures failed to deliver.

“The IMF has made a rule of thumb that there should be a standard rate of 17 per cent general sales tax (GST) across-the-board to generate the desired revenues for running the government without borrowing any amount from the State Bank of Pakistan,” he added.

In several cases it was difficult to defend some exemptions because they were obtained by the vested groups by exerting pressures in the past, the FBR chairman said. The IMF argued that if all exemptions were taken into account then Pakistan should be the most industrialised country but it was not the case because these were the incentives given to the powerful lobbies, he added.

The Chinese authorities and investors have also expressed concerns over the IMF programme. The rupee depreciation and a hike in the interest rates created a negative impact on the CPEC projects.

The opposition leaders also echoed the concerns of the Chinese investors and claimed that the investment in CPEC projects has slowed down.

The government maintained that the CPEC projects with the Chinese investment of $50 billion are of great importance and it is doing its best to facilitate them.

Many economists and other stakeholders believed that the rise in interest to 13.25 per cent and the depreciation of the rupee to 165 against the dollar in 2019 proved a disaster for the economy.

There are some glaring contradictory objectives by the government in the economic policy making by tabling two bills in the Parliament, as the SBP’s Amendment Bill envisaged the objective of the central bank to control inflation, while the Finance Supplementary Bill 2021 removed the general sales tax (GST) exemptions and enhanced other taxes that would fuel inflation, the economists said, and demanded clarity in the objectives of the policy making.

Finance Minister Shaukat Tarin, without naming former adviser on finance Dr Abdul Hafeez Shaikh and incumbent SBP Governor Dr Reza Baqir, said that those who signed the agreement with the IMF should be asked about the commitments, which are totally impractical and could compromise the country’s sovereignty.

“Whenever I argue with the IMF on certain clauses, they show me the agreement in which the government gives commitment to fulfil it,” he said.

He also admitted that the Ministry of Law was not taken onboard, especially regarding the State Bank (Amendment) Bill 2021 and later it raised serious reservations on it, which delayed the revival of the IMF programme.

The commitment to abolish the Monetary and Fiscal Policies Coordination Board proved harmful but, at the same time, all the appointments in the State Bank, including the deputy governors and other senior officials will be made by its non-executive board, which will be nominated by the federal government and resultantly it will maintain its control, he added.

Despite mentioning the exchange rate regime as the domain of the central bank, the finance minister said the rupee is undervalued by almost Rs10 against the dollar. “In my opinion, the real value of the rupee is in the range of Rs165 and Rs166 against the dollar and not over Rs175 on which it is trading, at present.”

Tarin also claimed that now a number of banks are involved in speculative business of dollars and creating artificial shortages to jack up the exchange rate.

“I asked the SBP governor to look into these unethical and unfair practices of the banks and punish them,” the finance minister said.

With the rising twin deficits and increasing cost of doing business, it seems that the government has to take some measures to soften the impact of the IMF conditions.

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