Huzaima Bukhari, Dr. Ikramul Haq & Abdul Rauf Shakoori
Pakistan is persistently confronting economic challenges, the resolution of which hinge on IMF’s new program, future conditions and Pakistan’s adherence to them with the hope of regaining the path to economic prosperity. If secured, this would mark Pakistan’s third IMF program since 2019. The Extended Fund Facility (EFF) worth $6 billion later extended to $7 billion ended prematurely in June 2023. Subsequently, on Prime Minister Mian Muhammad Shahbaz Sharif’s request, Pakistan signed a $3 billion standby arrangement (SBA) in July 2023. Now, negotiations are underway for a new agreement with the IMF.
While this prospective program is critical for Pakistan’s economic development and survival, concerns have emerged regarding IMF team’s inaccurate estimates of Pakistan’s current account deficit and potential loan payments. These discrepancies have sparked debate within Pakistan.
Despite completing the 9th review process, delays in signing staff-level agreements and disbursing payments have resulted in a premature lapse of the Extended Fund Facility (EFF) forcing the government to impose stringent conditions in a bid to stabilize the economy, triggering inflation and policy rate hikes, which have caused overall business climate to become gloomy. Furthermore, adherence to harsh conditions has bred uncertainty, particularly impacting importers who incurred significant losses due to strict import restrictions. Moreover, the looming threat of default has negatively affected foreign investments, among many other sectors.
Implications of these rigorous measures, rooted in erroneous calculations, have rippled across the economy, impacting SMEs, exports, and the populace at large. Pakistan has borne significant losses and remains entrenched in financial struggles as a result. Now, questions emerge regarding IMF’s revised estimates for current account deficit and disbursements of liabilities. Should IMF’s managing director hold her team accountable for this gross negligence?
In addition, concerns arise regarding competence of the IMF team and the necessity for investigations into potential political motives behind these miscalculations. Clarity and accountability are essential to restoring trust and stability for Pakistan’s economic growth. IMF’s latest report acknowledges emerging signs of economic stability marked by a gradual decline in inflation and ongoing relief from external pressures noted at the initial review yet the overall economic outlook remains challenging, with significant downside risks.
In this context, Pakistan must take proactive measures that include, fostering political stability and handling judicial crises. While our articles have emphasized the need to revamp judicial system to ensure transparency and accountability, replacing the current self-accountability system envisaged under article 209 of the Constitution of Pakistan giving unfettered powers to one person as chairman of the Supreme Judicial Council for judge’s accountability is highly advocated. Besides, appointment of judges in superior courts have raised numerous questions. Due to lack of a transparent and merit-based selection process, there is no way to ensure that candidates are evaluated solely on their competence, qualifications, and relevant experience. Judges are being labelled as driving political agenda and a few are complaining in writing regarding interference in their affairs, which is strange as they have unfettered, powers. The government must implement proper system for appointment of judges with rigorous screening mechanisms to assess candidates’ legal acumen, integrity, and ethical standards, including thorough background checks and vetting procedures. It may be appreciated that since its establishment, the judiciary’s performance has been a subject of scrutiny, influencing Pakistan’s present economic and political health.
For economic growth, Pakistan must address fundamental governance issues. Pervasive interference by both judiciary and military in matters of Executive have adversely impacted not just the economy but also, Pakistan’s political and democratic values. It is critical for Pakistan to confront these challenges and streamline governance. In its 10 May 2024 report, IMF lauded Pakistan’s policies, citing them as pathways to economic stability. Furthermore, recent data on Consumer Price Index (CPI) indicates a decline in inflation, signaling positive economic trends. Pakistan should leverage these commendations in its best interest.
The IMF country report also acknowledges that overall, Pakistan’s external position in FY23 aligns well with medium-term fundamentals and favorable policies. Current account deficit notably narrowed to 0.7 percent of GDP from 4.7 percent in FY22. Importantly, import payment restrictions prevented a larger deficit, indicating the necessity for real exchange rate adjustments. In FY24Q2, the current account achieved a modest surplus of around US$200 million, primarily due to export growth. Projections indicate imports will rise in the remaining quarters, leading to a FY24 CA balance of approximately -0.8 percent of GDP, compared to -0.7 in FY23. The cyclically adjusted CA in FY23 was estimated at -0.6 percent of GDP, slightly below the EBA CA norm of -0.7 percent. Staff suggests the norm should be closer to -0.5 percent to bolster NIIP, resulting in a CA gap of -0.1. Import payment restrictions in FY23, not factored into the EBA model, may worsen the external position, and overvalue the REER.
IMF also highlighted that Pakistan’s Net International Investment Position (NIIP) remained stable at US$-131 billion in 2023, comparable to 2022 but lower than the FY2019-2022 average of US$-116 billion. Net direct investment was US$-28.8 billion, while net portfolio investment amounted to US$-9.3 billion. Pakistan’s International Investment Position (IIP) lacks significant holdings in financial derivatives.
The report also highlighted that the gross reserves saw a significant decline in FY23, dropping to US$4.5 billion, but have since seen a gradual recovery, reaching US$8.2 billion by December 2023. Additionally, SBP has reduced its negative net forward position. However, Pakistan’s gross reserves in 2023 only reached 18.2 percent of the IMF’s adequacy metric, well below the normative range. The report suggested that to sustain ongoing reserve accumulation efforts, it is important to avoid actions that could trigger excessive real appreciation.
IMF report also explained that FBR maintains annual revenue targets, but potential shortfalls are anticipated in April and May 2024 due to holiday-related port closures. Contingency plans are in place to address any revenue collection gaps, with a focus on meeting SBA’s revenue administration objectives. Delays are there in efforts to increase revenue from retailers, while challenges persist in curbing smuggling and clandestine production in the tobacco sector despite implementation of track-and-trace system that FBR intends to extend to other sectors like sugar, fertilizer, and cement aims to enhance control over informal markets, with 1.1 million new filers registered, including 170,999 through enforcement actions.
Reforms initiated by the caretaker government face delays, necessitating renewed efforts for swift implementation. Launch of a retailer registration and tax enforcement scheme, slated for January 1, 2024, with the legal framework established through an SRO on March 30, 2024, has been postponed. Registration is underway, with tax collection scheduled to commence by July 1, 2024. Plans to transform FBR into a semi-autonomous body are deferred for engagement with a consulting firm. Despite setbacks, progress is made in areas such as enactment of documentation law and collaboration with NADRA. The Compliance Risk Management team has identified 39 high-risk cases, auditing 31, with projected additional revenues of Rs. 40 billion. Expansion of risk management training and digital invoicing system framework are underway, addressing implementation challenges by June 30, 2024.
In order to improve governance and economic stability, the government should introduce a mechanism to implement the principle of trichotomy of powers to restrict each organ of the state within its domain. Additionally, leveraging positive assessments from the IMF, Pakistan should prioritize economic policies conducive to growth, focusing on revenue collection, GDP expansion, and attracting foreign direct investments. Moreover, swift implementation of reforms, particularly in tax enforcement and digital invoicing, will bolster economic resilience and pave the way for sustained growth and stability.
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Huzaima Bukhari & Dr. Ikramul Haq, lawyers and partners of Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS), members Advisory Board and Visiting Senior Fellows of Pakistan Institute of Development Economics (PIDE). Abdul Rauf Shakoori is a corporate lawyer based in the USA and an expert in ‘White Collar Crimes and Sanctions Compliance’. They have coauthored a book, Pakistan Tackling FATF: Challenges and Solutions
