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Business Recorder

Reforms key to recovery

EDITORIAL: Anna Bjerd, World Bank Managing Director for Operations, after the conclusion of her two-day visit to Pakistan during which she also met Prime Minister Shehbaz Sharif commented that Pakistan's path to sustainable economic recovery and poverty alleviation rests on comprehensive reforms that prioritise human capital, macroeconomic stability, climate resilience, sustainable energy and private sector growth. While such exhortations have been repeatedly given by senior officials of multilaterals for more than two decades yet there is a growing perception in Pakistan that the programme designed by multilateral staff has several major flaws not only because they insist on standard normal conditions that are simply not applicable in Pakistan (particularly with reference to inflation control through a high discount rate) but also by Pakistani authorities agreeing to policies that have had severe implications on poverty levels which, as per a recent report of the World Bank, have reached a high of 42.4 percent (an example being taking administrative measures to pass on the costs of poor governance in the power sector and tax structure onto the general consumers). In this context, it is relevant to note that the World Bank in a recent report maintained that general sales tax has made the largest marginal contribution to the poverty increase as GST payments accounted for 7 percent of households' pre-tax expenditure, which lends to further impoverishment. During the week past the head of the department that designed and is implementing the 36-month-long ongoing Extended Fund Facility programme was also on a visit to Pakistan together with the mission leader and met with various members of the government, including the President who acknowledged that the IMF had helped the government stabilise the economy. There is no doubt that without an active Fund programme the threat of default was a distinct possibility not only because the Fund programme gave a comfort level to other multilateral donors but also because the three friendly countries (China, Saudi Arabia and United Arab Emirates) that have extended 16 billion-dollar rollovers this year indicated that they would withdraw the facility unless Pakistan is on a rigidly monitored Fund programme. While domestic economists have yet to express any satisfaction at the state of the economy (with rollovers admittedly 2 billion more dollars than the 14 billion dollars projected by the end of the current fiscal year), and net inflows are in the negative, yet there is no doubt that the looming threat of default has been averted. However, the first review report of the IMF warned that 'while the Debt Service Surcharge (DSS) are expected to fully cover payments the authorities must remove the existing DSS cap (end June 2025) to ensure that the DSS can be adjusted if needed to cover payments should there be any shortfall.' This is critical, given the limited fiscal space, which makes it necessary to ensure that the operations are entirety financed out of the existing DSS, the Fund argued. Finance Minister Muhammad Aurangzeb had previously stated that the budget would be finalised after the week-long discussions with the Fund scheduled to end on 23 May, which prompted Ahsan Iqbal, the Planning Minister, to state that the budget would be presented to parliament on 2 June. However, Iqbal has now stated that the budget would be presented on 10 June with speculation rife that the authorities and the Fund staff have yet to agree on certain government proposals and finalise the budget. There is little doubt that subsequent to India's failed adventurism defence outlay would have to rise; however, there is intense debate amongst domestic economists that the lack of a consensus with the IMF relates to the government's intent to lower the tax on the salaried, which has contributed to pushing more below the poverty line, reducing the electricity rates based on projection of reduced costs, higher external borrowings projected for this year (that may be a challenge as budgeted external borrowings this year did not materialise), greater reliance on sales tax with implications on poverty, an easy to collect tax, and low growth with rising unemployment due to input costs in this country being much higher than the regional average. We not only hope but expect that structural reforms will begin to be implemented in earnest rather than passing on the buck to the hapless consumers as in previous programmes that accounts for strengthening of the elite capture with respect to budgeted revenue generation as well as expenditure allocations. Copyright Business Recorder, 2025