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Success of IMF program depends on home grown plan, not on following fund’s recipe blindly

At a recently held seminar at the Sustainable Development Policy Institute (SDPI), Teresa Daban Sanchez, Resident Representative, International Monetary Fund (IMF) to Pakistan said, “The Fund’s program faces significant risk from a failure to build political consensus around its key components”. Added to this is the threat of failure to get off the ‘grey list’ of the Financial Action Task Force (FATF) that could complicate access to private financing from global markets. She also insisted that Pakistan has to get out of the grey list. She minced no words and said that the biggest risk faced by Pakistan is political risk.

The Government of Pakistan (GoP) has committed to making amendments to the State Bank Act, Nepra Act, Anti-Money Laundering Act and the State-Owned Enterprise Act as part of the IMF program. However, the incumbent government right now faces a weaker position and making these amendments may not be an easy task. A ray of hope emerged after the recent survival of Chairman Senate, in a non-confidence move. The situation demands better understanding of ruling regime with the opposition. It also demands the opposition to make a difference between ‘political rivalry’ and ‘achieving the national objectives’. Sitting Prime Minister, Imran Khan was the biggest opponent of borrowing from IMF, but has to swallow this bitter pill. Coming under an IMF program does provide a temporary relief but better policies have to be developed and implemented to find the sustainable solutions.

Documenting Gold Import

One of the requirements of FATF is that gold trade in Pakistan should be documented to avoid its use for money laundering and terrorism financing. Analysts FATF is completely unaware of the dynamics of this trade in Pakistan. They say if the central bank does not provide foreign exchange for the import of gold, the demand has to be met through smuggling, because gold is not produced locally. The FATF should make it mandatory for Pakistan’s central bank to provide foreign exchange for the commercial import of the precious metal.

IMF’s Resident Representative emphasized that failure to get off the ‘grey list’ of FATF could also complicate access to private financing from global markets. However, in the same breath she also created some hopes by saying, “Fund disbursements as well as those by other multilateral lenders such as the World Bank and Asian Development Bank have nothing to do with this listing. The Fund continues to work with countries even if they are in the blacklist. This clearly indicates that the Fund can be ‘accommodating’ if Pakistan is ready to extend favors and could also be ‘brutal’ if it does not pursue the foreign policy agenda of those countries enjoying majority at the IMF Executive Board.

Special Assistant to the Prime Minister, Dr. Shamshad Akhtar, who was Finance Minister in the last caretaker government, said stabilization of the economy was very critical for growth of the country, where one should not look at stabilization in isolation, rather a step forward towards the economic growth. She said that “there is no gain without pain”, after the period of stabilization, coupled with key structural reforms across the board, the economy would get out of the crisis. She added that the major economic challenge of the country is high consumption, low production and low savings and investments. The gap is widening between saving and investments, which pushed the country to seek foreign assistance.

 

While analysts have no doubt of the competence of Dr. Shamshad Akhtar, it seems she has been fed incorrect data. The country does not suffer from high consumption, on the contrary a significant percentage of population lives below the poverty line. Many of the industries face below optimum capacity utilization. On top of all the high inflation does not allow people to save any amount, which also keeps investments low, added to this is hardly any incentives for saving.

Analysts are also critical of her advocacy for introducing further structural programs, as previous programs have failed in yielding the desired results. They demand a detailed of some of the structural adjustment programs to determine, if the GoP failed in taking right and timely steps or the IMF condoned the deviation because it had to support Pakistan, being the frontline partner in war against terror.

The steps taken by the GoP to meet IMF conditionalities are attracting sever criticism. Analysts are of the consensus that Pakistan suffers from cost pushed inflation. Therefore, the hike in interest rate, electricity and gas tariffs and withdrawal of subsidies fuel inflation. They also say that due to the hike in interest rate investors are pulling their investment in equities and transferring to fixed income securities. It is on record that bulk of the deposits of commercial banks has been invested in government securities (Treasury Bills and Pakistan Investment Bonds). Analysts demand if banks are not allowed to invest more than a specified percentage of shareholders’ equity in the shares of public limited companies, there should also be a limit on the investment in government securities.

A lot of talk goes on about rate of tax for filers and not filers. The public is right in saying that even the poorest of the poor is paying huge taxes, but this payment is not recorded against his/her name. Every item from baby food to medicine and from petrol to airline tickets, eating at restaurants and easy load of cell phones is taxed. If FBR is not able to quantity the tax collected from each individual, it should stop discriminating between filers and non-filers.

In Pakistan certain groups enjoy exemption from payment of tax on their income, the largest being feudal lords. Over the years they have been enjoying this exemption and resist on paying tax, by taking refuge behind “taking agriculture income will affect small farmers”. It is justified to say that all sorts of income must be declared taxable.

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