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COMMENT: A bridge to stability
THE announcement of the new IMF-supported programme is a relief. It will give the country badly needed financial protection over the next few months from political developments as the country prepares for elections.
The government, the State Bank, and the IMF deserve credit for taking the difficult decisions needed to arrive at this moment — better late than never.
The announcement of the new programme is also a time for reflection. Where will this programme lead to? We need to recognise that this nine-month programme will necessarily be a bridge to a subsequent broad-based and longer reform programme.
That subsequent programme will need to address deep-seated structural areas that the previous programme could not and that the current programme is too short to tackle.
A short-term programme amidst elections and political uncertainty can most usefully provide macroeconomic stability. It cannot provide the space and ownership needed to address structural areas. Without addressing those, Pakistan will remain dependent on international assistance.
The best we can make of the new facility, therefore, is to use it to develop a national consensus, driven by Pakistanis, on the key structural measures that should underpin the next programme.
What are those areas? The list is long but these include first and foremost creating a vibrant, internationally competitive, and outward-oriented private sector that creates attractive employment opportunities for our youth, generates sustained and diversified export earnings, and attracts foreign direct investment.
IMF-supported programmes typically start with an emphasis on macroeconomic stability characterised by extensive discussion around fiscal, monetary, and exchange rate policies.
While this is necessary, these narrowly focused discussions end up crowding out the needed focus on a growth-oriented structural reform agenda.
Learning from this experience, and for the next time around, we need to start with an explicit focus on private sector-led growth. This would include addressing our energy and water problems from the lens of what is needed to support a thriving private sector.
The second priority needs to be a broader and deeper social safety net programme that better protects the poor, provides them with relief in a targeted manner to make judicious use of scarce public resources, and drives their financial inclusion.
This is all the more needed after the lower and lower middle classes have been ravaged by rampant inflation over the past year and stalled economic growth. Our current system of electricity and other subsidies is characterised by leakage and misuse.
New IMF programme will lead nowhere if we fail to reach national consensus on structural reforms
Third, the structural reform agenda would need to try — yet again — for a broader and fairer tax system.
This entails not just raising taxes on those who are already in the tax net but, importantly, extending the tax base to sectors and stakeholders that have successfully managed to escape it.
Our track record in this area does not necessarily inspire confidence. According to the latest IMF report, when the last programme started in 2019, our tax collections were 10.2 per cent of GDP for fiscal year 2019.
In fiscal year 2022, they were also estimated by the IMF at 10.2pc of GDP, the same as when the programme had started.
What are we going to do differently for the next programme so that we don’t continue to penalise good corporate citizens who are already paying taxes and that we bring into the tax net those who have been evading it?
This will mean ruffling feathers of important stakeholders and that will not be possible without prior efforts to develop national ownership.
Fourth, we will need to prioritise restructuring and privatising our state-owned enterprises. Many of these have been draining public resources to the tune of hundreds of billions of rupees in annual subsidies without making a commensurable contribution to national output. They have also materially contributed to the build-up of our national debt.
Fifth, and perhaps most importantly, we will need to think differently about the governance of implementing IMF-supported reform programmes.
Whichever government negotiates the next programme with the IMF after the elections will undoubtedly feel political heat and opposition from vested interests who have perpetuated such inefficiencies.
This political logjam will lead to delayed completion of programme reviews. No matter which political party has been in charge in recent history, we have seen this repeated cycle.
The next programme will need to create a dedicated project management office that takes a whole-of-country and whole-of-government approach.
It will need to be comprised of national experts from across relevant fields, be shielded from political heat and pressure from stakeholders, and be answerable to and overseen by an independent board that is comprised of nationally recognised non-partisan leaders.
The governance set-up will need to have representation from all relevant stakeholders, federal and provincial, civilian and establishment, the judiciary and law enforcement.
In other words, we will need to institutionalise national ownership of the reform agenda, not just leave it to one ministry or government agency or to the IMF. These are just some of the priorities that will need to be reflected in the next and longer programme. There are many more.
What is more important is that while the country prepares for elections over the next few months we start now a process of national debate and reach a consensus over specific measures in these and other areas so that the next government can drive them forward as a homegrown reform programme supported by the international financial community.
Starting this process now will also allow the next elected government to not waste time after coming into office to start negotiating with the IMF. In the past, such a window has not been utilised efficiently.
It is critical that we begin a process now of thinking about the key elements of the future structural reform programme and create a national consensus around it.
Otherwise, this short IMF programme instead of being a bridge to sustained stability and prosperity could risk becoming a bridge to nowhere.
The author is a former governor of the State Bank of Pakistan. He is currently a Senior Fellow at Harvard Kennedy School and Global Head of Sovereign Advisory Services at Alvarez & Marsal.
Twitter: @rezabaqir
Published in Dawn, July 2nd, 2023
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