IMF pushed Pakistan back to the beginning
In a crisis, the government is supposed to cut expenditures,
yet it is really doing the reverse.
Not so long ago, the country severely needed money, so the
previous finance minister, Miftah Ismail, went to the IMF in an effort to
negotiate a deal. Pakistan is back in essentially the same predicament a few
months later.
In the final week of October, Pakistan's financial
management and IMF representatives were scheduled to meet to start discussions
about the ninth review of the $7 billion loan program. However, the highly
anticipated conference was repeatedly postponed, most likely as a result of the
enormous discrepancy between the IMF's and the finance ministry's budgetary
predictions.
It is becoming clear that Ishaq Dar, the finance minister,
will have a difficult time persuading the IMF given the nation's worsening
financial situation. Due to a decrease in imports and a decrease in gasoline
demand, which will both have an adverse effect on tax collection, Pakistan may
need to modify its plans after lowering income projections.
Additionally, there are a few expenditure-related sectors
that should worry IMF officials.
It is important to keep in mind that the PTI government
received harsh criticism for handing out hundreds of billions in subsidies,
particularly for gasoline and diesel, which harmed the economy. Unfortunately,
similar actions have been taken by the current government.
The government declared in October that it will provide Rs
100 billion in power subsidies to five industries focused on exports through
the end of the current fiscal year (June 2023). Although the government
anticipates that this will increase exports by 15% to 20%, no pledges from the
five industries have been obtained.
Regardless of how well they do, the textile, leather,
medical, carpet, and sporting goods industries will receive a subsidy from the
budget. If anything, the exporters might find it difficult to even keep up the
growing momentum in light of import restrictions, cash flow problems in the
textile and other industries, and a slowdown in the economies of important
export targets.
In addition, Prime Minister Shehbaz Sharif unveiled a
sizable Rs1.8 trillion rescue package for farmers in October. The majority of
the farm package consists of bank loans, which don't have an impact on the
budget, although there are some unbudgeted elements.
This includes a suggested fixed electricity rate of Rs 13
per unit for tube wells, but there is uncertainty surrounding this aspect.
Depending on how one understands "fixed power pricing," this may
potentially cost between Rs 36 billion and Rs 180 billion for the current
fiscal year.
One would anticipate that the government would cut spending
and eliminate subsidies during a crisis to stabilize the economy. But it
appears that policymakers are acting in the opposite way. This demonstrates the
government's thin skin.
Pakistan is now approaching the IMF from a position of
weakness, just like it did before.
Policymakers cannot resolve fundamental problems that have
hampered Pakistan's economic growth by simply spending more money on them.
Untargeted subsidies, on the other hand, will simply make the economy's
problems worse by promoting elite capture and rent-seekers. The decision-makers
should focus on enhancing the business climate so that it can help all sectors
of the economy, rather than taking actions that can, at best, offer short-term
assistance to a small number of industries.
Businesses are hampered not just by the regulatory load,
political unpredictability, and red tape, but also by out-of-date laws and
regulations that limit growth and investment (including foreign direct
investment).
The oil refining sector is a clear example of how onerous
regulations and the absence of supportive policies stifle growth.
For years, neither a native nor a foreign company has made a
sizable investment in Pakistan's oil refining sector. The capacity for oil
refining has remained basically unchanged despite increased gasoline and diesel
usage.
The most important thing to take away from this is that, in
order to boost the economy, the government should use the regulatory frameworks
at its disposal to enhance the performance of all high-value businesses and
sectors, including manufacturing, IT, and the petroleum industry. That's
preferable to spending the country's limited financial resources on pointless
handouts, especially given that doing so could jeopardize the IMF plan.
Comments
Post a Comment