INP-WealthPk

Nine-month IMF SBA a short-term solution, long-term worry

July 27, 2023

Amir Khan

The International Monetary Fund (IMF) released its staff report on Tuesday, detailing the $3 billion Stand-by Arrangement (SBA) for Pakistan. The SBA includes 10 structural benchmarks for the standby arrangement facility and also criticizes the government's handling of the economy over the past year. Talking to WealthPK, Saher Masood, an economic analyst at the IMF, said the report highlighted critical points that the Pakistani government needed to address through appropriate procedures as specified by the IMF. “One such point is the suggestion that a ‘functioning and flexible exchange rate market’ should be used to address the balance of payments pressures instead of relying on administrative and exchange measures. However, questions arise how Pakistan will manage the combination of ‘inflationary pressures’ and the ‘dollar scarcity market cycle’ that has emerged,” she explained. She raised concerns about the revenue efforts to broaden the tax base, which fell short of expectations during the last four years' program period, leading to a decline in the tax-to-GDP ratio.

Even with additional taxes imposed and plans to increase the petroleum levy rate and broaden the tax net, there is uncertainty as to whether this will be sufficient, as over 80% of the additional revenue is still expected to come from the existing taxpayers. She added that the SBA provided Pakistan’s economy with a short-term surveillance opportunity that can be beneficial in the immediate future. However, there is apprehension that, in the long run, the economy might worsen compared to the current situation. Continuing, she said Pakistan must carefully strategize its long-term approach to manage the trade deficit, address inflationary pressures, broaden the tax base, and eliminate amnesty schemes and baseless subsidies. “Having a clear long-term vision and foresight in managing the economy is crucial to achievingthe desired results from the IMF deal,” she added. “Like a coin, every argument has two sides. It can be the result of a well-informed debate leading to agreement or a spontaneous, impulsive decision.

When discussing Pakistan's 9-month SBA with the IMF, people tend to lean towards one side of the coin, but they should carefully choose their perspective, grounded in analytical thinking and thorough research,” Saher pointed out. Regarding the SBA, she said that the economic theory supporting inflation control through adjustments in the discount rate might not apply to Pakistan due to a significant portion of domestic credit being taken up by the government, negatively affecting private sector credit and growth. To sum up, although the IMF assistance can offer temporary relief and aid during an economic crisis, its effectiveness relies on being coupled with sound economic policies and enduring reforms to foster lasting economic growth and stability. Excessive reliance on short-term financial solutions, neglecting the long-term consequences, may result in substantial challenges and impede a country's economic advancement.

Credit: INP-WealthPk