SUMMARY of the Article “A Close Watch,” Dawn, October 13th, 2024
This editorial discusses the challenging demands placed on Pakistan by the International Monetary Fund (IMF) as part of its $7bn rescue package. Although tough, these demands were anticipated as necessary for stabilizing the country’s economy. The program aims to rebuild Pakistan’s foreign exchange reserves, improve its tax-to-GDP ratio, and ensure debt sustainability. The IMF’s roadmap for reform includes overhauling the tax system, implementing energy sector reforms, and privatizing and deregulating key sectors. Additionally, the Special Investment Facilitation Council, Sovereign Wealth Fund, and Special Economic Zones will be scaled back to promote investment neutrality. The government has committed to not providing any special tax or regulatory incentives that could distort the investment landscape. If tax collection falls short by 1% on a three-month rolling basis, the government will introduce additional indirect taxes. Other commitments include cutting gas supplies to captive power plants owned by textile millers and provincial reforms to boost tax collection and end market interventions. While the IMF has acknowledged Pakistan’s recent macroeconomic stability, it cautions that this stability is unlikely to lead to growth unless the country can attract significant investment, which seems unlikely in the short term. The elimination of incentives for foreign companies, especially from China, could hinder plans to attract Chinese investment under the China-Pakistan Economic Corridor (CPEC). The IMF will closely monitor Pakistan’s adherence to its reform targets, and there is little margin for error as Pakistan must demonstrate every six months that it is faithfully following the program to secure future funding.
Easy/Short SUMMARY:
The article discusses the IMF’s new $7bn loan program for Pakistan, which comes with tough conditions. Pakistan must reform its tax system, energy sector, and privatize key areas to stabilize its economy. The government has agreed not to offer special incentives to investors and will impose more taxes if its tax collection falls short. There are concerns that removing incentives for Chinese companies may hurt investment under CPEC. The IMF will keep a close watch on Pakistan’s progress and expects the country to stick to its reform targets every six months to receive future funding.
SOLUTIONS of The Problem:
Strengthen Tax Reforms
The government should focus on simplifying and broadening the tax base to improve tax collection without burdening a specific group, ensuring that tax reforms are sustainable in the long term.
Attract Domestic Investment
Since foreign investment may not arrive soon, the government should prioritize policies that encourage domestic businesses and industries to invest, providing a more immediate source of economic growth.
Energy Sector Efficiency
Rather than solely cutting gas supplies to textile mills, the government should invest in renewable energy sources to reduce reliance on gas and make energy more affordable for all industries.
Enhance Transparency
To win public trust and attract investors, the government should make the reform process more transparent, ensuring that all stakeholders are informed about the long-term benefits of the IMF program.
Diversify Economic Partners
Pakistan should focus on diversifying its investment sources beyond China, seeking opportunities with other countries to avoid over-reliance on a single partner, particularly in light of the CPEC concerns.
Implement Technological Solutions in Tax Collection
Adopting technology for tax collection and monitoring can help improve efficiency and reduce tax evasion, ensuring that the tax system is both fair and effective.
Improve Governance and Accountability
Strengthening governance, especially in provincial administrations, will ensure that reforms are implemented at all levels, improving overall economic performance.
Phased Deregulation and Privatization
Deregulating and privatizing sectors should be done gradually to avoid economic shocks and allow businesses to adjust to the new environment while maintaining employment stability.
Engage with Investors
The government should actively engage with both domestic and foreign investors to build confidence, offering them clarity and assurance on the reforms being implemented.
Monitor Progress Regularly
Regular monitoring and course correction should be institutionalized to ensure that any slippage in reform progress is promptly addressed, preventing larger setbacks in the long run.
IMPORTANT Facts and Figures Given in the article:
- The IMF has agreed on a $7bn rescue package for Pakistan.
- The primary objectives include rebuilding forex reserves, improving the tax-to-GDP ratio, and ensuring debt sustainability.
- Reforms will involve the overhaul of the tax system, energy reforms, privatization, and deregulation.
- The government has agreed not to offer regulatory or tax-based incentives to select investors.
- Provinces have committed to boosting tax collection and ending agricultural market interventions.
- The IMF will monitor Pakistan’s adherence to the program targets every six months.
MCQs from the Article:
1. What is the total value of the IMF rescue package for Pakistan?
A. $5bn
B. $7bn
C. $10bn
D. $15bn
2. Which sector is NOT mentioned for reforms in the IMF program?
A. Tax system
B. Health sector
C. Energy sector
D. Privatization and deregulation
3. What will the government do if tax collection falls short by 1% on a three-month rolling basis?
A. Cut spending
B. Increase direct taxes
C. Impose additional indirect taxes
D. Reduce interest rates
4. Which country’s companies could be affected by the removal of investment incentives under the new IMF conditions?
A. United States
B. Japan
C. China
D. India
5. How often will the IMF monitor Pakistan’s progress in implementing reforms?
A. Every month
B. Every three months
C. Every six months
D. Annually
VOCABULARY:
- Afloat (adjective) (قائم رہنا): Keeping something in operation or in existence.
- Bitter pill (noun) (کڑوی گولی): A difficult or unpleasant situation to accept.
- Forex (noun) (غیر ملکی زرمبادلہ): Foreign exchange, usually referring to currency reserves.
- Deregulation (noun) (غیر ضابطہ کاری): The process of removing government controls or restrictions in a particular industry.
- Neutrality (noun) (غیر جانبداری): The state of not supporting or helping either side in a conflict or disagreement.
- Incentives (noun) (ترغیبات): A thing that motivates or encourages someone to do something.
- Distort (verb) (بگاڑنا): To twist or misrepresent the facts, making them false or misleading.
- Indirect taxes (noun) (بالواسطہ ٹیکس): Taxes that are not directly paid by an individual but are levied on goods and services.
- Macroeconomic (adjective) (معاشیاتی): Relating to the economy as a whole, including national income and output.
- Interventions (noun) (مداخلت): The action or process of becoming involved in a difficult situation to affect the outcome.
- Sovereign Wealth Fund (noun) (خودمختار دولت فنڈ): A state-owned investment fund comprised of financial assets such as stocks, bonds, real estate, or other financial instruments.
- Sustainability (noun) (پائیداری): The ability to maintain or continue over the long term.
- Captive power (noun) (اسیر بجلی): Electricity generated for a specific industrial facility’s own use, rather than for sale.
- Commitments (noun) (وعدے): An obligation or promise to carry out an action.
- Deviations (noun) (انحرافات): Departures from a standard or norm.
- Reputational risks (noun) (عزت پر خطرہ): The potential for damage to the standing or perception of an organization or individual.
- Woo (verb) (حمایت حاصل کرنا): To seek to gain or win over.
- Rollback (noun) (واپسی): A reduction or reversal of a policy or regulation.
- Provinces (noun) (صوبے): Administrative regions within a country.
- Stability (noun) (استحکام): The state of being steady and not likely to change.
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dawn.com
A close watch
Editorial
THE IMF’s new set of demands from Pakistan as part of its $7bn rescue package is tough, but in line with expectations.
The government has to swallow this bitter pill to keep the economy afloat. The details of the targets released on Friday show that the programme seeks to help Pakistan rebuild its forex reserves, improve tax-to-GDP ratio, and ensure debt sustainability.
The roadmap outlined by the lender in the document, which also contains firm commitments by the government to execute the agenda, will be implemented through the overhaul of the tax system, energy reforms, privatisation and deregulation, and the rollback of the Special Investment Facilitation Council, the Sovereign Wealth Fund and the Special Economic Zones to “promote investment, and ensure competitive neutrality, and a level playing field” for investors.
The government has further promised to not offer regulatory, spending, tax-based incentives, or any guaranteed returns to a particular set of investors that could distort the investment landscape. It has agreed to increase and impose additional indirect taxes in case of a shortfall of 1pc in tax collection on a three-month rolling basis to cover the gap. Moreover, the authorities have consented to governance reforms and to cut off gas supplies to captive power owned by the rich textile millers. The provinces have committed to undertake reforms to boost tax collection, end interventions in agricultural markets, and take over several spending responsibilities in line with the 18th Amendment.
The IMF document acknowledges the macroeconomic stability achieved in recent months. However, this stability is unlikely to translate into growth in the near to medium term unless Pakistan is able to attract significant investor interest, something that does not appear likely anytime soon. In fact, the conditions related to elimination of incentives to foreign companies, especially from China, is going to hit hard the government’s plans to woo Chinese manufacturers here under CPEC. How the authorities will deal with it remains to be seen.
While the IMF may ignore some minor deviations from the loan agenda, it is not going to condone any major divergence that might lead the programme off-track since, according to a news report, the Fund remains concerned about the country’s commitment to execute the suggested reforms going forward. Its worry that “reputational risks would arise for it if the Fund were perceived as treating Pakistan differently from other members that ostensibly enjoy less support” means that it would be monitoring progress on targets more diligently.
Unlike most previous occasions, the 25th rescue loan does not offer Pakistan much of a margin of error. The authorities will be required to prove every six months that they are steadfastly pursuing the IMF-mandated targets to secure the lender’s dollars and blessings.
Published in Dawn, October 13th, 2024
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