SUMMARY of the Article “IMF misses the mark yet again,” Dawn, October 18th, 2024
The editorial critiques the recent approval of Pakistan’s 24th IMF programme, highlighting its reliance on a simplistic cash-based accounting framework that fails to address the country’s structural issues. The authors, Nadeem ul Haque and Shahid Kardar, argue that the programme primarily rolls over existing debts without implementing meaningful reforms. There is skepticism regarding the programme’s approach to achieving a primary surplus, as it includes inflated revenue numbers from the State Bank that do not accurately reflect economic reality. The piece emphasizes the unrealistic expectations placed on exporters and farmers regarding documentation requirements overnight, without acknowledging their limited capacities. The authors note a misplaced focus on revenue generation rather than on establishing a sound fiscal structure, which has led to an unstable business environment and a culture of tax evasion. The editorial outlines how the convoluted tax regime, characterized by arbitrary taxes and high documentation burdens, has created distrust between the government and citizens. Moreover, government expenditures have spiraled out of control, with a proliferation of agencies and functions that the state undertakes without clear accountability or cost assessment. The commentary underscores the detrimental impact of government price controls on economic dynamics, noting that these controls affect 70% of the economy, thus hampering market competitiveness. The authors assert that despite the IMF’s mandate for an open exchange system, each programme has resulted in an appreciated exchange rate, further straining the economy. They criticize the IMF for not considering the adverse effects of excessive tariffs and non-tariff barriers on exports, suggesting that the programme perpetuates a cycle of economic stagnation instead of fostering genuine reform.
Easy/Short SUMMARY:
The article criticizes Pakistan’s 24th IMF programme, saying it focuses too much on short-term revenue generation instead of addressing deeper economic issues. The authors, Nadeem ul Haque and Shahid Kardar, argue that the programme simply rolls over debts without real reforms. They highlight unrealistic expectations for exporters and farmers to provide documentation immediately, without considering their capabilities. The authors also point out how complicated tax policies have created distrust among citizens and how government price controls distort the economy. They conclude that the IMF is not effectively promoting genuine reforms, which continues to hurt Pakistan’s economic growth.
SOLUTIONS of The Problem:
Implement Comprehensive Economic Reforms
The government should develop and execute a comprehensive reform strategy addressing both structural and operational issues within the economy, targeting inefficient sectors.
Prioritize Fiscal Structure Over Revenue Generation
Shift focus from mere revenue generation to creating a robust fiscal framework that ensures sustainable economic growth and equitable tax practices.
Simplify Tax Regulations
Revise and simplify tax regulations to ease the burden on taxpayers, particularly for small farmers and exporters, allowing for gradual adaptation to formal documentation requirements.
Enhance Transparency and Accountability
Improve transparency in government expenditures and ensure accountability through regular audits and public reporting on fiscal policies and programmes.
Rethink Government Size and Functions
Evaluate the necessity of various government agencies and functions to streamline operations and reduce inefficiencies, potentially reallocating resources to more critical areas.
Promote Market Freedom and Reduce Regulation
Minimize government intervention in markets to allow natural market dynamics to flourish, thus encouraging competition and attracting investment.
Engage Stakeholders in Policy Formulation
Involve a broader range of stakeholders in economic policymaking to reflect diverse perspectives and foster ownership of reforms.
Review Tariff and Non-Tariff Barriers
Reassess existing tariffs and non-tariff barriers to promote trade and enhance the competitiveness of Pakistani exports in global markets.
Strengthen the Exchange Rate Mechanism
Develop a market-determined exchange rate policy to allow for real price signals that better reflect economic conditions and improve export competitiveness.
Invest in Capacity Building
Invest in training and capacity building for tax officials and small businesses to facilitate better compliance and understanding of tax obligations.
IMPORTANT Facts and Figures Given in the article:
- The 24th IMF programme has been approved by the Fund’s Board.
- The programme relies on a cash-based accounting framework and rolls over existing liabilities.
- The State Bank’s profits, included in revenue estimates, stem from over Rs12 trillion injected into commercial banks.
- The government controls prices in 70% of the economy, distorting market dynamics.
- Excessive tariffs and non-tariff barriers have reduced exports significantly since the economy was liberalized in 2005.
MCQs from the Article:
1. How many IMF programmes has Pakistan had as of the 2024?
A. 20
B. 22
C. 24
D. 26
2. What approach does the IMF programme primarily follow?
A. Market-driven
B. Cash-based accounting
C. Asset-based valuation
D. Debt forgiveness
3. What percentage of the economy does the government control through price interventions?
A. 50%
B. 60%
C. 70%
D. 80%
4. What has been a significant consequence of the IMF’s revenue-focused policies?
A. Increased government trust
B. Improved business environment
C. Culture of tax evasion
D. Higher foreign investments
5. What do the authors recommend regarding the government agencies?
A. Increase their numbers
B. Evaluate their necessity
C. Merge them into one
D. Abolish all agencies
VOCABULARY:
- Liabilities (noun) (ذمہ داریاں): Legal debts or obligations that an individual or organization owes to another party.
- Reforms (noun) (اصلاحات): Changes made to improve a system, organization, or practice.
- Primary Surplus (noun) (بنیادی اضافی): The difference between revenue and expenditure, excluding interest payments.
- Documentation (noun) (دستاویزات): Official papers that provide evidence or information.
- Expenditures (noun) (اخراجات): The action of spending funds; expenditures are often contrasted with revenues.
- Distorting (verb) (مڑنا): Causing to change from the true, natural, or original form.
- Arbitrary (adjective) (خودسر): Based on random choice or personal whim, rather than any reason or system.
- Dilemma (noun) (مشکل صورت حال): A situation in which a difficult choice has to be made between two or more alternatives.
- Tariffs (noun) (محصولات): Taxes imposed by a government on imported goods.
- Intervention (noun) (مداخلت): The action of becoming involved in a situation to alter the outcome.
- Abolish (verb) (ختم کرنا): Formally put an end to a system, practice, or institution.
- Benchmark (noun) (معیار): A standard or point of reference against which things may be compared or assessed.
- Accountability (noun) (جوابدہی): The fact or condition of being accountable; responsibility.
- Complexity (noun) (پیچیدگی): The state or quality of being intricate or complicated.
- Convoluted (adjective) (پتھر کھنچنا): Extremely complex and difficult to follow.
- Bureaucratic (adjective) (انتظامی): Relating to the business of running an organization, or government.
- Investor (noun) (سرمایہ کار): A person or organization that allocates capital with the expectation of a future financial return.
- Sustainable (adjective) (پائیدار): Able to be maintained at a certain rate or level.
- Perks (noun) (فائدے): Extra benefits or privileges provided to employees in addition to their regular salary.
- Opportunity Cost (noun) (موقعی قیمت): The loss of potential gain from other alternatives when one alternative is chosen.
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dawn.com
IMF misses the mark yet again
Nadeem ul Haque, Shahid Kardar
THE 24th IMF programme has been approved by the Fund’s Board. As per the Fund’s traditional approach, the programme is grounded in a basic accounting and meaningless framework that relies on a cash-based system to achieve a magical number for primary surplus (or deficit), all the while ignoring the structural problems of the country. At best, lip service is paid to reforms. Despite all the celebrations, let us not forget that we are in a low-investment, low-growth, and low-export trap. Sadly, the IMF has once again missed the opportunity to address Pakistan’s structural problems.
The programme essentially rolls over existing liabilities to the IMF and other creditors without any real reform. Most programmes have been doing so without addressing the real issues. How Chinese lenders are treated also appears to be out of the ordinary, with the finance ministry still looking for ‘re-profiling’ — essentially restructuring bilateral debt.
The programme does not care how the desired primary surplus is to be achieved. For example, the revenue numbers it uses to estimate this surplus includes the profits of the State Bank, which are largely driven by its injections of over Rs12 trillion into commercial banks to essentially lend to government. The interest on these loans is not being considered in the determination of the primary surplus.
Overly ambitious, it also underestimates the economic complexity of reform. We can take the example of two cases. For the last 30 years or so, the final income tax liability on exports has been a sum of one per cent deducted at source by banks on receipts, with no requirement for documentation. Similarly, agriculture has hardly been made liable for income tax, and now farmers with limited capabilities are required to maintain formal documentation — in a cash-based system — and pay regular income tax. Instead of taking a pragmatic, phased approach, the programme demands that, literally overnight, documentation by exporters and farmers should be at a level and of a quality acceptable to the FBR.
There is a misplaced focus on numbers, with an emphasis on revenue generation instead of the fiscal structure.
Little has been learned from previous programmes; this one, too, is littered with several benchmarks and performance criteria targets to be delivered over the duration of the programme by a limited-capability system, which is overwhelmed by the confines of the political economy, the undertaking made more formidable by prevailing conditions.
There is a misplaced focus on numbers, with an overwhelming emphasis on revenue generation instead of the fiscal structure — especially on the expenditure side of the equation and the nature of instruments to achieve the objectives. Whereas the IMF’s core competence is supposedly fiscal structures, our erratic tax policies at the behest of the Fund’s single-minded aim of raising revenues, have destabilised the business environment, driving many towards informal economic activities and a culture of tax evasion.
This misplaced objective has resulted in a convoluted and unjust tax regime that is heavily reliant on import tariffs, arbitrary taxes — turnover tax, super tax, CVT, deemed income, etc — presumptive and multiple-rate withholding GST and income taxes. This has led to repeated changes in taxes through ‘mini budgets’, creating huge uncertainty in the market. Forty years of revenue chasing in this manner has led to the labelling of all Pakistanis tax cheats and burdening them with huge documentation. We now have a most distorted tax structure, along with complete lack of trust between the government and the people — rather like the Sheriff of Nottingham, with the informal sector playing Robin Hood.
Meanwhile, expenditures have continued to run wild, with several expansionary agendas at play, resulting in the government performing numerous functions beyond its staple role. There is an unending drive to increase the number of agencies in the government from all sides. All stakeholders — political, bureaucratic and international partners — want an increase in the number of agencies, infrastructure, social support as well as government employment — all without decent data on the huge paid and growing liabilities and the future operational costs of these structures. The trend has been for structures to grow despite many tasks having become redundant.
Adding to this dilemma is the politicised and expanded PSDP portfolio, with unknown cost overruns and no accountability. These misplaced expenditure priorities are being executed by a bloated and poorly equipped workforce absorbing a significant percentage of the budget, without even fully factoring in the opportunity cost of perks and privileges, including housing, vehicles, etc.
Compounding these problems is Pakistan’s heavily regulated market with the government fixing prices and controlling markets. The Pakistan Institute of Development Economics estimates the government’s footprint — through price controls or direct intervention — on 70pc of the economy, distorting markets, blocking opportunities and raising the cost of doing business by excessive, obsolete, discretion-laden policy and regulatory frameworks. The estimated cost of government regulation in some 50 activities is seen in well over 75pc of the economy. No wonder capital flight persists, investor uncertainty prevails, and the economic environment remains stifled.
Although the IMF charter calls for an open exchange system with a market-determined rate, each Fund programme has led to an appreciated exchange rate, distorting price signals and resource allocations, and making Pakistani exports less competitive, while lowering the cost of imports and further straining balance-of-payments. Despite claims of liberalisation, the exchange rate remains under tight government control, with artificial price and non-price mechanisms preventing the natural market dynamics from playing out. This is facilitated by the delay in the discharge of external obligations.
Excessive reliance on tariffs for revenue purpose as well as excessive non-tariff practices have adversely affected exports. It appears that the IMF has not even scanned the World Bank’s work showing how excessive protection and poor tariff policy is reducing exports. Note that the economy had been significantly liberalised in 2005, and successive IMF programmes, for revenue reasons and to protect the exchange rate, rapidly increased tariffs and created non-tariff barriers and exchange restrictions to support an appreciated exchange rate.
Nadeem Ul Haque is former VC PIDE and deputy chair of the Planning Commission. He is currently director at the think tank Socioeconomic Insights and Analytics. Shahid Kardar is a former governor of the State Bank of Pakistan.
Published in Dawn, October 18th, 2024
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