Fallout From Yet Another Pakistan IMF Bailout
Failure to collect taxes, abysmally low foreign investment and chronic fiscal mismanagement are some of the reasons why Pakistan has repeatedly found itself at the doors of the International Monetary Fund. But as the government, led by former cricketer-turned-politician Imran Khan, embarks on a three-year $6 billion – half of what the country needs to weather the balance of payments crisis – reform, it is the country’s most financially vulnerable who have to foot the bill.
The IMF’s program for the country, which has over 30 percent of its population living below the poverty line, has found few takers. The money comes with strict austerity guidelines with some harsh conditions, including – but not limited to – electricity tariff hikes, removal of subsidies on fuel prices, and massive cuts to development spending to manage fiscal imbalances. The stringent measures have been preempted by a colossal fall in the rupee’s value (by almost 40 percent), as well as interest rate hikes, removal of subsidies offered to the export-oriented sectors, and an ambitious tax collection target.
The budget for fiscal year 2019-20, which some quarters criticized as written to please the IMF authorities, imposed new taxes on cooking oil, electronic appliances, vehicles, sugar, processed food and mobile phones in addition to increasing taxes on salaried classes. As the masses prepare for double-digit inflation, the trader community, on the other hand, has also taken to the streets against what they allege are coercive attempts by the country’s tax machinery to bully them into paying more taxes as their revenues shrink amid declining economic activity.
As growth targets have been revised downward to 2.4 percent, rising inflation and preemptive interest rate hikes have sucked the oxygen out of the economy which was growing at around five percent just last year. Furthermore, with rising input costs rising alongside shrinking consumption, decline in almost all of the macroeconomic indicators including large scale manufacturing, cement and auto sales points towards an imminent slump in economic output.
But reforms are likely to make matters worse and hurt living standards of the country’s 40 percent middle class in the short-to-medium term. Moreover, the program has also set structural benchmarks to pull the country’s loss-making state owned entities out through either privatization or liquidation. The move, as seen in the past, is likely to result in massive layoffs inciting violent protests and in increasing unemployment across the country.
Adding to the woes is the ruling party’s razor thin majority in the parliament, which has limited its ability to pass the required legislation through to successfully implement reforms. The Khan-led party had promised the voters a welfare state, but ended up raising taxes instead. As a result, his approval ratings have also fallen below 50 percent. In an already fickle political environment, this can be a recipe for turmoil.
Even if Islamabad somehow manages to partially implement the unavoidable reforms during the three-year life of the program, most of the country’s population will have already suffered enormous costs. But how long would it take? Some experts believe the next two years are critical, and if the government is successful in meeting the revenue targets, Pakistan might just avoid another bailout at the end of Khan’s five-year term.
But Pakistan’s checkered history with the IMF paints a different picture, as the country, despite going through 13 such programs since 1988, has never followed through on its commitments towards structural reforms. This failure has been a result of caving into the political pressures emanating from difficult decisions.
However, the question that remains is this: how long will the country’s 204 million inhabitants pay for the costs of its political leadership’s inefficiencies?