The time for a paradigm shift

Finance Minister Muhammad Aurangzeb on Saturday said the new $7 billion aid package deal reached between Pakistan and the International Monetary Fund (IMF) would help bring macroeconomic stability to the country. The program, which needs approval by the IMF’s Executive Board, should enable Pakistan to cement macroeconomic stability and create conditions for stronger, more inclusive, and resilient growth. Coming to Pakistan in the form of loans, the latest bailout follows a commitment by the government to implement reforms, including a major effort to broad­­en the country’s tax base. Under the program, Pakistan needs to ensure structural reforms and bring self-sustainability in areas of public finance, energy, and state-owned institutions. Faced with chronic mismanagement, Pakistan’s economy has found itself on the brink, challenged by the COVID-19 pandemic, the effects of the war in Ukraine and supply difficulties that fueled inflation, as well as record flooding that affected a third of the country in 2022. With its foreign currency reserves dwindling, Pakistan found itself in a debt crisis and turned to the IMF, obtaining its first emergency loan in the summer of 2023. Prime Minister Shehbaz Sharif says that Pakistan needs to embark on a long and difficult journey to prevent knocking on the doors of the International Monetary Fund (IMF) again. If we want to get rid of loans, we need to consider this IMF program as the final one. Now is the time, it is our responsibility to act speedily and work tirelessly. Only then will this be the final IMF program in this country. It brings pain whenever Pakistan has to approach the World Bank and other institutions for loans. We collect billions, trillions, and we are still going to the World Bank and others. A country cannot run like this. The IMF statement issued earlier quoted the Fund’s mission chief to Pakistan, Nathan Proter, as saying that the new program aims to capitalize on the hard-won macroeconomic stability achieved over the past year by furthering efforts to strengthen public finances, reduce inflation, rebuild external buffers and remove economic distortions to spur private sector-led growth. In this regard, the authorities plan to increase tax revenues through measures of 1.5 percent of GDP in FY25 and 3 percent of GDP over the program. The increase in revenue collections will be achieved through simpler and fairer direct and indirect taxation, including by bringing net income from the retail, export, and agriculture sectors properly into the tax system. The federal and provincial governments have agreed to rebalance spending activities in line with the 18th Constitution Amendment by signing a National Fiscal Pact. Under the agreement, subjects including education spending, health, social protection, and regional public infrastructure investment will pass to provinces. The provinces have already committed to fully harmonizing their Agriculture Income Tax regimes through legislative changes with the federal and corporate income tax regimes. The move will see implementation from Jan 1, 2025. The government will also improve the power sector’s viability and minimize its losses through timely tariff adjustment, reforms, and refraining from further unnecessary expansion of generation capacity. The authorities remain committed to undertaking targeted subsidy reforms and replacing cross-subsidies to households with direct and targeted BISP support. The authorities will improve SOE operations and management as well as privatization, in which the most profitable entities will see prioritization. The government is also working towards phasing out incentives to Special Economic Zones, agricultural support prices, and related subsidies, while refraining from new regulatory or tax-based incentives, or any guaranteed return that could distort the investment landscape. The authorities have also committed to advancing anti-corruption as well as governance and transparency reforms, and gradually liberalizing trade policy.