A new report by the International Monetary Fund (IMF) disclosed that the lender has risked its reputation by extending a $7 billion bailout package to Pakistan. Any decision about whether to lend or not to lend carries risks due to the chances of the programme going off track.
The report disclosed that Pakistan’s overall risk of sovereign stress was high, reflecting a high level of vulnerability from elevated debt, gross financing needs, and low reserves. But for now, the IMF has declared Pakistan’s debt sustainable.
This revelation’s underlying message is that Pakistan’s fiscal and economic sustainability is vulnerable.
By pledging its reputation, the IMF appears to be a stakeholder in the nation’s fiscal and economic sustainability. Therefore, it is expected to take every possible step to preserve and protect its reputation. It has the release of the next tranche in its hands to make things happen.
The IMF recently recorded some relatively strong observations that Pakistan’s growth is hindered by favouritism in these two segments:
• Identifies the textile sector as having the highest tax gap relative to its value-added potential;
• Recommends simplifying trade policies, avoiding tariffs aimed at industrial protection.
The IMF has asked Pakistan to swiftly end preferential treatment, tax exemptions and other protections for the agriculture and textile sectors, which, it says, have stifled the country’s growth potential for decades.
In its staff report on the diagnosis of the factors behind Pakistan’s struggling economy, the IMF blamed these two sectors not only for failing to contribute adequately to the national revenue but also for consuming large portions of public funds while remaining inefficient and uncompetitive.
As part of the recently approved $7 billion Extended Fund Facility (EFF), the IMF stressed that Pakistan must break free from its economic practices of the past 75 years to escape its recurrent boom-bust cycles.
The IMF has come hard on Pakistan’s performance compared with its peers. The staff report released in October highlighted the country’s significant lag behind similar nations, a stagnation that has compromised living standards and pushed over 40.5 per cent of the population below the poverty line.
The IMF said Pakistan has “moved further and further behind” its regional peers in terms of living standards, “underscoring the need for urgent policy correction.”
The report added, “Pakistan has been falling behind its peers in recent decades in terms of income per capita, competitiveness, and export performance. From 2000 to 2022, Pakistan’s GDP per capita grew at an average annual rate of only 1.9%. By contrast, Pakistan’s peers achieved more than twice this rate: Bangladesh averaged growth of 4.5%, India reached 4.9%, Vietnam 5%, and China a growth of about 7.5%.”
Compared to regional peers, Pakistan’s export growth has been weak, while its competitiveness has declined, given an appreciated real exchange rate relative to productivity growth.
The lender said Pakistan’s growth underperformance reflects weak human and physical capital contributions and shrinking productivity.
“Economic growth during 2000–20 was driven mainly by physical capital accumulation and increased labor hours, contributing about 1.9 and 1.15% points per year, respectively.
The IMF said that Pakistan’s declining export performance and limited openness to trade challenge the country’s development and external viability.
“Beyond weak exports, Pakistan has struggled to innovate and develop production of more sophisticated export goods, as indicated by its low and declining share of knowledge-intensive exports,” the IMF noted.
The writer is the former president of the Overseas Investors Chamber of Commerce and Industry.
Leave a Reply