IMF:

• The IMF was established in 1944 in the aftermath of the Great Depression of 1930s.
• 44 founding member countries sought to build a framework for international economic cooperation.
• It has 190 member countries with staff drawn from 150 countries.

Mandate of IMF :

• To improve and Enhance global trade.
• To address balance of payment deficit(financing).
• Addressing international monetary problems by collaborating with other financial institutions.

Function of IMF:

1. Technical Assistance and training.
2. Surveillance of Member economic policies.

Technical Assistance and Training :

The IMF provides technical assistance and training to governments including central banks, Finance ministries, revenue administrations, and finance sector. These capacity development efforts are centered on the IMF's core areas of expertise ranging from taxation through central bank operations to the reporting of macro-economic date. Such training helps countries tackle cross-cutting issues, such as income inequality, gender equality, corruption and climate change.

Surveillance of Member Economic Policies :

The IMF monitors the International monetary system and global economic developments to identify risks and recommend policies for growth and financial stability. The funds also undertakes a regular health check of the economic and financial policies of it's 190 members. In addition, the IMF identifies possible risks to the economic stability of it's member countries and advises their governments on possible policies adjustments. IMF monitors it's members by current account deficit, fiscal deficit, circular deficit, circular debt, debt servicing , money laundering and terror financing depleting foreign reserves and declining exchange rate stability.

Cooperation :

All the concern departments should be involve in making their related policies.

Financing Balance of Payment Deficits :

At any given time the sum of money entering into the country with respect to the sum of money exiting from the country. This phenomenon is known as financing balance of payments deficit.

IMF Lending :

IMF gives loan to countries to stabilize their economy and this loan is given on the Quota basis. 145% of loan is given to the countries according to their currency value, on Quota.

IMF Letter of Intent :

IMF gives loan to economic disturb countries on some conditions which includes SAPs. Structural Adjustment Programs (SAPs) are economic policies for developing countries that have been promoted by world bank and IMF since the early 1980s, by the provision of loans conditional on the adoption of such policies. These policies are centered around increased privatization, liberalizing trade and foreign investment and balance government expanding revenues. 

IMF and Pakistan :

• Pakistan join IMF in 1950 and 22 loans have been granted to Pakistan till now of 2022 last loan in 2019.
• Extended credit facility.
• On July 3,2019 IMF approved a 39-months extended arrangement under the extended fund facility (EFF) for Pakistan 6B$ i.e 210 percent of Quota Special drawing rights (SDR) (4268m).
• 1B$ trench is haulted  due to PTI governement subsidies.
• PTI government gives subsidies to public on petrol and electricity.
• Increase of POL (petroleum , oil, lubricant) at 5% per month to reach 50rs per litre.
• Increase the poverty tax from 2% to 4%.
• To impose petroleum development levy and 17 % sales tax.
• To do away with pensions and salaries for which rupees 200 billion were allocated.
• Government reduce subsidies from 536B to 570B.
• The target of FBR to collect tax increased from 6.1 trillion to rupees 7.35 trillion.

Criticism on IMF :

a) Favouring the capitalistic segments of the world :

• Neo-liberalism.
• Increased privatization.
• De-regularization (State-intervention).
• Liberalization (trade).

b) Structural Adjustment Programs (SAPs) :

• Rigid (not flexible).
• Taxes, Tariffs, Subsidies, Privatization.
• Social impact.
• Lower and lower middle class.
• Inflation + purchasing power decrease.

c) Unbalanced voting power :

 Voting power of any country depends upon the quota (SDR) of the country. A country with high quota will have a high voting power.

IMF Programme Overview

24th IMF Programme Approval :

• Grounded in a traditional framework focusing on cash-based systems to achieve
• primary surplus targets.
• Neglects structural problems and pays minimal attention to reforms.
• Pakistan remains in a low-investment, low-growth, and low-export trap.
• Missed opportunity by IMF to address structural issues.

Debt Management and Liabilities

Rollover of Liabilities :

• Programme rolls over existing IMF and other creditor liabilities without real
• reform.
• Chinese debt restructuring (re-profiling) still being pursued by Pakistan's finance
• ministry.

Revenue Projections and Primary Surplus

State Bank Profits Included in Revenue :

• State Bank's profits from Rs12 trillion injected into commercial banks are considered as revenue for surplus calculations, without considering loan interest.

Misplaced Focus on Numbers :

• Emphasis on revenue generation over fiscal structure, ignoring the expenditure side and effective instruments.

Tax Reforms and Documentation

Over-Ambitious Reform Expectations :

• Sudden requirement for exporters and farmers to document income for tax purposes, disrupting long-standing practices.

Erratic Tax Policies :

• Single-minded IMF aim for revenue has led to an unstable tax regime, fostering tax evasion and informal economy growth.

Distorted Tax Structure

Convoluted Tax Regime :

• Heavy reliance on import tariffs and arbitrary taxes (turnover tax, super tax, etc.).
• Mini budgets have created market uncertainty, damaging trust between government and citizens.

Uncontrolled Government Expenditure

Expansionary Expenditure Agendas :

• Government's expanding role across agencies and employment has worsened without proper financial oversight.
• Poor workforce capabilities and redundant tasks inflate costs.

Poorly Managed Public Spending

Politicized PSDP :

• Expanded Public Sector Development Programme with unknown cost overruns and lack of accountability.
• High cost of perks, privileges, and inefficient workforce draining the budget.

Overregulated Markets and Stifled Growth

Government Control Over Markets :

• Government's regulation affects 70% of the economy, distorting markets and hindering business opportunities.
• Capital flight and investor uncertainty persist due to heavy market intervention.   

Exchange Rate and Trade Policies

Distorted Exchange Rate Management :

• IMF programmes have led to an appreciated exchange rate, negatively impacting export competitiveness and increasing import costs.
• Government control prevents natural market dynamics from setting the exchange rate.

Trade Barriers and Export Decline :

• Excessive reliance on tariffs and non-tariff barriers has hurt exports.
• IMF neglects World Bank's findings on how protectionist policies damage trade.

Key Suggestions to Overcome Pakistan's IMF Programme Challenges

1. Focus on Structural Reforms :

Shift IMF Programme goals from short-term primary surplus targets to addressing long-term structural issues like low investment (16% of GDP, below the regional average of 30%), low growth (projected at 2.5% for FY2024), and weak export performance (around $27 billion in 2023 [PBS]). Incentivize sectors like technology, manufacturing, and renewable energy to boost productivity and exports.

2. Debt Restructuring & Sustainable Borrowing :

Renegotiate debt, including $30 billion owed to China, to ensure favorable repayment terms. Avoid rolling over debt and limit new external borrowing to  high-return infrastructure projects. Develop a debt management strategy to ease pressure on Pakistan's $23 billion external debt payments due by mid-2024.

3. Tax Reforms & Broadening the Tax Base :

Expand the tax base by formally taxing the agriculture sector (currently contributing just 1% to tax revenues despite being 22% of GDP) and improving documentation in the real estate sector. Implement a phased tax reform process to avoid market disruption and ease the burden on existing tax payers.

4. Simplify and Stabilize Taxation :

Create a predictable, simplified tax regime by reducing reliance on arbitrary taxes like super tax and withholding taxes. Stabilize tax policies to avoid frequent "mini budgets" that create market uncertainty. Focus on improving tax compliance, especially in sectors like retail, with potential to increase tax revenue by up to 2-3% of GDP.

5. Cut Unnecessary Government Spending :

Streamline government functions by eliminating redundant agencies and controlling expanding public sector expenditure (currently 18% of GDP). Audit the PSDP (Public Sector Development Programme) and eliminate cost overruns, aiming to save up to $1 billion annually by increasing efficiency.

6. Liberalize Markets & Reduce Government Control :

Reduce government's 70% market footprint by relaxing price controls and regulations. Encourage private sector-led growth, particularly in export-driven industries. Improved market competition could boost FDI inflows beyond the current $ 1.5 billion annually.

7. Adopt Market-Based Exchange Rate :

Transition to a flexible, market-determined exchange rate to improve export competitiveness and manage the $8 billion trade deficit. This would also prevent artificial appreciation, which has hurt exports and increased the cost of imports.

8. Reduce Tariff and Trade Barriers :

Lower tariffs (currently among the highest in the region) and remove non-tariff barriers to stimulate export growth. Implement World Bank recommendations to reduce excessive protection, which is currently hurting trade, and aim to double exports in the next 5-7 years.