Pakistan's IMF Bailout: Economic Crisis and Reforms Analysis

[00:00:00]hello and welcome to this week's edition of crosses the program on the print where we discuss the big Regional or national security issue of the week I'm Praveen Swami National Security editor the print and I'm joined today by the eminent Pakistani editor and journalist Murtaza solanki and by mehtab Heather who is chief economic reporter at the Pakistani newspaper the news first of all I'd like you to thank you both for making the time to join us today I know it's a busy day for you uh I'll go straight to the point prime minister Sharif announcing today that Pakistan has no option but to go for an IMF bailout politicians has been resisting this for weeks now uh what has brought about the change of mind thank you very much for giving me this opportunity I actually you know Pakistan's foreign exchange reserves are depleting and the gross financing requirements estimated by the by the IMF and the doors by the World Bank stands at 32 billion dollars out of which 23 billion dollars is meant for paying the debt servicing external debt Servicing and the remaining is to finance the current account deficit so after passing the six and seven months of this financial year because in Pakistan financially starts in July and it ends on 30th of June so after passing of seven months uh our economy has shown has faced a disaster in the in the wake of severe floods and after that you know because of our Reliance on imported uh items our current account deficit and the external account problem is aggravating at the moment Pakistan's Foreign Exchange Reserve stands at only 3.08 billion dollars held by the State Bank of Pakistan only now four weeks we don't have any reserves if there is no IMF for the next five months we required 9 to 10 billion dollars per repayment of our debt and for the uh managing the current account deficit so the problem is huge and there is no other option but to get and ensure the securing of the payload package of the IMF we resisted uh and and you know Pakistan's Finance Minister sagdar a special love to to manage the exchange rate uh it was a Floodgate which was broken with the severity of the water and now you know in last three or four days we have witnessed that the exchange rate had depreciated massively it stood at rupees 220 against US dollar today it crossed 278.

[00:03:25]it's almost 60 rupees depreciation just in a matter of three or four days there was another demand of the IMF to raise the petroleum products because you know we imported uh petroleum products and there was a agreement with the IMF that we will impose a levy of rupees 50 per liter maximum limit so we imposted on the petrol and on diesel it stands at 40 rupees per liter so we jacked up the Pol prices by rupees 35. in case of petrol and Diesel there was another demand of the IMF now to raise the electricity tariff and there's also demand of the IMF to impose the additional taxes so the it's a better spill which we we will have to swallow if we we refuse to swallow then the default is knocking at our doors that's why prime minister now conceded to all these tough prescriptions suggested by the image thank you thank you so much uh politicians anywhere in the world don't like these IMF conditions because they mean hardship for ordinary people they mean higher prices more taxes restrictions on government spending and we saw prime minister Imran Khan in his own time ducking these uh issues on raising petroleum prices announcing a lot of subsidies and so on I can assume I'm I'm guessing this was not an easy call for prime minister Shahbaz Sharif to take saying that we're going to go down this road especially perhaps with elections not too far down the road you're right politicians uh don't like decisions that would annoy the electorate especially in an election year that's true but it's also a matter of fact that whatever the state of economy is that's forcing them to agree to the what prime minister Shahbaz today said unimaginable conditions they are responsible for the state of economic Affairs whenever they are ruling directly except for the years when we had military rule now the problem is that our ruling Elite is responsible for this state of affairs because they have been reaping the windfall after a strategic uh position of Pakistan during war and Terror and before that the Soviet Afghan Jihad uh our power elite has yet to realize that the world has moved on and we are not that strategically important for them that somebody would bail us out so at the end of the day uh if Pakistan a power elite does not go for a massive economic restructuring uh I am afraid that more shameful conditions will back and our doors decides default that my friend just mentioned I want to go a little deeper into this question of uh [Music] Pakistan's dollar reserves now since the 1950s I think Pakistan has approached the IMF if I am not wrong 22 23 times uh for IMF support uh get each cycle of these IMF bailouts or IMF assistance over the problem and Pakistan is confronted with it again after a few years why is why is there this recurrent problem in a in layperson's language can you explain it for our listeners yes sir actually the Pakistan's economy can be attributed as boom bus cycle whenever we we actually we we don't have uh we are unable to finance ourselves through through maintaining or through promoting investment and savings that is the major problem in Pakistan so we will have to rely on foreign savings so it it actually increases our Reliance on the foreign debt as well as the domestic debt to finance our internal deficit as well as the external deficit so this boom and bus cycle actually you know when we increased our resources or external inflows it helps us to boost up our GDP growth and economic activities promoted but whenever it shrinks it resulted into creating of twin deficits that is called the current account deficit and the budget deficit and and you know uh as langisab has mentioned this lead capture basically the con the fiscal deficit is the result of this Elite capture because our lady elite doesn't allow to bring itself under the tax net and we love to uh involve into the spending spree so we spent more but we generate little so that is the problem and whenever we we our Elite has so much money just at their disposal it resulted into increased our Reliance on Imports because they have the money so they they changed into the dollars and they plot different kind of things or uh through through import it increased our import Bill and second problem is we have uh heavily reliant on Imports of petroleum products and especially the electricity sector it's also we didn't generate the electricity through indigenous resources for instance in last year in last fiscal year we had imported fuel of more than 10 billion dollars and on the same side on agriculture we we are agriculture economy but our import bill or agriculture is also more than 10 billion dollars so these two resulted into the creating a current account deficit to the tune of 17 to 80 billion dollars it's a huge and on the other side we are unable to bring our Elites into the into the tax net so they don't pay taxes but they have so much money to spend this kind of structure cannot be sustained on longer basis so we will have to broaden our text base we will have to reduce the tax rates and we will have to broaden it and we will have to ensure the competitiveness so that we can achieve the exportable Surplus up to that extent that we can Finance our Imports there is no other solution on short-term basis there is a patchwork which we can done through the IMF and whenever we Face the balance of payment crisis we approach the IMF but Pakistan is known as a single or two trans country in the committee of IMF and World Bank so there is a need to bring it bring a paradigm shape we will have to be competitive we will have to ensure uh the broadening of the tax base actually you know everyone is paying taxes but it's indirect taxes ever indirect tax is 80 to 90 percent there's a need to bring a paradigm shift there's a need to bring each and every penny of the elite into the into the textnet there is no the solution under the imframe we always done a patchwork window dressing now will not work we cannot run this economy with the status quo so we will have to bring the desired reforms but reforms doesn't mean that we will have to increase the Tariff tariff is not the Tariff increases will not provide the solutions we will have to bring other structural reforms which will bring the elite and the affiliate segment server Society into the textnet we will have to increase our exports we will have to reduce our dependence on Imports that is medium to long term solution but we are not moving towards that direction that is the problem you just you know both of you have mentioned this issue of elite capture you also spoke about this earlier and I'm guessing one of the debates now I see unfolding in Pakistan is this is great the elite has made a mess but who is to pay the bill for rectifying the mess is it to be ordinary people um already some divisions within the ruling Alliance on issues like privatizing loss making public sector Industries in in like steel mills and so on uh former president apparently not very happy about some of these privatization measure us and I can imagine many Ordinary People very worried that look we're already going through a terrible time making ends meet why should we pay the bills for these rich people making a mess would that be uh would that be a fair characterization of the sentiment I think it is because last year our largest Province Punjab that has a population of over 120 million people and that's one of the most fertile lands of Pakistan the food basket the most modern agriculture whatever we have is in Punjab with higher yield higher productivity the total agricultural income tax collected in the province of Punjab was less than what a friend of mine head of a pharmaceutical company paid in Texas what is the level according to undp report the subsidies provided to a big Elite and corporate sector and including real estate exceeded 17.5 billion dollars a country that was considered food basket of the region now we have to import wheat we have to import pulses it's a matter of a shame for a nuclear state um so if you do not change your tax system uh bringing in more direct taxes um and uh taking out those uh subsidies um there is no way forward now if uh you know my friend has more figures on the losses of the state-owned Enterprises those politicians who criticize privatization of those white elephants should also have some kind of alternative if you cannot run those corporations and state-owned Enterprises efficiently and you are Doling out tax rupees into those big potholes you would only bleed the economy so with their reservations apart either you have to reform those institutions which we have failed or you have to provide provide privatize them there is no other option because they are bleeding uh taxpayers money like hell further question on these uh Power sector reforms now this this debate has been dragging on if I remember correctly since general public style um and one of the things that was meant to happen was that with greater uh Chinese investment in the power sector uh there were also measures promised to price electricity at uh economic level and to try and solve this problem of circular debt which for our audience is essentially people not paying uh Power bills that are economical that means power companies can't procure their energy and debt uh goes on and on why why did these efforts fail what what fundamentally went wrong with this critical issue actually you know this power sector leading is more than the defense budget spending in the last Financial year defense budget publicly known defense budget I am talking about for instance the power sector losses was 1600 billion rupees in last Financial year ended on June 38 2022 and the defense budget was only 1400 billion so the power sector losses were 200 billion more than the defense budget actually you know the problem is that under the World Bank program we unbundled the power sector but it was not done properly and not up to the extent for instance our power sector is basically a recipe of piecemeal approach for instance we we have established different uh distribution companies there was a Genco and then the distribution companies but the problem is these distribution companies were not run on efficient basis and actually it was meant that it would be privatized so it was not privatized now the problem is this please meal approach is not working and the second problem is our Energy Mix our Reliance is on the furnace oil and the the rlng and the coal over 70 percent more than 70 percent power is generated through imported furnace oil rlng and coal and it's expensive because it's linked with the dollar when we depreciated the exchange rate it resulted into the height of an electricity tariff now and the second problem is our losses the losses of uh more than 90 percent discourse are 40 30 to 40 percent and the efficient discourse losses are 10 to 15 percent maximum nepra is allowed 70 losses are being absorbed World Bank of suggesting or proposing or giving us prescription only to raise the Tariff but we are not doing the other structural reforms for instance if you ask the public sector people they will give you different number after every hour the number will be different why because there is there is whole supply chain and there is a need to conduct a forensic audit certain the exact losses of this cash bleeding power sector because it cannot be sustained on on on on forever basis uh so it resulted because our power generation cost is more and our losses are high so we are not uh receiving uh the cost recovery of those generated units so it resulted into creating of the circular debt and now the circular debt in last three or two two decades and three governments in 2008 When people's party was ruling for Pakistan under the IMF program we raised the power table tariff have almost 40 percent and under the pmln program we are we again raise the power to effort tariff 30 to 40 percent under this program which was signed by the PTI we had already raised the power table tally for 30 to 40 percent so the power tariff is not resolving our problem so we need to undertake a comprehensive approach and reform this whole sector either we should privatize it or we should establish public private partnership but it wouldn't work the solution is privatize it if and for instance prepaid meters why we cannot install prepaid beaches what is the problem because there is a leakage there is a vision and there is a vision of almost 500 billion to 1 trillion per year but we parked it to different we don't bring into the books that is the problem it cannot be run on sustained basis so the solution is we will have to abandon this piecemeal approach and we will have to devise a comprehensive medium to long-term plan to overall this sector because it cannot run also same basis with this kind of peaceful approach I was wondering how you know you you discussed this in an earlier uh episode of process but how this is going to play out politically now prime minister Imran Khan during his years in office had made a big Prestige issue of this whole IMF thing and Gareth and so on and so forth uh in your view as a political Observer is going back to the IMF and this economic chaos is it going to strengthen imran's hands or are people able to see uh where this entire problem actually began I'm not sure because uh Imran initially in his uh you know when he became prime minister in 2018 um tried to stay away from INF but then had no option because of the structural issues of economy that methab just mentioned boom and bust cycling uh so then they had to go to IMF um now uh before uh the vote of no confidence when he knew that his government is about to fall he somehow sabotaged IMF program and it was suspended when the oil prices in the international market was going up he reduced the petroleum prices and he also Frozen uh the power rates so basically he caused lot of economic damage before he left office uh but now when IMS program was resumed when Mr Ismail was for a finance minister um after that you know we had a change of the portfolio and again we are in a state of limbo but Imran Khan is on record saying that Pakistan has no option even a blind man with somebody who is not too bright would agree that Pakistan has no option but to go to IMS he would criticize and he is criticizing that this seven eight months government is responsible for the economic mess now it will be a test after political leadership uh who persuades electorate who is responsible for the economic mess uh would it be the current coalition government that would succeed or Imran Khan it also depends upon the state of pti's uh uh you know leadership that's implicated in several cases including Imran Khan who might land in jail who might be even disqualified so it all depends upon the strength of Imran Khan's party if he uh is uh if he ends up in jail and he stands disqualified and if his party splits then probably they would not be in a position to take advantage of it otherwise the popular pulses that probably in the province of Punjab and we have almost 80 percent of the total voters of the country that might benefit him maybe he can win a landslide maybe he can get a two-third majority but that would not be first time in Pakistan's politics Nawaz Sharif became prime minister twice the two-third majority and he was thrown out like you know in 99 and in 2017. so if in Pakistan's uh power equation if you fall out with establishment no matter how popular you are if you are not you know you don't have good relations with the establishment no matter how popular support you have it will be tough for you to govern uh a final I give you the last word and I'm you know this is a bad time for the world and I have two questions if you like as this parts of this last question the first is after entering into an IMF program a lot of people or media in Pakistan have been saying money will come from China or from Saudi Arabia wherever but all these countries are having difficulties of their own in this post-covered environment so do you believe uh this money will really come or we are going going to have tough times and secondly what will the impact of this continuing and English war in Ukraine be as Pakistan seeks to improve its exports uh and you know sort out its its economy Yes actually you know the rising inflation in in many General parts of the world especially after the coveted Corruption of Russia Ukraine war it also creates problem for many other developed countries as well as in this region and and many many countries which were supposed to help the Pakistan and another message is quite loud and clear for instance uh Saudi Finance Minister in his uh one of the interview he said that you know when we are clapping taxes on our in our own country so we expect that the same path will follow those countries to which we use to give the grants and the deposits so the message is quite loud and clear that we will have to secure the iMac program there is no other option and imf2m means IMF param clearly indicates that it will take care of all the external sector requirements of of the program period so it is hope that when if the hyper program will be revived the external financing will be managed because I I IMF Ram basically means that uh the whole world especially the multilaterals and the bilaterals are seeing the IMF stamped approval as guaranteed that this country's debt and external sector is sustainable and it's not going to default so it's so that it will be done but we will have to manage uh our economy by ourselves we will have to ensure our increased Reliance on the non- debt creating inflows for instance boosting up exports as well as the remittances for which we will have to develop the skills of our Workforce on your second question you know it's it's a move that we should procure or get cheap oil from Russia negotiations recently they have visited and we have shown our interest but let's see because you know it depends that how we will proceed with IMF and you know with the blessing of the United States it requires uh uh United States Sports to to get the highway package especially from the approval of the Executive Board of the IMF so let's see fingers crossed it depends that how the IMAP Ram proceeds and it is hope that the police level talks with IMF will be concluded by a 9th of this month and if staff level agreement will be signed then it also requires two to three weeks to get approval of the executive board and keeping in view the depleting foreign exchange reserves we don't have the money but if the this ongoing parlays did it end on any positive note or striking staff level agreement tell the problem or the crisis will trigger so the next few days are very important in this case of IMF drops so uh thank you so much for your time pleasure always to have you back Murtaza and I hope we'll be seeing more of you also uh my thumbs up on this program uh but all I you know as I uh speak to Old Friends in Pakistan just wish you uh good luck in the days ahead and we'll be discussing this uh in detail this financial crisis uh with our listeners uh on crosses at the print uh in coming days and weeks thank you and uh see you again next week foreign [Music] [Applause] [Music]