Economists Raise Questions Over IMF’s Political Statements

Economists have questioned whether the International Monetary Fund (IMF) has the mandate to make a political statement and social unrest in Pakistan.

Propakistani talked to a few economists who endorsed that the fund cannot comment on the volatile political environment, political tension, and social unrest in Pakistan.

The IMF report on the Seventh and Eight Reviews of the extended arrangement under the Extended Fund Facility stated that on April 10, Shehbaz Sharif (Pakistan Muslim League-Nawaz) became Prime Minister (PM) of a coalition government with the Pakistan Peoples Party and other smaller parties. The new government took power after a no-confidence vote against former PM Imran Khan. The political environment, however, is complex: the governing coalition enjoys a slim majority and comprises traditionally opposing parties, while former PM Imran Khan continues to hold large protests across the country and had a strong showing in key Punjab by-elections, the report stated. The government has expressed its intention to complete its term, with elections due no later than August 2023.

Political tension led to significant fiscal slippages. The former government granted a 4-months “relief package” in late February 2022 that reversed commitments to fiscal discipline made earlier in the year. The largely untargeted package
(i) reduced petrol and diesel prices (through a generous general subsidy and setting fuel taxes at zero taxation)
(ii) lowered electricity tariffs by PRs 5/kwh for almost all households and commercial consumers
(iii) provided tax exemptions and a tax amnesty.

These measures were accompanied by the deferral of regular electricity tariff increases, as well as increases in the minimum wage and public wages and pensions, and additional food subsidies. The retention of these measures, as well as additional slippages in Q3 and Q4, widened the FY22 fiscal deficit by more than 1½ percent of GDP, missing the end-June fiscal target by a wide margin.

The IMF report stated, “Socio-political pressures are expected to remain high and could also weigh on policy and reform implementation, especially given the tenuous political coalition and their slim majority in Parliament. Furthermore, high food and fuel prices could prompt social protest and instability. All this could affect policy decisions and undermine the program’s fiscal adjustment strategy, jeopardizing macro-financial and external stability and debt sustainability,” it added.

The IMF report further said that the challenging political climate could weaken reform and policy implementation, and undermine Pakistan’s adjustment path, debt sustainability, and growth potential. Moreover, reform fatigue, the political cycle, and weak governance and anticorruption institutions could quickly narrow the window to undertake critical reforms.