Business

Can output rise without incentives?

AnyFans 2025-09-23

By Anjum Ibrahim

There is an across the political divide consensus on ensuring private sector as the engine of growth with the historic modus operandi being to extend incentives at the taxpayers’ expense – fiscal, monetary and utility subsidies – justified on the grounds that it would reduce unemployment (which currently stands at 22 percent) and allow wealth to trickle down (a theory clearly debunked with 44.7 percent Pakistanis living below the poverty line today).

The International Monetary Fund (IMF) in its 10 October 2024 documents zeros in on the root of the problem that accounts for the country currently being on the twenty-fourth programme loan: “a tight correlation between Pakistan’s boom-bust economic outcomes and its macroeconomic policies.” From 2008 to-date Pakistan secured five IMF programme loans by agreeing to implement critical reforms but abandoning implementation as and when the balance of payment crises eased.

The 2008 loan was suspended in 2010 due to failure to implement agreed tax and power sector reforms. In 2013, the PML-N government contracted a Fund loan, which was completed in 2016; however, reforms did not target the solution of the boom-bust cycle leading to the government initiating negotiations for yet another Fund loan by 2017 (appropriately deferred till after the 2018 elections).

The claim by the PML-N stalwarts that the economy was on an upward trajectory during their tenure and source the decline to PTI’s administration is debunked by the first para of the June 2019 IMF document titled Request for extended arrangement under the Extended Fund Facility: “misaligned economic policies, including large fiscal deficits, loose monetary policy, and defence of an overvalued exchange rate, fuelled consumption and short-term growth in recent years, but steadily eroded macroeconomic buffers, increased external and public debt, and depleted international reserves.

Structural weaknesses remained largely unaddressed, including a chronically weak tax administration, a difficult business environment, inefficient and loss making SOEs, and low labour productivity amid a large informal economy. Without urgent policy action, economic and financial stability could be at risk, and growth prospects will be insufficient to meet the needs of a rapidly growing population.”

And further damning for the performance of PML-Ns two economic team leaders, Ishaq Dar and Miftah Ismail, the Fund contended that “less than three years after the completion of the last Fund arrangement (in 2016), Pakistan’s economy is again under duress on the back of large fiscal and external financing needs, which have only been alleviated by short-term bilateral borrowing. Policymaking and economic institutions have not been strong enough to ensure sound macroeconomic policies, giving rise to unbalanced growth, a heavy debt burden, and risks of a disorderly adjustment in the absence of a new program. Per capita growth has almost stalled, hampered by a difficult business environment, large informality, and an overvalued exchange rate.”

From 2019 to-date Pakistan secured three IMF programmes – 2019 under the administration of Pakistan Tehreek-e-Insaf (PTI) postponed for two years due to the onset of Covid-19 in 2020 and finally suspended in 2023 due to abrogation of agreed conditions by the then finance minister Ishaq Dar; nine-month Stand By Arrangement in 2023 completed by the caretakers; and thirty-six month Extended Fund Facility 2024, which is ongoing and seeks to end the elite capture of resources – elite defined as the major stakeholders plus the rich private sector molly-coddled by all administrations though the favoured sub-sector varied from one administration to the next.

One focus of the Fund in the ongoing programme is to end the elite capture of the influential in the private sector through “simplifying the system by eliminating numerous exemptions and preferential rates and enhancing the sales tax of petroleum products. In particular, exemptions granted to four export-oriented sectors for domestically sold products will be eliminated, together with non-essential food related products exemptions. Moreover, preferential rates related to sugar, steel sector, edible oil, medium and large retailers will also be eliminated and aligned with the standard 17 percent sale tax rate.”

Not mincing words, the IMF in the October 2024 documents further notes that: “The state’s support of businesses through subsidies, favourable taxation arrangements, protection and governmental price setting has undermined the development of a dynamic and outward oriented economy. Subsidies have taken the form of low-cost financing and other concessions, which although varied across industries, left financing and taxes net of subsidies more favourable than in peer economies and less-favoured sectors (text chart).

The tax system has been extensively used to provide non-transparent support through exemptions for privileged sectors like real estate, agriculture, manufacturing, and energy, as well as, through the proliferation of Special Economic Zones (SEZs).

The government’s intervention in price setting, including for agricultural commodities, fuel products, power, and gas (biannual), combined with high tariff and non-tariff protection tilted the playing field in favour of selected groups or sectors. Despite all this support, the business sector has failed to become an engine of growth, and the incentives eventually weakened competition and trapped resources in chronically inefficient (including perpetually “infant”) industries.”

The Commerce Ministry, exporters and manufacturers appear to be ignorant of these programme conditions agreed by the authorities and one hears the same cacophony of demands (monetary and fiscal incentives and lower utility prices), which are being shot down by the Finance Division.

In addition, the Fund conditions relating to severely contractionary monetary and fiscal policies continue which are anti-growth and hence the litany of private sector-led growth need to be injected with a heavy dose of realism.

To conclude, the need for the Fund programme is paramount as without it the country is likely to default because the three friendly countries have demonstrated in no uncertain terms that they would withdraw the 12 plus billion-dollar rollovers unless we are on an active Fund programme.

Thus, chances of any reversal or abandonment of agreed conditions appears to be unlikely for at least another year, given the severe devastation due to the ongoing floods. It is hoped that the government supplements the agreed reform agenda with the Fund with a massive voluntary decrease in its current expenditure to provide the fiscal space that would strengthen the economy.