IMF’s Conditional Measures Create Concerns for Subsidies and Economic Zones

Desk

Zafar Iqbal

The International Monetary Fund (IMF) has raised concerns about the grant of subsidies and tax incentives by the government, resulting in significant repercussions within Pakistan. The IMF’s disapproval of these measures has led to the suspension of new special economic or export processing zones enjoying tax incentives, as well as the withdrawal of the Rs14 per unit electricity subsidy for consumers in Islamabad Capital Territory (ICT) and Punjab.

The recent instructions from the IMF highlight that the government is prohibited from establishing new special economic or export processing zones with tax incentives. Additionally, the incentives already availed by existing zones will not be extended after expiry. Furthermore, the IMF has directed the government to immediately withdraw the electricity subsidy for consumers in the ICT and Punjab.

As a result of these conditions, the subsidy for domestic single-phase consumers in the ICT has been discontinued, while it will continue for consumers in Punjab until September 30. Moreover, all provinces have been prohibited from extending any subsidies during the 37-month period of the IMF program, signaling a significant shift in the government’s fiscal policies.

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The IMF’s decision to halt new special economic zones (SEZs) and export processing zones (EPZs) will have repercussions on Pakistan’s economic landscape. While the suspension may not have an immediate negative impact, it could potentially hinder future economic development plans, particularly for the special zone planned for Gwadar under the China-Pakistan Economic Corridor (CPEC). This move poses challenges to the government’s efforts to address unemployment and poverty through the establishment of SEZs and EPZs, which are entitled to special facilities and tax incentives.

The conditions imposed by the IMF also affect Pakistan’s plans to attract Chinese industries to SEZs as part of the second phase of the CPEC. The restrictions on tax holidays and exemptions raise concerns about the feasibility of these zones and their ability to attract investments. Additionally, the IMF’s focus on fiscal prudence may disregard the socio-economic implications of its conditions, as it limits the government’s capacity to negotiate terms that align with broader socio-economic goals.

The dominance of the finance ministry in negotiations with the IMF, at the expense of the planning ministry’s role, has also raised criticisms. The acceptance of conditions has significant socio-economic consequences, prompting concerns about the reduced influence of the Planning Commission in IMF talks. As the government navigates the terms of the IMF’s $7 billion Extended Fund Facility, significant concerns emerge about the potential impact on the country’s socio-economic dynamics and the well-being of its people.

The IMF’s stringent program leaves little room for negotiations, underscoring the urgency for Pakistan to avail the IMF program and manage the associated irritants. As Pakistan urgently seeks to secure the IMF bailout, the conditions imposed carry significant implications for the country’s economic and social well-being, prompting a critical evaluation of the trade-offs associated with IMF assistance.