Pak Economy: Doing without the IMF

By Dr Pervez Tahir

 

WHEN the finance minister of an economy in trouble persistently denies reports about a possible recourse to the IMF, the popular perception is that the arrival of the dreaded IFI is imminent.

But it seems Naveed Qamar has not been bluffing. There appears to be an indigenous adjustment programme taking shape, though its main contours have not been elaborated on systematically. At a time when the IMF is very nearly out of a job and may well be looking for customers by offering ‘discounts’, the temptation is still worth resisting.

It is, however, important to clearly lay down the main objective of the strategy to do without the IMF. In some sense, the IMF conditionalities are now the general conditions for proper economic behaviour in the globalised world, particularly for economies such as Pakistan with a high degree of openness to the world. Even if the economy is not under an IMF programme, not very dissimilar conditionalities can be expected from the WTO, other IFIs and, most important, the non-debt-creating foreign direct investors. Sustainable fiscal and external deficits are the key barometers for all global economic players.

So it will be hard to argue that lowering these deficits is not in the national interest. What is against the national interest is the loss of freedom to choose which deficit is more important, its reasonable size, the policy instruments to deal with the deficits and the sequencing and the time frame of reform. Under advice, Pakistan systematically dismantled the much-needed subsidies on agriculture. Another piece of advice put the cart before the horse by liberalising the capital account of the balance of payments first. Yet another act of subservience was the lowering of tariffs at a much faster rate than the WTO would have required. Income taxes were also brought down sooner than the economy could afford, again under prescription. This is what has given us a flat tax/GDP ratio. So eager was the Shaukat Aziz team to enter into an IMF programme that it accepted the maximalist position placed on the table for negotiation without any question.

This experience of a low-quality economic team makes it clear that the main objective of doing without the IMF is to retain the freedom to act, which is restrained by the IMF’s one-size-fits-all approach, and not to shy away from adjustment.

Signs of it are there already. Credible efforts have been made to turn off the tap from the State Bank of Pakistan. Alternative sources of borrowing are being tapped. National Savings Schemes, subjected to thoughtless reform under prescription in the past, are being revitalised to access household saving. Domestic debt, even if costlier, is preferable to external debt because we owe it to ourselves. Tax collection in the first two months following the budget is satisfactory. Falling oil prices have also provided some respite. The PSDP is being cut significantly. All PSDP is not investment which leads to growth.

There is still a lot of room here. Frequent CDWPs (Central Development Working Party) and ECNECs (Executive Committee of the National Economic Council) were held in the last days of the previous regime to approve projects in indecent haste and without proper technical and economic appraisal to accommodate cronies. Growth in the near term can only come from agriculture. Here, the freedom of action has already led to needed subsidies, price policies and credit. The current budget is proverbially rigid but expenditure-cutting, like charity, should begin at home.

The fall of the rupee continues. It is good for exports but a poorly diversified export structure fails to benefit. It is bad for our debt servicing. And it is worst for our economic image. Belatedly, imports have been restricted and concerted efforts are underway to mobilise external inflows. The reality is that private sector earns the foreign exchange it needs for imports and the deficit arises from the government requirements for foreign exchange.

I continue to believe that the free-falling behaviour of the rupee has had more to do with political uncertainty than economic fundamentals. The market knows that the war on terror is not about to end and that there is no escaping from it for Pakistan. This entails massive inflows from abroad. But these inflows have to be hosted by a stable political framework.

With a smooth and democratic exit and entry at the presidency and the beginning of judicial restoration, the political roadblocks in the way of a stable rupee have been removed. It is unlikely to revert to Rs60 to a dollar, but would settle around Rs70. Inflation is likely to recede after Ramazan. The stock exchange will follow the behaviour of the rupee and inflation.

Some fresh thinking is needed on inflows related to the war on terror. Thus far these have taken the form of budgetary support and reimbursement of expenditure incurred by the military. A democratic regime should look for long-term benefits to the economy. Pakistan still owes some $15bn in bilateral debt to Paris Club countries, the list broadly coinciding with the coalition members engaged in the war on terror. With the backing of a parliamentary resolution, Pakistan should seek cancellation of this debt. This, together with Senator Joseph Biden’s proposal of $1.5bn in annual US assistance for the next 10 years, should bring the economy back on the rails.

Pakistan should say thanks but no thanks to the IMF. As my friend Meekal Ahmad, himself ex-IMF, wrote in a letter in this paper last month, IMF is never a choice. Countries drift towards it. If Pakistan can have a decent adjustment programme of its own, why bother? For at least two years it is this programme, rather than the Planning Commission’s plans for a freshly learned five-year plan from India, which can steer the economy back to its potential growth.

The writer, a former chief economist of Planning Commission, teaches at GC University, Lahore.

Source: Daily Dawn, 10/9/2008

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