MANY educated and well-intentioned Pakistanis I have interacted with over the past few months have expressed a near-consensus of sorts: that the economy is in bad shape and needs to be kick-started as of yesterday. Fair enough.
They have then invariably concluded their prognosis with either one of two opinions, both implicitly connected, that: 1) Pakistan’s economic woes have more to do with its ‘tight embrace’ of IMF-dictated fiscal austerity over the past two decades or so; and, 2) it is time to discard the ‘contractionary’ monetary policy that has been thrust down Pakistan’s throat for the past ‘eight to 10 years’.
Hence, in cyber-space, a leading currency trader and blogger (and friend) wants the ‘terrifying’ consequences of the SBP’s supposedly ‘high’ interest rates to be reversed, starting with an immediate 200-300 basis points cut in the policy rate. In Lahore, a mixed group of senior executives from the private sector and civil servants at the National Management College echoed similar sentiments, with a few brave exceptions. In Karachi, a close confidant of the leader of a fast-emerging political party innocently asked over lunch why the silver bullet for the economy did not lie in the injection of ‘just’ Rs3tr by way of newly minted currency, hot off the printing press!
Branded as a fiscal conservative, an inflation hawk and IMF ‘sympathiser’ (and hence, someone who cannot think out of the box), my reaction has been in each case to turn purple and blue — and, in the latter case above, to choke on my food.
The road to economic prosperity is strewn with good intentions — but delusional beliefs. Given the persistence of the myths regarding the economic policies Pakistan has been pursuing (or, mostly, not pursuing) over the past decade, if not longer, it is time to examine these delusions.
Myth 1: Pakistan has been following IMF dictates for too long
With the fiscal deficit set to cross well over seven per cent of GDP this year, over the Rs1tr mark yet again, public debt doubling in the past four years, inflation averaging nearly 15 per cent, government borrowing from SBP bursting its ceiling, the smouldering ruins of tax reform and the debris of VAT and RGST for everyone to see, and public-sector enterprises close to collapse, it is hard to imagine what dangerous contraband my friends are partaking of to be able to still see an IMF shadow over us. With every conceivable target under any conceivable stabilisation programme (home-grown or IMF-choreographed) up in smoke, the fig leaf of reform has been blown by the lightest of spring breezes. Maybe we should take a closer look at our emperor’s clothes?
The fate of so many promises on fundamental economic reform — given not just periodically to international lending institutions, but implicitly to Pakistan’s own citizens since Independence — has been the same for over 60 years: unfulfilled and broken. Each and every IMF programme the country has negotiated since 1988 has met the same fate, barring one. So, one may wonder, the diligent pursuit of which IMF policies or targets are to blame for the economy’s present mess — when none have been followed?
Myth 2: IMF policies don’t work
Since the centre-piece of IMF policies is achieving ‘structural’ macroeconomic stabilisation, i.e. reducing the vulnerability of a country’s balance of payments and lowering runaway inflation by curbing excessive government borrowing, which is to be achieved by containing the fiscal deficit, this line of reasoning essentially argues that an economy can sustainably grow without deep-rooted structural reform.
This is the path of least resistance that we are so familiar with. If only we can get free Saudi oil, larger Chinese investment, another 10-year freebie engagement with the US, better than budgeted (but one-off) revenues from auction of 3G telecom licences and so on, we will be fine — for this year. Why bother with raising tax revenue and making people pay their utility bills — that too in a recession?
If none of the above options materialise, the prescription is really simple: lower interest rates and print rupees! This policy will ‘guarantee’ investment and economic growth, which will lead to jobs and higher tax revenue. Icing on the cake: the supply side response of the economy will lower inflation.
One can only marvel at the naivety of this argument, since it is not rooted in Pakistan’s own ‘rich’ experience in this area. Since 2008, Pakistan’s fiscal deficit has averaged 6.5 per cent.
During this period, economic growth has stuttered to a halt (averaging 2.9 per cent), while inflation remains elevated. Not surprisingly, the financing of the high fiscal deficits has choked credit to the private sector, halting investment and hurting growth, while feeding inflation. In addition, the country is careening towards a balance of payments crisis.
Even in the best of times, and under the most benign conditions as during the Musharraf years, with historically low interest rates and high investment rates, Pakistan managed less than four years of strong economic growth. In addition, even after hitting reported economic growth of nine per cent in one year, the country’s tax-to-GDP ratio could not cross 9.8
per cent. What further proof is required that economic growth on its own, without fundamental structural reform, cannot be sustained under the circumstances, nor does it deliver miracles such as higher tax revenue?
An extreme example of the non-sustainability of extended periods of fiscal stimulus and pump-priming of the economy is Japan. Despite over 10 years of running a zero interest rate policy, and piling up government debt to nearly 200 per cent of GDP to stimulate the economy, it remains mired in the doldrums. At the other extreme, two countries that successfully followed IMF-led structural programmes in the early 2000s (Brazil and Turkey), after many false starts earlier, have experienced several years of unbroken growth and unprecedented prosperity.
Pakistan’s own limited experience in 2008-09 of successfully pursuing stabilisation policy reveals how rapidly the economy responds: after reducing the fiscal deficit from 7.6 per cent to 5.3 per cent in a year, inflation more than halved, plummeting from 25 per cent to 8.9 per cent (year-on-year). The current account deficit dropped from 8.7 per cent to 5.7 per cent of GDP, stabilising the rupee and providing support to investor sentiment.
Bottom-line: Without fundamental and urgent economic and institutional reform, Pakistan cannot prosper. (The misconceptions about SBP’s monetary stance will be taken up in a subsequent piece.)
The writer is a former economic adviser to government, and currently heads a macroeconomic consultancy based in Islamabad.