KARACHI: International Mon­etary Fund (IMF) Deputy Director Athanasios Arvanitis said there is no magic bullet for lifting emerging economies like Pakistan out of balance-of-payment (BoP) crises.

“When pressures are acute, solutions are not easy,” said Mr Arvanitis while addressing a seminar and panel discussion on managing crises in emerging markets at the State Bank of Pakistan (SBP) on Friday.

“There is no spending your way out of high public debt,” said the IMF official currently responsible for overseeing the loan programme of $6 billion in Pakistan. He added that few countries have managed to reduce their debt by running larger deficits.

This approach advocates fiscal belt-tightening and demand compression to overcome a recession. In contrast, Keynesian economists suggest governments should do the opposite by resorting to a heavy deficit spending amidst economic downturns.

“There is often a desire to delay the necessary adjustment. But delays make the crisis bigger,” he said, noting that reducing imbalances is difficult and carries an upfront cost.

‘Poorly-designed bailouts don’t allow reforms’

Addressing the seminar, Macro Economic Insights CEO Sakib Sherani criticised the IMF for its poorly designed loan programmes for Pakistan.

“IMF programmes do not allow for structural reforms. How long does it take to fix the tax system of a country? To expect the Federal Board of Revenue to deliver a 45 per cent increase in the first year means you are not expecting it to reform. This need-for-speed is self-defeating,” said Mr Sherani.

He also accused the IMF of adopting the one-size-fits-all approach. There is a whole range of crises that emanate from terms-of-trade shocks, debt overhangs and monetary overhand, he said. “Yet the crises are dealt with similarly even though their genesis is very different.”

With regard to the oft-repeated mantra of creative destruction under capitalism, Mr Sherani said private firms in Pakistan are bearing the brunt of a bad policy framework.

He challenged the claim by the IMF and the government that the “burden of adjustment” — ie the fallout of policies aimed at compressing demand — is fairly distributed across different segments of society.

“The large part of the burden of adjustment (in the 2008 IMF programme) was actually borne by the people who were not in the BISP category, but in the lower middle income households. They faced steep increases in utility tariffs, in transportation fares. And they were completely uncovered and un-hedged,” he said.

In his address, Pakistan Business Council CEO Ehsan Malik said the SBP should reduce the key interest rate because the working capital cost is far in excess of what the industry can afford.

“You must have seen the corporate results at the end of December. All of them, barring the results of the banks, are looking south — and some of them, very significantly south,” he said.

He criticised the government for its many U-turns, including the recent one on the energy cost of exporters. “We still have a 100pc letter-of-credit margin requirement on industrial imports. I don’t understand its logic,” he said, noting that aside from the concessional funds for exporters, there has been no change in the country’s export policy. “It is exactly the same it was two years ago.”

SBP Governor Reza Baqir moderated the discussion. Business journalist Khurram Husain also spoke on the occasion.

Published in Dawn, February 15th, 2020