- Pressure on all fronts
Pakistan’s economy is currently facing challenges on both macroeconomic and growth fronts. On the macroeconomic front, challenges remain primarily on rising fiscal and current account deficits, while the average growth of around five percent in recent years has not been able to trickle down enough to reduce income inequality gap and poverty level, where the rate is now around one-third of the population, 30 percent to be precise, being below the poverty line.
Given the deteriorating economic conditions raising eye-brows especially after the country’s completion of the Extended Fund Facility (EFF) programme with International Monetary Fund (IMF), meant for bringing both external reserves cushion and structural reforms, auditing indicates here that the programme could not create needed boost in export performance and foreign investment, at the same time neither providing sustainable BOP (Balance of Payments) reserves cushion, nor bringing calm in servicing rising external debt.
Since the late 1980s, after which Pakistan actively went into successive IMF programmes, I think it is only twice that it has completed a programme. That is why it has been coined as a ‘one-tranche country’. Actually IMF loan comes in instalments after usually quarterly reviews where the first few instalments are generally front-loaded and also bulky, compared to the later ones; a design issue that persisted with successive programmes, even after having the knowledge that Pakistan left incomplete programmes! Hence, commitment to programme objectives faded later in the programme, since the objective seemed like gaining quick bucks for BOP support. The easily available IMF money has provided successive governments with fiscal space to evade hard economic reforms on one hand, while on the other hand policy milieu of IMF lacks needed commitment on institutional development, and constrains growth and employment by focusing on restricting the demand side of the economy.
Policy makers in Pakistan and in multilaterals need to revisit their approach, shifting from one of neo-liberal, Washington-consensus style orthodox economic policy, to that of heterodox, political economic contextualised institutional development, that is more informed in terms of behavioural aspects. This is all the more important to do since the previous IMF programmes have remained unsuccessful in dealing with the slippages on both the macroeconomic and growth fronts, especially soon after when they ended.
Any future economic policy endeavour will be futile, if it does not attack this ‘institutional design’ which is extractive in nature, allowing political and economic elites to connive and extract resources and control over policy
What is more important is that income inequality and poverty have continued to remain a major concern, pointing towards lack of overall corrective policy and as negotiated in IMF programmes to improve upon the distributional consequences of growth. For tackling this, rather than just focusing on isolated initiatives in improving the ‘structures’ of certain specific sectors like energy or subsidy provision, policy will need to attack the current institutional design, which is prejudiced in its support of businesses that provide support in electioneering.
Unfair competition, tax and incentive policies have created a select group of favoured cartels, may that be the banking/financial sector or the real sector. For example, for raising bank borrowing for meeting fiscal needs, governments have left banks and financial institutions weakly regulated, allowing them to channel loanable funds to governments at high interest rates. This has kept on one side funds away from domestic investors, and on the other have meant banks earning high profits by keeping also the deposit rates low (high spread in other words).
On the real sector side, using SROs (Statutory Regulatory Orders) and preferential policy parameters, specific industry and agriculturists have been given preference in subsidy initiatives and tax relief. These unfair ‘rules of the game’ have meant that in Pakistan the problem is not lack of overall competition and poor business conditions for the overall economy, but inequality of competition and bad business conditions for many for the benefit of few. These few are allowed these favours by political elites at the back of seeking their monetary support for running election campaigns. This has had negative consequences for both the economy where oligopolies and oligarchies are in effect shaping policy, to each others’ advantage, while the many in the economy have been marginalised to low-end jobs and misery.
On the democratic side, the withering of the middle class has meant that given strong correlation between election campaign funding and election results, only the ‘men of weights’ or the wealthy few have disenfranchised the many out of the democratic realm, since these many have rightly realised over time that they have little or no say in policy.
Any future economic policy endeavour will be futile, if it does not attack this ‘institutional design’ which is extractive in nature, allowing political and economic elites to connive and extract resources and control over policy, in turn taking it from the hands of the many, to the hands of the few. Programmes with IMF will also have to be formulated, if at all, with focus on the improving institutions to beat this design. Therefore, isolated discussion of macroeconomic indicators like the twin deficit will be hard to deal with successfully if this overarching institutional design is not challenged by putting in place inclusive institutions, well incentivised underlying organisational structures, and appropriate regulators. A first step here would also to be to have sound data, since IMF programmes and policy in general all basically rely on data that the national authorities provide. Currently, the state of data is suspect due to apparent lack of capacity and independence of data colleting organisations.