Programme with IMF: some reflections

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  • Will export growth be put on a sound footing?

 

The International Monetary Fund (IMF) approved an Extended Fund Facility (EFF) programme with Pakistan, whereby $6 billion will be disbursed to the country in a phased way, over a period of 39 months. Up front, $1 billion will be disbursed.

Two main issues with the programme relate with approaching the spheres of exchange rate and inflation. Although many economists, including myself, pointed to doing the contrary– whereby learning from a) experiences of countries like Malaysia and Indonesia in the way they handled the currency crisis of late 1990s, and b) the overall counter-productive policy of over-reliance on policy rate in dealing with inflation after the global oil crisis of early 1970s– yet the current programme has not internalised this.

Hence, exchange rate is to be determined in ‘a flexible, market-determined’ manner’, to quote the programme related document. In a developing country with severe market failures, issues of acute asymmetry of information, and weak regulatory framework towards both controlling speculative activity and foreign portfolio investment, this policy will not help ‘promote strong and sustainable growth in Pakistan’ to quote the thinking of the currently acting managing director (and previously, deputy managing director) of IMF, David Lipton. This thinking in turn appears wishful, given the policy approach being taken in the programme.

Perhaps the bigger question for the government is to understand the economic cost of this $6 billion programme, and to plan accordingly

While the Prime Minister and the PM’s Finance Adviser have indicated that it is not a flexible exchange rate regime, yet even upon insistence by interviewers and others, they have not indicated any ‘band’ within which the exchange rate will be targeted by State (or central) Bank of Pakistan to remain. Lack of needed intervention to this effect by the central bank does not come to support of the PM and PM’s Finance Adviser claiming that the exchange rate will not be as volatile as to be free-floating. There is clear contradiction here, which only continues to stoke uncertainty in the minds of businesses, not to mention the damage being caused to rebuilding official reserves– another of the programme objectives– supporting industrialisation, boosting exports, and overall employment and growth levels.

The only forward is for the State Bank of Pakistan to intervene effectively in a way as to manage-float the exchange rate in a reasonable and somewhat predictable band; in turn keeping a needed balance between market determination and regulation, or in other words between flexibility and predictability. Here, it is worth mentioning the comment made by Dr Hafeez Sheikh that as PM’s Finance Adviser he should not be making a comment on exchange rate; meaning in turn that it is only for the central bank to deal and comment on. Is central bank outside of the economy, and if so, isn’t ultimately this the responsibility of the Finance Adviser and the government as a whole to deal with economic issues.

Such a comment also weakens democracy, because the elected government is answerable on all matters of economy, since they affect the electorate. Moreover, what kind of confidence will it instil in the economic agents, when the PM’s Finance Adviser is not ready to take any responsibility for the exchange rate. Taking responsibility and providing guidance to the people is not to say that the PM’s Finance Adviser should actively be interfering with the daily working of the central bank. For the PM’s Finance Adviser to say then that the exchange rate will be virtually totally left in the hands of central bank, for a country which is a net-importer of oil for example, and is in a situation where the import payments substantially outstrips export earnings and that too at the back of slim official reserves, not only increases economic uncertainty, but also indicates shirking of the mandate given by people to the government to manage the economy in all its entirety. With all due respect, it is not the central bank that will go to polls, or has been elected into office.

Secondly, the programme underlines the adequacy of ‘an adequately tight monetary policy’ for ‘keeping inflation low’, when the data since January 2018 of policy rate and CPI (consumer price index) inflation has shown a strong lack of negative correlation between the two variables. In fact, not only that the short-term Phillips curve phenomenon also did not hold, whereby there has been a simultaneous increase in inflation and unemployment, along with reduction in economic growth; with its projection all the more paltry for the current fiscal year, whereby to slightly outpace population growth rate. Hence, the programme prescribing an aggressive monetary policy stance– even when it is already the most aggressive in Asia for over a year now– is only likely to perpetuate stagflation further.

Tight monetary policy is being over-used in Pakistan for many months now. This is because inflation is at least equally a fiscal/supply-side-driven phenomenon- and not just primarily demand-driven, as has been the focus of policy earlier and in the programme now. Therefore, what is required is correction of market failures, reducing transaction costs, and at the same time to lower policy rate (loose monetary policy) to come out of stagflationary spiral.

Thirdly, the EFF programme, unlike the Standby Arrangement (SBA) programme of the IMF, is negotiated to deal with not just concerns on the aggregate demand-side, but also more medium term issues on the aggregate supply-side. Here, although the programme talks of addressing ‘structural weaknesses’ in the economy– details of which will be indicated in the programme document, released a little while later after approval generally– there is not much focus on improving economic institutions overall. Improving institution determinants, as has been highlighted in my own doctoral research and by many others, is significant in tackling macroeconomic instability, and economic growth– the two main areas of focus of the programme.

Even the programme objective whereby ‘social spending will be expanded and the most vulnerable supported’ requires effective institutions and not just allocating fiscal resources; a lesson otherwise also important for the ‘ehsaas’ (or welfare) programme launched by the government. Having said that, there is no mention– and which is strange– of the word, ‘inequality’, in the released document, which has otherwise been shown very clearly by research, even by that of the IMF staff, as an important endogenous determinant of economic growth. Hopefully, the programme document will place focus on addressing important equity concerns facing the economy.

Overall, it is yet to be seen how much of neoliberal policies the programme holds, where such policies have not allowed recipient countries in general to follow a sustainable growth trajectory. Lastly, the approval document makes note that, ‘The approval will unlock from Pakistan’s international partners around $38 billion over the programme period.’ Although a welcome thing for the low reserves situation, but then sustainable official reserves accumulation requires policies that take the country out of a stagflation situation, and put exports growth on sound footing. Also, the expected inflows– a mix of loans and foreign investment probably, and when public information on composition of each in the whole is also not very clearly known– is no substitute to a home-grown policy that helps address the abovementioned concerns in a far better way. Perhaps the bigger question for the government is to understand the economic cost of this $6 billion programme, and to plan accordingly.