The last IMF-programme | Pakistan Today

The last IMF-programme

  • Or is it?

By Usman Masud

Turn a few pages in the history of the economy of Pakistan and you will see a vicious pattern. The outgoing government hands over an economy that is plagued by all kinds of meltdown– fiscal, financial, external, and real. Faced with such a dire situation, the new government’s most immediate priority becomes rescuing the economy. With debt payments around the corner, and virtually nothing in the national coffers, the first thing it has to do is knock at the IMF’s door out of necessity. Thus, it starts its tenure by muddling through a very difficult first year characterised by stabilisation. The following year mostly brings recovery, and finally the economy kicks off by the middle year.

But then the policy-makers realise the urgent objective of impending elections, for which all they have left is 24 months. It is reasonable, and not just opportunistic, they assume, to start spending big then, as the economy begins to show signs of robustness. Reforms, that were led by the IMF, are left half-way, as the IMF-programme by then is already ‘successfully’ completed. The politicians have no incentive to bite the bullet anymore.

Thus, begins a period of rapid expansion of economic activity. The government goes into overdrive. The rupee is ‘stabilised’ on the back of the foreign exchange reserves accumulated during the IMF programme. The development expenditure surges. Alongside, imprudent subsidies and generous tax cuts are offered.

Lastly, of no less importance is the need to create awareness on economic matters among the public. Till the voter can see what lies behind the flashy numbers like the GDP growth rate, and such indicators like the Rupee’s exchange rate, we can expect the circus to continue

But there is a cost to this complacence. A closer look at the data, almost always, would show a spike in debt behind this semblance of prosperity. Thus there is a ballooning fiscal deficit, an inflationary momentum, and an overvalued exchange rate, all to build into an avalanche before long.

Yet, to their voters, the ruling party offers overblown figures of prosperity, flaunting the rise in economic growth, fall in unemployment, and the rise of the mighty rupee. For the average voter the package seems promising. But behind all this, there is a ‘political business cycle’ in the making.

Enter the new government and the economy finally implodes. The lagged effect of overspending and window-dressing by the previous government comes into play. Helpless, back we recede to the IMF. Over and over again this cycle repeats itself, as complicit politicians curse the international lender at the top of their hollow voices.

All recent transitions, from General Musharraf to the PPP, from the PPP to the PML-N, and from PML-N to the PTI, all followed the same path. Whether it is FY2008, FY2013, or FY2018, the fiscal deficit was 6.5 per cent of the GDP or higher, inflation was on a steeply upward trajectory; the rupee was grossly overvalued; and foreign exchange reserves were totally dried up. Go further back in history, and you will see exactly the same pattern.

So, is there any end to this vicious cycle in sight?

To stem this pattern, the Parliament and the current government need to give more meaning, and at least some teeth to the Fiscal Responsibility and Debt Limitation Act 2005. While the law requires transparency in fiscal policy, fiscal consolidation, and explicit targets for debt reduction, it is hardly effective. In some senses it may be argued that it is even self-defeating. If you have the snooze button in your range, waking up on time is virtually impossible. The governing party has a majority in the Parliament. That is, the snooze button is well in their range. One possible solution here is independent expert advice. The central and commercial banks, consultant firms, and the government’s economic advisory team can help in anchoring the fiscal policy and debt in reasonable ranges.

But the longer-term solution is to root out the actual problems behind imbalances in the fiscal and external accounts, for which structural reforms and sustained economic growth are needed. Domestically, this will mean raising more tax revenues by not just broadening the tax net, but also invigorating the economy; privatising (or restructuring) loss-making state-owned enterprises; and offering targeted supply-side incentives which enhance the productive capacity of the economy. On the external front, this will mean promotion of exports, curbing of avoidable imports, and attracting foreign investment.

Lastly, of no less importance is the need to create awareness on economic matters among the public. Surprisingly, analysts– including economists– fail to highlight this plain cycle of exploitation. Till the voter can see what lies behind the flashy numbers like the GDP growth rate, and such indicators like the Rupee’s exchange rate, we can expect the circus to continue.

The writer is a freelance columnist.



Top