So much for Dar-nomics
During her recent visit to Islamabad, Christine Lagarde, IMF’s Managing Director, praised Pakistan for “successfully completing” a three-year programme under which Islamabad received $6.7 billion after signing a bailout package with the fund amid fears of default. She also stated that Pakistan’s economy is improving but she urged Pakistan to continue efforts on “more private sector job creation and higher living standards.”
Quick to take credit even where it is not due, Federal finance minister Ishaq Dar claimed that Pakistan was being considered one of the emerging economies of the world owing to good decisions and management since the past three years. Patting his own back, Dar claimed that during the past three years, he had taken decisions for the betterment of the country’s economy and owing to that, Pakistan had ridden itself of macro-economic instability.
Dar’s euphoria was short lived because three prominent Pakistani economists wrote an open letter to IMF challenging IMF’s portrayal of the health of Pakistan’s economy. The letter has been published in Weekly Corporate Ambassador of 24 October 2016, titled ‘Wrong Sides of the Picture’.
The three eminent economists, Dr. Ashfaque H. Khan, former Federal Secretary Finance, Dr. Hafiz A. Pasha and Dr. Salman Shah, former Finance Ministers, have exposed the wrong picture presented by the Dar-led economic team about Pakistan’s economy.
The three year program under the IMF’s Extended Fund Facility (EFF), has just concluded. Pakistan has received $6.1 billion loan from the IMF under this program and pocketed the last tranche of $102 million under this package in September 2016. During the tenure of the program, Pakistan was required to undertake wide – ranging structural reforms and implement the type of macroeconomic policy that would restore macroeconomic stability, gradually promote economic growth and build foreign exchange reserves to bolster external buffers.
Unfortunately, the exposé by the trio discloses that IMF was complicit in the eyewash.
After the completion of the twelfth and the final Review, the IMF Staff Mission Report declared ‘victory’ and stated that “the Fund Supported Program has helped the country restore macroeconomic stability, reduce vulnerabilities and make progress in tackling key structural challenges. Economic growth has gradually increased and inflation has declined. External buffers have been bolstered, financial sector resilience has been reinforced, and the fiscal deficit has been reduced while social safety nets have been strengthened”.
In the realm of “reform”, the Report stated that “tax policy and administration reforms allowed for further revenue mobilisation. Steps have been taken to strengthen the State Bank of Pakistan’s autonomy. Energy sector reform allowed a reduction of power outages, energy subsidies, and accumulation of power sector arrears. A country – wide strategy to improve the business climate was adopted”.
The Staff Report contains the views of the IMF on the “success” of the program.
The three independent economists, through their open letter have presented the obverse view of the picture. They have gone to great lengths to identify the extent of the success, how these “successes” have been achieved and express their disappointment with the failure to implement reforms that are critical for achieving higher economic growth.
Firstly, building foreign exchange reserves to bolster the external buffer was the main pillar of the hurriedly put together IMF Program. The idea was to build reserves and repay the then IMF loan on time. That is why many independent economists including the ones who remained associated with the IMF for a long time termed the program as ‘Self-Serving Program’.
Such an objective of the program forced the government to borrow extensively to build foreign exchange reserves and in the process accumulate net external debt of over $12 billion during the program period. Incidentally, Pakistan added exactly the same amount to its foreign exchange reserves, that is, from $6 billion in end-June 2013 to $18.0 billion in end-June 2016. The above facts clearly suggest that we improved the external buffer entirely through adding external debt. This is tantamount to simply postponing the current problem of insolvency to a future date.
Secondly, in a three year program, the IMF has extended sixteen waivers, which is unprecedented and diluted the purpose of the program and also reflected on the lack of emphasis towards implementing and achieving the stated goals of the program.
Sadly, the IMF Staff Mission has selectively highlighted the improvement in some economic indicators from 2012-13 to 2015-16. This includes rising economic growth, falling rate of inflation, rising tax-to-GDP ratio, higher spending under BISP and private sector credit and falling subsidies as percentage of GDP.
The rate of economic growth achieved in the last three years remains contentious. The Pakistan Bureau of Statistics (PBS) has estimated the GDP growth rate as 4 percent or above each year, reaching 4.7 percent in 2015-16. The authors have presented contrary evidence that the growth rate has been exaggerated each year, and it has ranged between 3.1 & 3.7 percent during the program periods. The Data Quality Assessment Framework (DQAF) of the IMF should have been used to check the reliability of the national income estimates.
The authors have quoted the recent statement of the Managing Director of the IMF as posted on September 1, 2016 by iMF direct. In her words “The longer demand weakness lasts, the more it threatens to harm long-term growth as firms reduce production capacity and unemployed workers are leaving the labor force and critical skills are eroding. Weak demand also depresses trade, which adds to disappointing productivity growth”.
This statement clearly depicts the current state of economic growth and unemployment in Pakistan in terms of the social costs of the excessive focus on stabilisation policy. The persistence of lower economic growth has failed to create enough jobs. People in general and youth in particular, are finding difficulties to get jobs. People remaining unemployed for a longer duration are becoming unemployable, with all its social and economic consequences. Not only that the unemployment rate has surged to a 13 years high at over 8.0 percent (including the ‘discouraged worker’ effect), youth unemployment rate has also increased to over 11 percent in 2014-15. Furthermore, between 2012-13 and 2014-15, the annual number of entrants into the labour force has been approximately 650,000 as against 1.3 million during 2008-13.
A particularly worrying feature of the current employment situation is the extremely high unemployment rate of 20 percent of workers with either graduate or post graduate degrees. There are 2.4 million educated workers with bad employment prospects. This is the unfortunate outcome of the IMF Program.
On the size of the fiscal deficit, the IMF Report claims that this has been reduced from 8.5 percent to 4.6 percent of the GDP. A number of steps have been taken to report smaller deficits. For example, holding back refunds and forcing commercial entities to pay taxes in advance to jack up revenue, privatisation proceeds and foreign grants treated as non-tax revenue to inflate overall revenue rather than treating them as financing items, engaging in quasi-fiscal operations outside the budget, allowing for large statistical discrepancy each year (cumulatively Rs. 600 billion in three years) to show lower expenditures, exaggerating the size of the Provincial cash surplus, retaining earmarked revenues in the Federal consolidated Fund and building up large contingent liabilities (over Rs. 1400 billion of power sector circular debt, accumulation of debt in commodity financing and pending tax refunds). The IMF staff has either been blissfully unaware of or has condoned this creative accounting. Adjusting for these practices implies a fiscal deficit each year in the range of 7.0 to 8.0 percent of the GDP.
Other areas, where serious distortions exist, are: the estimates of the GDP deflator; investment and saving rates and rate of inflation, especially for poor households. A case ought to have been made for complete operational autonomy of the PBS.
Yet another “success” of the program being touted by the IMF Staff Mission is the sharp reduction in inflation rate. It has declined from 7.4 percent in 2012-13 to 2.9 percent in 2015-16. This decline is not due to the ‘prudent’ fiscal and monetary policy pursued during the program period. The international oil and commodity prices started collapsing since June 2014. Such a collapse in the oil and commodities prices led to a worldwide decline in inflation, including in Pakistan. Furthermore, as stated above, the pursuance of stabilisation policy for a prolonged period weakened the domestic demand, resulting into deceleration of prices. Thus, the sharp decline in inflation during the program period owes to the weakening of domestic demand, as well as a collapse in the international prices of oil and commodities and not to the prudent use of monetary and fiscal policy. In fact, when inflation rate was rapidly on the decline, the SBP was pursing an easy monetary policy.
The quarterly reviews have ignored the deterioration in key economic indicators. They failed to discuss big decline in exports – to – GDP ratio, stagnation in the overall and private investment – to – GDP ratio, fall in FDI, rise in external debt and public debt – to – GDP ratios, fall in total PRSP pro-poor expenditure to GDP and very importantly, a rise in the rate of unemployment especially among young, educated, and female workforce. Only 750,000 jobs were created annually in 2013-14 and 2014-15 as against 1.1 million jobs annually earlier.
As far as the reforms are concerned, in the Power Sector, the glaring failure of the Fund program is in the implementation of power sector reforms. The 12th Review Report declares victory primarily by demonstrating that the subsidy to the sector has fallen massively from 2 percent of the GDP in 2012-13 to only 0.6 percent of the GDP in 2015-16.
IMF claims on behalf of the Government, that power load-shedding has been substantially reduced, especially in industry. Evidence to the contrary is the large continuing demand-supply gap according to NEPRA, and the fact that electricity consumption per industrial consumer has fallen in nine out of ten distribution companies, in comparison to the level achieved in the pre-load-shedding years.
Under tax reforms, which are being highlighted, as one of the key successes of the Program, the over two percent points increase in the tax-to-GDP ratio. Much of the improvement has come in 2015-16, which came about from enhancement in effective tax rates and not by broadening of the various tax bases.
The biggest failure is in lack of development of the direct tax system. The elite continues to enjoy wide ranging tax exemptions and concessions like the virtually no or low taxation of global income, profits of private companies, agricultural income and unearned capital incomes. The IMF clearly prefers not to antagonise the ruling elite through its reform agenda.
Contrary to the claims by the IMF, living standards have probably fallen in Pakistan during the tenure of the Program. A number of reforms undertaken have contributed to rising unemployment and poverty. The anti-poor actions include, firstly, the rise in input costs of fertiliser and electricity in agriculture due to hike in power and gas tariffs and additional taxation in the form of the GIDC. The result is that food prices have risen faster than the overall CPI and wages of unskilled workers. Today, Pakistan has the extremely serious problem of malnutrition. In the 2016 ranking of the Global Hunger Index, Pakistan has the 11th lowest position, even below Bangladesh, out of 118 countries. The non-implementation of the PMs agricultural package of September 2015 under the IMF pressure has contributed to the recent debacle in the sector.
Secondly, the primary adjustment mechanism for achieving the fiscal deficit targets in the Program has been large cut backs of up to 30percent in budgeted development spending by the Federal and Provincial governments. In 2015-16 alone these cuts have implied less employment generation of almost 300,000 jobs. Thirdly, hikes in indirect taxes have affected the cost of living adversely. This includes the levy of minimum import tariffs on basic food and other items and jump in GST rates on petroleum products, especially HSD oil. Fourthly, the decline in exports has contributed to loss of employment in labor-intensive sectors like SMEs and textiles. Consequently, as highlighted earlier, the underlying unemployment rate has gone beyond 8 percent. Fifthly, social indicators have shown only minor improvement in three years. This is due particularly to the pressure on Provincial governments to spend less on social and other sectors so as to generate large cash surpluses.
One can continue to fool oneself at the peril of disaster or wake up with the reality check presented.
