The IMF programme

Dr Ashfaque H Khan Tuesday, September 17, 2013 From Print Edition News The Executive Board of the IMF has approved a 36-month programme under the Extended Fund Facility (EFF) for US$ 6.68 billion on September 4, 2013. After the board approval, the IMF has released the first tranche of $540 million to the Pakistani authorities. The remainder of the amount will be released in equal instalments subject to the satisfactory quarterly reviews. The efforts of the present government must be appreciated for successfully negotiating a programme with the IMF within the first 100 days of its tenure. This programme supposedly aims to reduce the risk of balance of payment crisis in the short-term and to address Pakistan’s underlying medium-term problems to sustain higher and more inclusive growth. Quantitative performance criteria are set to reduce fiscal deficit, build foreign exchange reserves and lower inflation rate. Structural conditionality is designed to strengthen the country's tax system, address energy bottlenecks, liberalise the trade regime, restructure or privatise PSEs, improve the business climate, strengthen the SBP's operational independence, enhance financial sector stability, and protect the most vulnerable from the adjustment costs. The present IMF programme is designed in the worst form of ‘stabilisation first’ with major emphasis on reducing budget deficit, controlling public debt, building foreign exchange reserves and keeping inflation low. Growth and employment generation have been ignored altogether at least during the medium-term. The readers are reminded that the conventional macroeconomic policies that focused primarily on stabilisation to create the conditions for growth and employment generation have been discredited, particularly after the recent experiences of Greece, Spain, Italy and other European countries. The sharp fiscal adjustment to stabilise the economy was found to be associated with human suffering of colossal proportions. Such policies have not only postponed economic recovery in these European countries but some of them had to battle 60 percent youth unemployment with all its social consequences. The pain and suffering of the people in Europe have forced global leaders to rethink the ‘stabilisation first’ strategy. Over the last two years and as late as in early September this year in St Petersburg, the G-20 leaders recognised the importance of growth, job creation, equality and social development. They brought robust and ‘job-rich’ growth which is inclusive, broad-based and sustainable at the centre of macroeconomic policies. The managing director of the IMF has been attending the G-20 Summit and as such is fully cognizant of the developments. Given the fact that the eurozone economies are still weak and fragile and the risk of prolonged stagnation is gaining traction, the IMF on July 25 strongly recommended these economies to ease monetary and fiscal policy to spur growth and employment. Why have such policies not been prescribed for Pakistan which is stuck in a low growth mode (three percent per annum) for five consecutive years? Do Pakistan's economic woes diff from Greece and Spain? The answer is no but the prescriptions are discriminatory. Under the no-programme scenario, Pakistan's economy, as projected by the IMF, continues to grow by three percent per annum but with the programme, it grows at a marginally better rate of 3.2 percent during the programme period and 3.8 percent over the next five years. Given the demographic structure of Pakistan, over 2.5 million new job seekers are entering the job market annually for which its economy must grow by 7-8 percent per annum to at least absorb the new entrants. Under the IMF programme the people of Pakistan will experience the pains of adjustment on the one hand and a growing pool of the unemployed, particularly the youth, on the other. Such an outcome will have disastrous consequences both for the country and the political leadership. The conventional macroeconomic prescription has not worked in Europe; it is not working in Asia-Pacific and, therefore, will not work in Pakistan. I would like to make it abundantly clear that I am not at all advocating lax fiscal and monetary policies; neither am I encouraging fiscal irresponsibility. I am simply advocating for striking a balance between stabilisation and the developmental roles of macroeconomic policies. Such balance is missing in the IMF programme. It is a stabilisation policy of the 1980s vintage, applied in 2013. The world has changed since the 1980s. The new generation economists have learnt new tools and better way to address the conventional challenges. It was the same new generation of economists that brought the world economy out of the great recession of 2007/2008 within two years. The older generation economists took seven years to take the world economy out of the Great Depression of the 1930s. While there can be several risks as documented by the IMF itself which have the capacity to derail the programme, the very design of the programme is a major risk. Who will be blamed for the disastrous consequences of the programme? Naturally the present government and the IMF will be held responsible. Granted that the IMF has bailed the country out of the economic mess created by the incompetent economic team of the previous regime. Nonetheless, the design of the programme is the greatest risk to its success. Asking a political government to reduce budget deficit by five percentage points of GDP (from 8.8 percent to 3.9 percent of GDP) in a 36-month programme with three percentage points of GDP alone in the current fiscal year is a tough target which in all probability will not be achieved. While the IMF staff may be blamed for designing a programme that is bound to fail, the Pakistani authorities engaged in negotiation will equally be held responsible for its failure. The Pakistani side, it appears, was oblivious to the developments that were taking place on the global economic scene. They failed to put forward their views on fiscal deficit reduction, on the pace of removal of subsidies, on tax system and tax administration reforms and on growth and employment generation. They could have conveyed the social cost and human suffering of such a sharp adjustment. They could have argued for striking a balance between stabilisation and growth. It appears that Pakistan was in such dire straits that it wanted the IMF's support and money desperately. This programme is different from past programmes in many ways. First, the Letter of Intent jointly signed by the finance minister and the governor of the SBP gives explicit commitment from the highest level of political leadership (prime minister), cabinet, and provincial governments to comply with the policies and reforms underlying the programme. This has never happened before. Second, never before has the IMF been so explicit in commenting on the security, political and judicial environment of the country. It has talked about intensification of insurgency in Pakistan after the withdrawal of Nato forces from Afghanistan, sectarian violence in Baluchistan and street crimes in Karachi. What message has the IMF conveyed to global investors? It is the weakness of the Pakistani authorities that allowed such misplaced comments to be the part of the document. The writer is the principal and dean of NUST Business School, Islamabad.