Do we still need the IMF?
Recently, analysts in Pakistan are debating why the government is revealing an exceeding uncertainty about resorting to an IMF bailout. The Finance Minister has not openly come out to say that IMF assistance will not be required, but at the same time has reiterated that Pakistan is in no hurry to sign off. All this really reveals, is the inner workings of an economic team struggling to grapple with Pakistan’s short to medium term economic challenges.
Recently, the ministry of finance shared its macroeconomic forecast as part of a mini budget the PTI government is announcing this month. Most economists agree that its projections are entirely unrealistic and based on naive assumptions about national savings and investment. Within the government, this lack of a cohesive economic vision has resulted in the ministry of finance and the planning commission to provide two very different projections on the table.
In its early days, the government felt it could reduce the need and urgency of approaching the IMF if it took painful economic adjustment measures on its own to achieve some macroeconomic stability. They hiked up the interest rate and allowed the currency to devalue, which is the equivalent of applying full brakes to demand in the economy. Tax and tariff policy interventions were also allowed to curtail imports.
To be fair, this did result in some shrinking of the current account deficit, but heavy pressures on the Pakistani rupee remain. The markets are still unconvinced about the government’s ability to augment falling foreign exchange reserves and meet upcoming debt repayments. Sustaining essential industry imports like oil and gas will also be a difficult challenge with a weak rupee.
Meanwhile, Pakistan’s development partners have been expressing their confidence in the economy as well as a willingness to help Pakistan once IMF’s macroeconomic oversight and guidance is implemented. The question remains, ‘Does Pakistan really need this oversight?’
Four facts make an answer somewhat clearer.
First, the ministry of finance has been unable to put in place a clear solution to managing circular debt in energy and other sectors. The energy sector circular debt has now touched PKR 1.4 trillion.
Several high-level officials at regulatory bodies including the Competition Commission of Pakistan were removed by the cabinet but still continue to function due to reasons best known to the ministry of finance.
Dr. Vaqar Ahmed
Second, the government seems clueless about what to do with the loss making public sector and state-owned enterprises. Recently, the team tasked with the fate of Pakistan Steel Mills demanded several more weeks to provide a verdict on whether to retain it in the public sector or to privatize. Meanwhile, taxpayers continue to fund the losses of these enterprises, including Pakistan International Airlines and several energy generation and distribution companies.
Third, the government is taking far too long to put in place a strong and credible economic management team. The ministry of finance, planning commission, ministry of commerce and other economic departments at the federal level do not have a single known macroeconomist with the experience of handling the kind of economic crisis which Pakistan finds itself in today. Additionally, the positions of several economic ministers responsible for trade diplomacy in our embassies around the world remain empty.
Several high-level officials at regulatory bodies including the Competition Commission of Pakistan were removed by the cabinet but still continue to function due to reasons best known to the ministry of finance. The credibility of the central bank and the securities and exchange commission also came under question after a joint investigation team’s report pointed fingers towards them for deliberately violating laws and assisting money launderers.
Fourth, as part of its first-100 day agenda, the government promised a long-term trade policy with national level industrial and investment policies. These policies were expected to provide potential long term investors with clear indications about future export competitiveness reforms including tax and tariff policy structure, and measures which the government would undertake to facilitate doing business. It is already well past the 100 day mark and with no policies on the horizon, the delays add to market uncertainty.
Whatever the government’s decision will be regarding reverting to the IMF, the above four tasks are something which the federal government must expedite. Foreign donors need not remind us any more to have more discipline in our fiscal policies, to reduce losses in public sector enterprises, and to bring in a credible economic management team.
Finally, while these structural reforms remain critical to Pakistan’s future growth, perhaps most important today is that mammoth task of putting food on the tables of the poor. In this regard, we must not wait for the IMF to tell us that we need to move away from regressive taxation and expand our social safety nets.
• Dr. Vaqar Ahmed is joint executive director of the Sustainable Development Policy Institute, Pakistan. His book ‘Pakistan’s Agenda for Economic Reforms’ was recently published by the Oxford University Press. Twitter: @vaqarahmed