Unsatisfactory: Economic stabilisation without growth

Political opportunism in absence of structural reforms leaves economy stunted.

LAHORE: Every government goes to the IMF for breaking out of the balance of payments (BOP) crisis since it provides a natural solution to the problem. However, opposition parties raise hue and cry to attain political mileage out of it.

The interesting phrases to score politically are ‘begging bowl’ and ‘slavery’. The government responds by saying that loan package is inevitable and ‘home-grown’.

The continuous recourse to the lender of last resort ie the IMF just provides oxygen to an already ailing person since the IMF is designed for addressing the BOP problems.

The problem partly lies in the public policy failure of successive governments and partly in the conditionality clause of the IMF.

The policy action and/or inaction in Pakistan is ad hoc and restricted to an election cycle. The previous government negotiated a standby agreement with the IMF from 2008 to 2011 and foreign exchange reserves were bolstered to $18.25 billion.

It met the criteria and conditions of the IMF which brought macroeconomic stability to some extent in a tough international situation. However, as the election season approached, the government would opt out of the programme and substitute the foreign debt with domestic one, a fate thrust upon them due to dearth of their own commitment towards structural reforms.

Then came IMF’s Extended Fund Facility (EFF) in 2013. The criteria and conditions under the EFF were relatively soft. The government could not meet certain criteria on various occasions, but was able to convince the authorities for waivers.

Again macroeconomic stability is achieved and foreign exchange reserves have been raised to $20.9 billion. The government is able to adopt strict fiscal discipline due to favourable international environment. Since good times are bad for economic reform, the structural problems have been brushed aside.

Stock bubble

The accommodating zero interest rate policy adopted by central banks around the globe is still pumping cheap money into the international stock markets. All the major stock markets are still bubbling. Pakistan Stock Exchange (PSX) is not an exception and cheap money flew to Pakistan in the last couple of years.

However, the possibility of higher interest rate in the US in coming months is creating portfolio investment outflow from the emerging and developing countries’ stock markets.

During July 2015 to February 2016, an outflow of $340 million of portfolio investment has been recorded in Pakistan. It seems that the PSX is integrated with the international stock markets.

The increase in interest rate in the US would have serious consequences for the emerging and developing countries at large, creating huge volatility in the stock markets along with downturns, so one should expect capital outflow ahead.

Capital goods

To increase economic growth, capital goods imports have to be increased. These imports could be financed through borrowing from the international capital market in the form of Eurobonds.

Under the current scheme of things, the economy can grow around 5% annually. If government were to target a higher growth rate, it would rapidly drain the foreign exchange reserves in the absence of borrowing since Pakistan’s growth rate is constrained by BOP.

In a nutshell, the manifestation of the public policy failures of successive governments and the conditionality of the IMF are promoting macroeconomic stabilisation at the expense of growth. The structural weaknesses of the economy have been continuously ignored by successive political administrations. In order to meet the political objectives, they have either to take an early exit from the IMF programme or avoided the programme close to elections.

The writer is an Assistant Professor of Economics at Suleman Dawood School of Business, Lahore University of Management Sciences (LUMS)

Published in The Express Tribune, April 18^th,  2016.

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