A recipe for disaster?

The detailed terms and conditions of the proposed IMF loan have not come out yet. But the information leaking out of some the conditionalities is nothing short of a recipe for disaster.

The rupee has already depreciated more than 27% since the start of this year and 15% in the last five months alone. Any further devaluation on IMF’s say so, will result in increase in the country’s external debt in rupee terms, increase in budget deficit, make industrial raw material — cotton for instance — more expensive. Past experience has shown that whenever Pakistan has devalued its currency on the IMF’s insistence, there has not been a corresponding rise in exports. In fact, in present day dollar terms, Pakistan’s exports have been perpetually on the decline, while imports have been on the rise creating substantial problems for the balance of payments.

The State Bank of Pakistan has already increased interest rates to unrealistic levels, making it expensive for industry to do business, especially the export-based industry. Any further interest rate increase on the IMF’s insistence will only fuel inflation, and create unemployment as some of the industries will not be able to sustain increase in financial costs. If anything, Pakistan needs to lower interest rates so that the industry can be revived. Pakistan’s largest industry — the textile industry — has suffered over the years due to decline in cotton crop, reliance on imported cotton and lack of incentives. Further depreciation or devaluation and increase in interest rates will be nothing short of the last nail in the textile industry’s coffin.

There are some suggestions that the IMF is asking for an increase in sales tax from 17% to 18%. This will directly affect low-and middle-income people and will push them further towards the poverty line, let alone pulling them out of poverty. What is needed is a reduction in sales tax to 15% and not an increase so that the common man gets relief and does not get punished by increasing costs. Increase in sales and income taxes invariably leads to tax evasion, misreporting and a heavier burden on the already taxed. The need is to expand the tax base by reducing personal income tax rates, not increasing them, by offering a one-time amnesty to those who have never filed income tax returns ever with a more vigilant FBR with an active forensic department tracking large property and other transactions and bringing those people into the tax net. NADRA has one of the best identification systems through the CNIC network and the FBR should have no problem tracking large transactions provided they have a will to do it. Endemic corruption within the FBR may be the reason for lack of interest in pursuing non-taxpayers.

Pakistan has been in and a part of several of IMF programmes in the past, but apart from providing a temporary relief, none of those have ever worked. Had those programmes worked, Pakistan’s economy would have been in a better state today, exports would have improved substantially and the tax base expanded considerably, but none of that has happened. Apart from lending money and putting countries like Pakistan in a jacket so that they never come out of the debt trap, the mid-level babus of the IMF do not have a recipe for improvement. Almost all the measures currently being suggested by the IMF will destroy Pakistan’s economy, create inflation, create unemployment and resultant unrest in the country, hit exports, increase import bill and budget deficit and bring a host of new problems for Pakistan. John Perkin’s Confessions of an Economic Hitman is almost beginning to prove true in this situation.

Pakistan’s economic problems will never be resolved if we continue to latch on to the IMF and other lending agencies. The Asian countries that have made massive economic progress in the last 30 years have not done so with the IMF’s help. Pakistan needs to sort out its own economic disorder. If the PTI government has obtained sufficient help from Saudi Arabia, China and the UAE, then it has borrowed some time and now it needs to focus on economic development that would help substantially increase exports, capture at least another $10 billion in home remittances from Havala to the banking system.

The IT Industry is crying out for help, its current exports of $4 billion can be rapidly increased to $10 billion a year within three years and potentially $20 billion in five. No government has paid any attention to IT except for making broad political statements. It is time to recognise it as a proper industry and provide whatever help and support it needs. Similarly, the fruit industry offers a huge potential for export, but fruit worth a billion dollars or more is wasted every year. Chinese and international companies with experience in processing food and fruit should be invited to set up processing units in CPEC SEZs. China is a huge consumer market next door and export of processed food and fruit can improve Pakistan’s sizeable balance-of-trade deficit with China.

The solution for Pakistan’s economic salvation has to come from within and not dictated from Washington or elsewhere. There is an opportunity to increase exports rapidly, reduce reliance on imports by curtailing import of unnecessary goods that currently adorn the supermarket shelves. In a matter of two to three years, Pakistan has the capability to come out of this rut and become a major regional player in trade, industry and commerce.

So, thanks to the IMF, but no thanks.

Published in The Express Tribune, November 20^th, 2018.

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