Another IMF bailout and then what?
For long-term results, govt will need to take guidance from other countries
PHOTO: REUTERS
ISLAMABAD:
The International Monetary Fund (IMF) deal has now been finalised at the staff level but Pakistan’s indecisiveness of the past nine months has played havoc with the economy.
During this time, the gross domestic product (GDP) growth rate has almost halved, inflation has more than doubled and the rupee has lost almost one-fourth of its value against major currencies. Had the government taken a timely decision, much of these hardships could have been avoided.
Now the government is facing its second major test and success or failure this time could be even more consequential. The IMF bailout package of $6.6 billion over the next 39 months is only a short-term solution. For long-term results, the government would need a proper plan and take guidance from the experience of other countries. It could also learn from Pakistan’s own previous programmes.
Although Pakistan has had to approach the IMF for almost two dozen times during the last 60 years, the more comparable ones in terms of size of the programmes were the last three, each negotiated by a different government.
The first one was the Poverty Reduction and Growth Facility (PRGF) from 2001-2004; the second was the Standby Arrangement (SBA) from 2008 to 2010 and the last one was the Extended Fund Facility (EFF) during 2013-2016.
None of these programmes was able to provide long-term economic stability, but they had varying degrees of success. Judging by the IMF’s final review of each of the three programmes, it emerges that the PRGF was the most successful one.
Following its implementation, the GDP growth averaged over 6%, exports started growing at an average of 14% annually and the percentage of population living in poverty dropped from 34.5% in 2001-02 to 17.2% in 2007-08.
The more significant reforms carried out during the PRGF included opening the country to greater competition through liberalisation of telecom and financial services and liberalisation of trade policies including a reduction in import tariffs. Unfortunately, during the two latter programmes, there was no effort to build on those reforms. Indeed, many of the earlier initiatives were rolled back.
It is instructive to look at some other countries that also faced similar situations as Pakistan is experiencing now. The most relevant is the example of India, which in 1991 encountered a serious economic crisis with its high imports and stagnant exports resulting in a large fiscal deficit. It had to pledge its entire gold reserves and also meet all IMF conditions to be able to borrow $2.2 billion to save itself from default.
Thanks to the IMF’s conditions and then finance minister Manmohan Singh’s resolve, India started on a reform path from 1991 onwards. It replaced its inward-looking protectionist policies with an outward-looking approach. Implementation of World Trade Organisation (WTO) rules from 2000 onwards (some of which were imposed by India’s trade partners through the WTO dispute settlement mechanism) also helped the reform process.
For example, India had to eliminate its auto deletion (localisation) policies, which led to that industry becoming competitive. As a result of these reforms, Indian exports of goods and services, which were about $25 billion in 1992, have surged to $500 billion in 2018. Its foreign exchange reserves are now in excess of $420 billion.
Pakistan is at a similar crossroads as was India in 1992 in terms of its exports and balance of payments problems. This is a defining moment. If we continue to follow the same policies that we did while availing the two previous IMF’s loans, at the end of the current programme we would find ourselves in the same situation as we did after each of those packages.
Pakistan has to accept that in terms of import tariffs, it is one of the most protectionist countries in the world. It has also to recognise that domestic debt and liabilities of state-owned enterprises (SOEs) are growing at a rather alarming pace and have almost doubled from Rs665 billion (or 2% of GDP) in 2015 to Rs1,299 billion (or 4% of GDP) in 2018. These are no longer sustainable.
If we are serious in our resolve to make it our last IMF loan, we have to fix the twin problems of skewed import tariffs that stagnate our exports and inefficient loss-making SOEs, which are a major drain on our resources. Otherwise, we will find ourselves in the same pothole at the end of every government’s tenure.
The writer served as Pakistan’s ambassador to the WTO from 2002 to 2008
Published in The Express Tribune, June 3rd, 2019.
The International Monetary Fund (IMF) deal has now been finalised at the staff level but Pakistan’s indecisiveness of the past nine months has played havoc with the economy.
During this time, the gross domestic product (GDP) growth rate has almost halved, inflation has more than doubled and the rupee has lost almost one-fourth of its value against major currencies. Had the government taken a timely decision, much of these hardships could have been avoided.
Now the government is facing its second major test and success or failure this time could be even more consequential. The IMF bailout package of $6.6 billion over the next 39 months is only a short-term solution. For long-term results, the government would need a proper plan and take guidance from the experience of other countries. It could also learn from Pakistan’s own previous programmes.
Although Pakistan has had to approach the IMF for almost two dozen times during the last 60 years, the more comparable ones in terms of size of the programmes were the last three, each negotiated by a different government.
The first one was the Poverty Reduction and Growth Facility (PRGF) from 2001-2004; the second was the Standby Arrangement (SBA) from 2008 to 2010 and the last one was the Extended Fund Facility (EFF) during 2013-2016.
None of these programmes was able to provide long-term economic stability, but they had varying degrees of success. Judging by the IMF’s final review of each of the three programmes, it emerges that the PRGF was the most successful one.
Following its implementation, the GDP growth averaged over 6%, exports started growing at an average of 14% annually and the percentage of population living in poverty dropped from 34.5% in 2001-02 to 17.2% in 2007-08.
The more significant reforms carried out during the PRGF included opening the country to greater competition through liberalisation of telecom and financial services and liberalisation of trade policies including a reduction in import tariffs. Unfortunately, during the two latter programmes, there was no effort to build on those reforms. Indeed, many of the earlier initiatives were rolled back.
It is instructive to look at some other countries that also faced similar situations as Pakistan is experiencing now. The most relevant is the example of India, which in 1991 encountered a serious economic crisis with its high imports and stagnant exports resulting in a large fiscal deficit. It had to pledge its entire gold reserves and also meet all IMF conditions to be able to borrow $2.2 billion to save itself from default.
Thanks to the IMF’s conditions and then finance minister Manmohan Singh’s resolve, India started on a reform path from 1991 onwards. It replaced its inward-looking protectionist policies with an outward-looking approach. Implementation of World Trade Organisation (WTO) rules from 2000 onwards (some of which were imposed by India’s trade partners through the WTO dispute settlement mechanism) also helped the reform process.
For example, India had to eliminate its auto deletion (localisation) policies, which led to that industry becoming competitive. As a result of these reforms, Indian exports of goods and services, which were about $25 billion in 1992, have surged to $500 billion in 2018. Its foreign exchange reserves are now in excess of $420 billion.
Pakistan is at a similar crossroads as was India in 1992 in terms of its exports and balance of payments problems. This is a defining moment. If we continue to follow the same policies that we did while availing the two previous IMF’s loans, at the end of the current programme we would find ourselves in the same situation as we did after each of those packages.
Pakistan has to accept that in terms of import tariffs, it is one of the most protectionist countries in the world. It has also to recognise that domestic debt and liabilities of state-owned enterprises (SOEs) are growing at a rather alarming pace and have almost doubled from Rs665 billion (or 2% of GDP) in 2015 to Rs1,299 billion (or 4% of GDP) in 2018. These are no longer sustainable.
If we are serious in our resolve to make it our last IMF loan, we have to fix the twin problems of skewed import tariffs that stagnate our exports and inefficient loss-making SOEs, which are a major drain on our resources. Otherwise, we will find ourselves in the same pothole at the end of every government’s tenure.
The writer served as Pakistan’s ambassador to the WTO from 2002 to 2008
Published in The Express Tribune, June 3rd, 2019.