An economic consensus is happening

Whichever party comes to power after the elections will have its role pre-ordained

An economic consensus is happening behind the super-charged political posturing. Leader of the opposition, PPP leadership, economists and business organisations have all called for a charter of economy at one time or the other. But it takes three to tango — establishment, government and opposition. The passage of the supplementary finance and the State Bank bills are the strongest indications to suggest that there is a consensus in disguise. It seems the third pillar of the state is also part of it. Says the newly installed CJP: “the court would be keen to engender initiatives”, among others, for “increasing revenue generation by expanding the tax base, and empowering statutory and public institutions to effectively perform their role under the Constitution and the law.” This makes it obvious that the script has been secured from the IMF to alibi all players. As prior actions on fiscal and institutional reforms have been faithfully taken, the Executive Board has approved the release of around a billion dollars. The Extended Fund Facility (EFF) is back on track. Very likely the consensus is to continue with another programme after the EFF to complete the reform process. Whichever party comes to power after the elections will thus have its role pre-ordained.

The rationale for this prolonged austerity regime is pretty familiar. Whenever growth is pushed by the Pakistani policymakers, a reasonable level of which is necessary for all good things desired, the economy runs into high fiscal and external deficits that fuel inflation. With a very low rate of domestic saving, most investment for growth is financed by borrowing. Due to a low tax-to-GDP ratio, all public investment is financed by running fiscal deficits. This adds to the already unsustainable debt, crowds out private investment and leads to inflation. Increased private investment and overall demand accelerate imports more than exports. Predominance of traditional exports fails to pay for the import of inputs, petroleum products and edible oil. The result is a higher current account deficit, requiring even higher external borrowing. Productivity of investment is also low due to low-tech and poorly skilled nature of manufacturing. This oft-repeated cycle is being witnessed at present. After a negative growth in the Covid-affected FY20, growth was pushed up in FY21, but FY22 is bringing back higher inflation and lower growth. The consensus is to break this cycle first by persisting with austerity and reform process for a longer period of time.

Will the operation be successful, without killing the patient? The problem is that the IMF medicine has no mechanism to ensure a fair distribution of the burden of austerity. For example, the supplementary finance bill is focused on indirect taxes that hurt the lower middle class most. Direct tax exemptions and exclusions enjoyed by the parties to consensus remain untouched. For the poor, direct transfers such as the Ehsaas Programme alleviate their suffering somewhat, but fail to reduce poverty. The world over, the examples of failure of the IMF programmes exceed the successes. In Pakistan’s case, a common explanation for the failure of programmes is the lack of political will to implement the harsh conditionalities. The disguised consensus is an attempt to overcome this weakness. The trouble is that the IMF is designed as a fire fighter, and that too in friendly places. Those perceived as less friendly are kept on a tight leash. In any case, fire fighters are never the ones to be asked to build back. That is a task for the owners of the house. If they don’t know how to rebuild, nobody else can.

Published in The Express Tribune, February 5^th, 2022.

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