Should IMF define Pakistan’s economic policies?

Agreement with lender driving country’s economic direction, targeted reforms

ISLAMABAD:

The latest IMF Country Report on Pakistan is out, and $1 billion are in.

The report’s language is largely critical and cautionary. Whether one agrees with the IMF programme or not, one thing is clear – Pakistan’s economic direction, policy discussions and targeted reforms are all driven by the agreement with the IMF.

Anyone wishing to understand what our economic managers are deliberating or planning just needs to read the 34 pages of IMF report.

Everything, including taxation policies, housing finance policies, social protection programmes, and development spending has to follow the guidelines as defined in this document. Any policies or allocation not consistent with the IMF guidelines will be reversed.

Consider. There has been a heated media debate on the State Bank autonomy bill, which has already been passed by parliament. IMF’s prescription prevailed.

The government announced a major housing finance programme one year ago with unprecedented allocation of Rs30 billion as subsidy, which now risks reversal or reduction as the IMF staff disagrees with it.

To improve fiscal space, the country needed to surpass tax collection targets. A mini-budget was passed and the FBR is likely to exceed its collection target now.

By setting policy targets, the IMF has defined policy debate also – or at least the debate that the government will be keen to listen.

There are five dimensions. In IMF’s own words, these are (i) reinforcing fiscal discipline by mobilising revenues and controlling current spending (ii) ensuring disinflation through a tighter monetary policy stance; (iii) maintaining market-determined exchange rate and building external buffers; (iv) restoring financial viability of energy sector; and (v) advancing structural reforms, including by addressing deficiencies in AML/CFT regime, SOE governance, and business climate, as well as stepping up to the challenges posed by climate change.

Let me simplify. To remain in the IMF programme, the government must increase tax rates and cut state spending, increase interest rate further, keep exchange rate free floated, increase energy tariffs, and close down state-run companies.

All of these measures will result in fast deterioration of political capital and increase in public dissonance that the government is visibly experiencing.

Hypothetically speaking, one can get out of this “bondage”, by not agreeing to accept $6 billion in the first place, from which $3 billion is yet to be received.

With the remittance and export receipts expected to gross over $60 billion this year, and balance of payments cushion available through FDI, Roshan Digital Accounts and bilateral loans from countries like China and Saudi Arabia, Pakistan will not experience any major difficulty if it does not receive $1 billion of the IMF fund in one year.

The problem does not lie in finances. The problem lies in how to understand our economy and a missing credible resolve to put our house in order.

If we cannot understand, for example, what are our housing needs, we remain gullible to a political fiction – called construction of 5 million homes.

This target has no relationship with the demand from an increasingly mobile and dynamic population.

By allocating resources to concessionary financing for real estate, the government has done developers, especially the elite developers, a major favour. Real estate prices have skyrocketed and land has become unaffordable.

Fiscal and monetary measures were grossly misplaced. The IMF staff is right in asking to reduce and reverse this bonanza. It is, at the end of the day, a lender only and not an agency for housing policy.

Take another example. Pakistan needs more fiscal resources and also needs to stop leakage of hundreds of billions of rupees channelled through SOEs.

To close down inefficient state-owned enterprises is hard. To come up with an equitable tax mechanism is harder. The easier option to increase government resources is to increase the tax rates.

All that it takes is changing input figures in an excel sheet in a computer in the Q-block. This is the genesis of the mini-budget.

As a lender, the IMF does not, and should not, care about where the money comes from. It will care about performance criteria and structural benchmarks. Where the actual performance is missing, the commitment to future reforms is good enough reason to qualify for waivers.

Should we blame the IMF? Far from it. If I were Pakistan’s finance minister, I will actually follow the broad IMF guidelines – without asking for its funds and hence will define my own strategy, pace and priorities.

I will bring in a broad-based, low-rate regime instead of just hiking rates. I will figure out how to use the policy to unlock the dead land in cities. I will preserve the SBP policy autonomy and will reduce its operational autonomy.

These reforms need systematic thinking and research, otherwise they will be short-lived and will never get local ownership. While we continue to outsource policy and research to lenders, we will keep passing on the blame to them.

IMF is not right or wrong. It is the government approach to policy which can be right or wrong. It has the agency to design a reform programme which can work for Pakistan. It has stopped exercising this agency.

The writer is founder and executive director of PRIME, an independent economic policy think tank based in Islamabad

Published in The Express Tribune, February 14^th, 2022.

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