Buying time or wasting it
The writer is a senior political economist
Before even arriving at the D-Chowk in Islamabad in utter disregard of the Supreme Court Order, IK has succeeded in causing a delay in the deal with the IMF. (Ironically, it also shows that the ‘imported government’ is not getting any assistance from those who ‘conspired’ to install it). First, as Prime Minister, he laid the landmine of subsidising fuel and energy in violation of the agreement with the IMF. Now in opposition, his dharna is the main source of uncertainty that is making the international lender of the last resort to insist on its conditionality. The rise of the dollar and the fall of stock exchange continue. A respectable growth in the real economy has not defused the situation. I have always argued that it is possible to do without the IMF. Its prescription to control inflation by hiking interest rate doesn’t make sense in our context. It disincentivises investment, not consumption. Servicing of public debt increases and a regime of austerity adversely affects human development. But the mess that we are in makes it a Hobson’s choice.
The government of Prime Minister Shehbaz Sharif misread the situation by not correcting the deviation from the programme quickly. He had hoped that the lender would appreciate the difficulties of a new government, and a coalition of ten parties at that. Even the fulfilment of the condition of raising the policy rate was not taken as credible intent. On the sidelines of the World Economic Forum in Davos, Foreign Minister Bilawal too expressed a similar sentiment: “This IMF deal is not based on ground realities, and the context has absolutely changed from the time that this deal was negotiated.” Not quite, says the IMF. The deal may be ‘outdated’ in the eyes of Bilawal, but so is the IMF. As a matter of fact, fuel and energy subsidies announced in February, according to the statement issued by the IMF on 25 May, reflect only partly the deviations on the fiscal side. Any further delay to end the subsidies will only prolong the process before the final approval by the IMF Board and the signal to other donors to shore up the fast depleting reserves. Beggars, after all, are not choosers.
It is a tough decision to remove subsidies that affect almost the entire population. The State Bank’s baseline outlook incorporates the “reversal of fuel and electricity subsidies together with normalization of the petroleum development levy (PDL) and GST taxes on fuel during FY23”. As a result, the headline inflation is expected to rise even further from the already higher level. Until the global commodity prices remain high, inflation is not likely to moderate. The government, therefore, has to focus on implementing the much delayed fiscal reform in the forthcoming budget. There is need to follow the 18th Constitutional Amendment in letter and spirit. The overdue NFC award must not be delayed any further. Tax exemptions to the privileged have to go. Log rolling and pork barrel spending has to end. Development spending should be productive and not wasted on monuments to development. Let this be the last IMF programme. The weaknesses of a political alliance cannot be the excuse. It was a minority government in India that implemented India’s first IMF programme in the early 1990s. It was also the last, as finance minister Manmohan Singh put in place the required structural reform to avert the recurrence of unsustainable fiscal and current account deficits. From the brink of default to a budget that transformed India was a matter of months, not years.
Published in The Express Tribune, May 27th, 2022.
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