On matters fiscal

The political class has to see clear returns before it shows real commitment to economic reform.


Dr Pervez Tahir August 23, 2012

Chairman Nadeem Afzal Chan of the Public Accounts Committee is stated to have remarked that the government of his own party has a planted finance minister. As journalist Ian Jack would have put it, this is “a minor accuracy embedded in a larger untruth”. The larger untruth came out a little later in the story that the IMF wants the president to put his signatures on the Letter of Intent (LoI) requesting any future programme. Reportedly, the IMF staff also met with the army chief. Who knows, their next port of call may be the UN Security Council for a binding resolution. So much for the democracy support programmes of the International Financial Institutions!

These extraordinary approaches show frustration with the usual co-signees — the finance minister and the governor of the State Bank of Pakistan. The LoIs of 2008 and 2009 remain largely unimplemented. It is no secret that the IFIs find it difficult to deal with the political class in Pakistan. Out of the 30 odd finance ministers appointed since 1947, only seven were politicians and the IFIs had problems with most of them. A mutually convenient way out is to appoint present or former IFI staff or friendly civil servants. Both sides speak the same language and reach agreements and understandings in an atmosphere of ideological echoism. Even so, the letter is drafted by the IMF side. Once the negotiations finish, the IMF staff takes its time to dot the i’s and cross the t’s. Removed as they are from the political culture, the co-signees fail to sell reform to those who have to vote them in the legislature. The evidence from Latin America, except for Luiz Lula’s Brazil, Europe and our own experience is that the draconian austerity measures proposed by the IMF require a bureaucratic-authoritarian state for execution. Technocratic set-ups are proposed in this very background, despite repeatedly unsustainable outcomes.

The Memorandum of Economic and Financial Policies (MEFP) appended to the LoI included full elimination of electricity tariff differential subsidies. Circular debt was to be eliminated within the agreed fiscal deficit target, not through additional borrowing. The State Bank financing of the budget was to be reduced to zero. An integrated tax administration organisation on a functional basis was to be established together with risk-based audits. Income tax and GST laws were to be harmonised and a full VAT with minimal exemptions was to be legislated. The State Bank had to tighten monetary policy, stop foreign exchange provisioning for oil import, eliminate exchange restrictions, amend the Banking Companies Ordinance to strengthen its supervision and review the legal provisions relating to the operational independence of the State Bank itself. Government support for the stock market had to stop.

In practice, ‘revenuecracy’ is back to business as usual. The monetary joyride has begun. Circular debt is alive and kicking. In an attempt to wear a human face, the MEFP required better targeting and delivery of the Benazir Income Support Programme. This has happened, as the political class sees clear returns here. And this is the catch. The political class has to see clear returns before it shows real commitment to economic reform. This can take the form of an economic consensus across the political spectrum, which I have been advocating for the past four years. Or, one has to wait for the difficult prospect of a party to win a clear majority by selling the idea of reform in the elections campaign. At this very moment, all parties in the parliament have a consensus on no more taxation.

Published in The Express Tribune, August 24th, 2012.

 

COMMENTS (12)

gp65 | 11 years ago | Reply

@Dr Nadia Tahir: "IMF was asked to pack off as soon as it came to India. The money was returned with thanks. Suharto’s Indonesia was hardly a democracy. Thailand has coups by the day".

IMF agreement was signed in early 1982 and the last installment paid off on schedule tat end of 1984. So it is no correct to say that it was packed off as soon as it came. I do agree with your assessment that political ownership is a must. The reason for success was that Pranav Mukherjee (the current President of India) was a very seasoned politician and the finance minister at that time. He met the IMF goals on fical deficit, debt servicing as a percentage of exports etc. using reforms that were tailor made for India.

Also while Suharto's indonesia signed the IMF agreement, the implementation occurred during Sukarnoputri Meghawati's rein and that WAS a democracy. The fact that Thailand may have had copus later does not change the fact that it WAS a democracy at the time that IMF conditionalities were implemented there

John B | 11 years ago | Reply

@HH: All ministerial positions are political positions. It is not the educational qualtification that is essential for success in political office, but the vision and means of leadership to bring a team together to accomplish the goal. If a politician is educated in the area of the portfolio, it is well and good. But most successful politicians are leaders who bring consensus among chaos and they are not technocrats.

Leadership is what PAK needs. On that front, I don't see any. If education should be the criteria for portfolio, then the author could be a better FM than the current one, since the author is both educated and experienced. But he will fail miserably, since he lacks political clout and means.

As much as this government failed PAK in many fronts, I must say that Mr. Zardari has turned out to be a good leader who managed to keep the house (PAK) in tact amidst lot of trouble and chaos and kept the political distractions at bay and managed to get lot of things done.

Wish the general politicians and their supporters listened to the FM and SBP governor about two years ago to keep the economy on tract. What IMF is asking again today is what the FM and SBP pushed years earlier and I remember reading about general strikes, violence, and reversal (reinstatement of subsidy) of policies. Then abottabad, NATO route closing and all down hill from there-consensus among political parties who represent the diversity of population is essential for uniform austerity measures to succeed.

I see PAK is in right tract provided they bring the economy under reigns and improve the internal security. At this pace PAK will begin to grow at reasonable 5-6% annual growth rate five years from now. Not enough, but better than none. PAK needs 7-8% of sustained growth for 10 years to see a visible change and for that to happen, you guessed it, PAK needs to take care of Karachi and Taliban hooligans.

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