The IMF and economic revival

Even as the interim government is in the throes of warding off terrorists to be able to hold elections, it will have to conduct preliminary discussions with an International Monetary Fund (IMF) delegation that is expected in Pakistan soon. Ideally, the IMF ought to begin the negotiation process for another Standby Credit Facility (SCF) with the new government after the election. But given the urgency of Pakistan’s need and the time required to finalise the agreement, it may be necessary for the finance minister of the interim federal government to be sent in to bat. Let us outline the state of play.

Pakistan needs to, clearly and with adequate analytical rigour, lay out the guiding principles of the negotiations. First, the economy must pull up from its present nosedive and revive GDP growth to the cruising level, the trend rate of five per cent.

Second, such acceleration in growth has to be integrally related with policies for a more equitable income distribution. The evidence shows that the more equitable the distribution of income, the greater the magnitude of poverty reduction for a given GDP growth rate.

So, the aim of economic policy for Pakistan is a new structure of the growth process that enables growth by the people and for the people. Such an economic structure will provide the necessary scaffolding for strengthening democracy.

Third, the control of the fiscal and balance of payments deficits, respectively, cannot be achieved through the standard IMF recipe of economic contraction. A further reduction in GDP growth would, in fact, increase the fiscal deficit through lower revenues and increase the balance of payments deficit through a reduction in exports. Slower growth would also increase poverty and unemployment, thereby placing an unbearable stress on the fragile democratic edifice.

Fourth, on the issue of negotiating a target budget deficit, let us for once give the IMF a commitment that we can fulfil. On the last occasion, our bureaucracy proposed four per cent of GDP as a budget deficit target when the IMF, I understand, was willing to live with 7.5 per cent. Let us not damage our credibility with such empty-headed heroism. Of course, the government ought to commit to changing the composition of the budget deficit: a drastic reduction in unproductive expenditure involving a smaller, more austere government; elimination of the plethora of tax exemptions; improving tax collection; ending government trading in food grain, which is locking up hundreds of billions of rupees; a proper property tax at the provincial level and a tax on services. But development expenditure must be increased from the present one per cent of GDP to the traditional seven per cent of GDP and focus on reducing the physical constraints to growth: electricity, gas and irrigation water.

This new SCF agreement will not bring fresh cash from the IMF. It will only reschedule the imminent seven billion dollar debt repayment to the IMF that currently the country cannot afford to pay. So, this time, we need to negotiate on the basis of Pakistan’s interests, sound economic reasoning and above all, honesty.

Published in The Express Tribune, April 1^st, 2013.