Why does Pakistan intermittently turn to the IMF?
ISLAMABAD: The Planning Commission think tank “Pakistan Institute of Development Economics (PIDE)” suggested that Pakistan could not get rid of the IMF in the short term but could say goodbye in the long term by putting implementation of well-documented policy prescriptions.
In its Policy Viewpoint published on Friday, the PIDE argues that strangely “to go or not to go to the IMF” continues to dominate the economic debate in Pakistan. All kinds of statements have come out from the government’s economic leaders and their advisers.
“We don’t need to go to the IMF if we ban the import of luxury items.” “We can borrow to get out of our problems because our problems are just current financing.” âBy borrowing, the IMF will reduce all conditions. “
These statements simply show the lack of understanding of the role of the IMF. As always, the government has relied on hastily formed committees where people come and go to examine this existential question. But the answer remains elusive.
So let’s clear up the confusion.
Q1. Should we get rid of the IMF? The answer is unequivocally âNOâ in the short term and âYESâ in the long term if we work hard, develop a thoughtful and well-documented policy and have the capacity to implement it. The reason is simple and lies in an understanding of the overall architecture. The IMF by global consensus is the lender of last resort. Its blessings and certification are necessary for continued aid flows and for maintaining the confidence of international markets. If the situation were normal in Pakistan, such certification would not have been necessary. But with low and declining reserves, markets are nervous and reluctant to deal with Pakistan. Firm and decisive action is needed with or without the IMF. However, the reason for the creation of the lender of last resort was to calm nervous markets with IMF certification. Throughout our history, we have been to the IMF several times. No effort has been made to address our long term policy and structural deficiencies. Instead, we thought all of our problems lay in corruption. It is time we reassessed our approach to politics. So far, not all governments have succeeded in pushing back the IMF just because the policy has remained frivolous and lacked in-depth thinking.
Q2. But Mahathir did not go to the IMF?
Indeed, he did not. He also did not beg to postpone the reform. For anyone willing to look into the situation, he took the IMF medicine – exchange rate change, deficit reduction and reform – but refused to approach the IMF. He did all that was necessary to put Malaysia on the right track. Yes, his personal credibility and firm political action kept the IMF away.
Q3. Friendly countries have come to help Pakistan and that will allow us to better negotiate with the IMF?
The harsh truth is that no country helps another without return. We need to be clear that the loans have to be repaid. There is no fault. The reason for going to the IMF is not to borrow money but to adopt a comprehensive set of policies to deal with the problem of falling reserves and growing deficits. Anyone devising a set of policies to deal with the ongoing hemorrhage in the economy (widening twin deficits and declining reserves) will need to aim for a return to normal (manageable deficits and building reserves) within a timeframe. reasonable 3-5 years. Ultimately, the books need to balance each other out. The bleeding cannot continue. The markets watch the problems that arise and want to see a credible solution. Borrowing today to pay off next year when the problems go unresolved is not a solution. When someone (IMF) prepares an adjustment program, they will have to plan policies that will include repayments on those loans. Much more may need to be done if the situation worsens.
Q4. The IMF has not been the solution in the past? Will their policies not hurt Pakistan?
Yes, Pakistan has participated in an IMF program on several occasions. 22 programs in 70 years and yet no lasting solution. Yes, IMF programs have been timely and unwilling to tackle deeper structural issues. It is the fault of the IMF. But not all of our governments are ready to make tough decisions. They have always been hungry for easy solutions. To this day, we have clung feverishly to the Raj who did not want to tax agriculture, retain colonial lifestyles, including gifts from the treasury without due process, maintain subsidies for the rich, take credit away from the system. and allow social, judicial and governance capital to depreciate. For decades now, all commentators have echoed a sense of discouragement with the government and its inability to develop a state and its policies. All of this has nothing to do with the IMF. These are secular trends. Unless we develop a modern functioning state, economic policy will never be properly framed. The IMF or any other donor or outside friend can help us get our house in order. We must build a modern state and society that is responsible and ready to participate in the global economy of the 21st century. Without it, we will continue to bleed and demand the IMF again and again.
Q5. So what would you suggest for economic policy?
Unfortunately, our economic ministries do not have the capacity to do this since we have never prioritized thinking in our government and the government does not hire economists. The recommended program would be:
Develop a system where the exchange rate can never be overvalued by the whims of any man. An exchange rate management policy should be put in place, focused on building up reserves and not on losing reserves as in recent decades.
Develop over one year a serious reform of tax policy for the following objectives: o Simplify taxes by eliminating withholding taxes and all flat-rate taxes.
Remove all exemptions and eliminate the government’s ability to grant exemptions.
There should be only four taxes: (i) Income tax with progressivity. (ii) Corporate tax in line with the rest of the world. (iii) A GST with a rate lower than the current rate – say 8 percent but with cautious implementation that expands its use and prevents avoidance. (iv) A reasonable tariff system devoid of regulatory duties and significant exemptions and penalties.
Eliminate subsidies except those targeting the poor. The government must stop all purchases of basic commodities which block bank credit to the tune of 400 billion rupees and provide budget subsidies to wealthy farmers. No more purchase price.
Engage in an independent public sector expenditure review commission through a panel of local experts (no more than 5) to review public sector agencies and expenditure processes to reduce waste. The members of this commission will be remunerated and in function with staff and a budget and with powers of investigation and obtaining testimony.
The government needs to develop an electricity market with decentralized nightclubs and GENCOs which are managed and operated on a profit basis.
Defined subsidies will be given, but circular debt will be eliminated through governance and metering reform. In three years, most prices will be determined by the electricity market. The gas companies will be restructured to develop a gas market around the LNG system which has developed. They will be restructured into smaller companies but operating on a profit center, and not on the current return on assets model.
The new gas pipelines will be cut. A plan will be drawn up to limit the supply of domestic gas and shift the gas towards the development of electricity. New gas companies will be empowered to explore and develop gas fields.
The PES will be grouped together as planned by the government but with an independent holding company. But then the key is to maximize autonomy. Professional management with complete autonomy to restructure, liquidate and manage investments for yield and growth will be essential. Revitalize regulation by professionalizing and automating regulatory agencies beyond politics and administration.
Reform the public investment project for efficiency and yield. In the next five years, do not engage in any public sector development project. Meanwhile, develop plans to consolidate current investments and budgets as in the rest of the world. In doing so, move from our current input-based budget framework to performance-based budgeting through the Medium Term Budget Framework (CBMT). Only megaprojects involving many sectors and agencies will remain the responsibility of the Planning Commission. The Planning Commission will manage the CBMT and the performance-based management system.
Q6. Will this set of policies revive growth and jobs and help the middle class?
These reforms are necessary if long-term fiscal control is to be achieved. For decades, governments have taken the approach that tax audits mean only arbitrary tax increases. The dialogue on corruption has heightened suspicion everywhere. The result is an increase in the cost of business and investment. This only created repeated seizures and slowed down growth. Arbitrary and ill-conceived policies have slowed growth and productivity as well as investment.
These measures will easily take around 3 to 4 years to implement, even with a fully engaged and strong government. But they alone will not accelerate growth. To meet the employment needs of our young and growing population, Pakistan must grow by more than 8% per year over the next 25 years.
For this further reform is a must. To do this, the government must undertake reforms to: Develop a serious policy and governance, by rolling back the colonial administration and the legal system. In doing so, develop serious analysis, research and policy development, and monitoring and evaluation processes.
Without a concerted effort to reform our legacy colonial system, the economy will never function at full capacity. We cannot operate with a colonial legal and judicial system. The world has moved and so have we. The civil service must be reformed to make modern governance through rights, policies, monitoring and evaluation and not through direct checks and favoritism. Such a system confuses control and politics and leads to waste. Currently a closed system of civil service controls all government with lower ranks and officials responsible for local government, middle level responsible for provincial government and as they become senior they control the federation.
It is inefficient, unnecessary and destructive to local productivity and development. Even our democratic processes – electoral systems, power sharing, party functioning, parliamentary and government systems, term of office, size of constituencies – need to be reviewed to ensure that effective legislation and parliamentary review occur regularly.