IMF: critical choices

By Rashid Amjad

Published in DAWN on February 27, 2020

After hitting rock-bottom, the economy is finally beginning to show some signs of being on the cusp of an upturn. The recent review by the IMF team points in this direction — inflationary pressures are easing and there is a gradual rekindling of economic growth. The real challenge now is to nourish the emerging green shoots and concentrate policy efforts on building growth. The alternative, sadly, would mean a painfully slow recovery after walking on broken glass to restore macroeconomic stability. This the government can ill afford.

To reignite sustainable growth, however, it is not the government that has to be convinced that a change is needed in the sequencing of the current IMF programme but the Fund itself. This may turn out to be a Herculean task since the IMF is known for its stubbornness and its ‘one shoe fits all’ neo-liberal economic dogma.

The basic aim of the current stabilisation package under IMF tutelage is basically twofold. The first aim is higher revenues and the second is increasing exports and reducing imports to overcome the recurring fiscal and current account deficits (and eventually building our real not borrowed foreign exchange reserves) which have been responsible over the past three decades for bringing the economy to a grinding halt and having to turn to the IMF to bail us out yet again.

Unfortunately, in designing this IMF programme what was not sufficiently realised by the government and the IMF was that in the short run, there may be a trade-off between the two goals of maximising revenues and maximising exports at the same time. Just eight months into the programme, this trade-off is apparent; meeting the ambitious revenue targets increasingly entails reneging on the incentives promised to exporters.

This has taken the form of long delays in duty drawback refunds that reached Rs300 billion in December 2019 and retraction of cheaper energy and much-needed reduction in tariffs for cheaper imported inputs to make exports, and indeed the economy, internationally competitive — a major goal of the current IMF programme.

While the Pakistan government has now realised the limits to which the people can bear backbreaking inflation, the loss of jobs and the resulting rise in poverty, the IMF, unfortunately, is still slow to grasp the stark reality. All benchmarks set by the IMF to be achieved by December 2019 have been satisfactorily met. But the Fund is not compromising when it comes to reducing its still unrealistic revised revenue targets, and insists on raising energy prices to bring down the circular debt.

It is imperative that the IMF realises before the current programme stalls that not only are these conditionalities impossible for the government to accept but also that there exist fatal flaws and contradictions in the programme which must be urgently corrected. A glaring example is that the revenue target originally agreed upon did not take into account the reduction in revenues resulting from the large fall in imports due to the massive devaluation.

That said, nobody is denying that Pakistan’s tax revenues are abysmally low at around 11 per cent of GDP. And no one can disagree with the IMF argument that if we are to improve our pathetic human development indicators and meet the SDGs by 2030, tax revenues would need to be increased by at least five to six percentage points sooner rather than later. Yet given the government’s fast-dwindling political capital or goodwill among the people, and the narrowing space for higher taxes, revenues can only increase gradually. When economic conditions improve, the people will be more prepared to bear the needed tax burden.

Making the case for shifting the emphasis to maximising exports under the current IMF programme is to acknowledge that, as in the past, the binding constraint on Pakistan’s sustained growth revival is the lack of foreign exchange. Solely slashing imports through massive devaluation is not a feasible or efficient solution, nor is an increase only in export volumes. What is critical is a corresponding rise in our export foreign exchange earnings.

To achieve this goal, the government’s efforts should be concentrated on easing the constraints faced by exporters even if it means taking some bold unconventional steps including the immediate return of import duties that have been paid, as well as reducing the high banking margins required on imported inputs by decreasing interest rates. Many exporters are already facing severe capacity constraints. This situation should not be made worse as they are facing liquidity constraints in meeting new orders. There are indications that recent developments in East Asia are making many global importers turn to Pakistan. They will definitely turn to other countries, including India, if we are unable to respond to their demands.

The other real opening on the economic front, mainly as a result of massive devaluation and the exorbitant prices of imports, are the profitable opportunities for the growth of import-substitution industries. Ensuring their efficient and low-cost production would need cheaper imported inputs which can only be made available by cutting import duties. While the IMF supports further opening up the economy it must also realise the trade-off in meeting the extremely ambitious revenue targets.

We can, with the IMF’s support and understanding, move out of the current downturn and stagflation phase through an export-led growth strategy which can create decent jobs together with the recent upturn in manufacturing after many months of decline. This would, however, require a better sequencing of economic reforms and greater concentration on export-led growth instead of pursuing impossible revenue targets at the same time. But will the IMF ever change its spots?

The writer is a professor at the Lahore School of Economics and former vice chancellor of the Pakistan Institute of Development Economics.

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