Vagaries of Consciousness
- Pakistan has to remain a part of the international financial system evolved in the backdrop of WW-II
The government has not so far unveiled its economic agenda. A key element of strategy would be whether to seek an IMF program. On the one hand there are speculations (Financial Times) that the country is going to IMF whereas the PTI leadership has maintained a vague position, insisting that all options are on the table. The ambiguity has now given rise to a reverse speculation that Pakistan would not go to the Fund and rather seek Chinese and Saudi help. To avoid further weakening of the economy, it is imperative that a clear stance is adopted at the very outset.
Indeed, we are of the view that there is no practical alternative to seeking a Fund program. The following are the reasons behind this assertion.
First, Pakistan has to remain a part of the international financial system evolved in the backdrop of WW-II, and comprising IMF, WB, ADB, IDB and international capital markets. It would be inadvisable to think otherwise. Frankly, there is no alternative system competing with this system. The multilateral institutions are cooperatives, designed to mitigate occasional balance of payments (BOP) problems or provide the much needed capital for development of member countries. Pakistan has enjoyed a healthy relationship with these institutions and we have never defaulted on our obligations. It is difficult to find a justification for not approaching the IMF. Surely, one can take a principled position that Pakistan should not submit to a tight discipline that a Fund program would impose besides other policy demands it would make, which would be politically infeasible. As we explain later, austerity and tight fiscal discipline are inevitable whether we do it under a Fund program or go at our own. The recipe to stabilise the economy is the same.
Inflation was registered at 5.8pc and is rising since last four months. Foreign investment was flat. The most surprising outcome was stubbornness of current account deficit
Second, recognising that our immediate problem is foreign exchange, the very idea that support from friendly or brotherly countries or expatriate Pakistanis would be sufficient to tide over our needs is mistaken. Our needs both in size as well as in nature, are completely different than what comes as friendly grants. We need to put a derailed economy back on track. Such gracious help could supplement and lessen the financing gap, but would not be a substitute for a Fund program. Also, we are getting a great deal of hammering for the negative propaganda against the Chinese help and CPEC. In an opinion piece in Bloomberg on 23-8-2018, titled “IMF should stick to its guns”, an Indian writer has surmised that Pakistan is delaying seeking IMF support as it would be forced to open up its books, which contain Chinese projects that have been guaranteed 34pc return in dollar terms. While all this is baloney, it does show the kind of malignant dis-information and white lies spread against the Chinese assistance. Taking a non-standard approach would further compound this problem.
Third, the multilateral institutions, despite different functions and membership, work in unison when dealing with a member. In particular, IMF takes the lead for certifying macroeconomic health of the economy. World Bank and ADB sometimes provide policy loans to top-up the resource envelop provided by IMF. Indeed, the policy mix promoted by WB and ADB is built within the Fund program and thus the three organizations work together. Now, unless the Fund is certifying macroeconomic health, policy loans from WB and ADB would not be available. Project lending, on the other hand would continue but that’s not helpful to solve the BOP problem.
Fourth, Pakistan has issued three Euro Bonds and three Sukuks, totaling $7 billion, in the last five years. Much of it was to refinance the previous such securities issued during 2004-07. The refinancing needs would start from 2019 when $2 billion would be due. Besides there would also be a need for additional borrowings to support a high rate of growth once the economy is stabilised. Although there is no formal need of an IMF certificate to approach capital markets, a poor assessment of economy from IMF, like in the last post-program monitoring review last December, would effectively eliminate our chances to successfully refinance maturing issues, much less seek additional resources.
Fifth, the Fund program brings a discipline that permeates across all the key economic ministries. After the last IMF program was successfully completed in September 2016, within 21 months we not only squandered all the gains but brought the country back to where it was in 2013. But unlike 2013 – which preceded long spell of low economic growth – we have a buoyant economy with growth of nearly 6pc last year, which was highest in 13 years. Strong consumer demand and continuing investments in the private sector, with private sector credit at unprecedented level in last two years, is the brightest sign of an economy on the move. But it is the government’s poor economic management since then that is pulling it down by incurring massive fiscal and current account deficits. Our capacity to self-discipline is virtually zero. If the new government is confident that it would bring that discipline, we have no reason to doubt. But it would be logical to test that hypothesis under stable economic conditions and not when things are already in disarray.
Sixth, those who advocate freer hand in fiscal affairs to provide relief and pursue campaign promises, sadly there is no room available for such pursuits. Not going to the Fund does not provide freedom to continue to live the life of profligacy. Austerity, frugality and economy have to be the catch-words or defining characteristics of the new economic agenda. But if that be the case, seeking Fund assistance would only help bring stability faster and with ease, as it would open numerous windows of mobilising critically needed resources both for immediate needs as well as to build buffers for future security.
Finally, let’s note that early indicators in first fiscal month of July – such as inflation, foreign investment, current account deficit – are all pointing to continuing deterioration. Inflation was registered at 5.8pc and is rising since last four months. Foreign investment was flat. The most surprising outcome was stubbornness of current account deficit which was again registered at $2 billion even after a 15pc depreciation of rupee in last few months. These developments point to some deep structural imbalances afflicting the economy, which would be corrected only through sustained reform efforts. Of these, none is more significant than to tame the fiscal deficit which is the primary cause of unraveling the macroeconomy. When addressing it, real pain would be felt across many parts of the economy. The talk of relief any time soon would be misplaced. Indeed, the government should refrain from meddling with prices such as those of electricity, gas and petroleum products. In coming days, all these prices would be on the rise and there would be temptation to interfere with their passage to end-consumers. If the government has necessary resources to subsidise these prices, there would be no issue. But when the primary concern is spiraling deficit, the question of resource availability doesn’t arise. The need is to remove subsidies and other costs that have given rise to the unsustainable deficit.
Based on the above, our sincere advice to the government is to adopt an unequivocal stance on economic management without any delay and, in our view, the straight forward way is to seek a Fund program to stabilise the economy that would support a buoyant private sector, which is already rendering exceptional performance.