Consumptive luxuries continue to consume economy

LAHORE: Regulatory institutions in Pakistan are both weak and corrupt because of governance flaws giving International Monetary Fund (IMF) and other donor agencies a leverage to impose harsh conditions when we seek financial assistance.

A major flaw is that every ruler wants to run the government on his whims, bypassing rules and regulations. They think that what they say is the law and must be obeyed. They are convinced that tinkering with the posting and transfers is their right. The ruling elite’s wanton deviation from laws licenses the bureaucracy to flout the rules and indulge in rent-seeking activities.

It is because of this bad governance that every time we seek help from the IMF, it imposes harsh conditions on the hope that the reforms undertaken on its recommendations remove the governance flaws.

However after each IMF program the economy invariably worsens, leading to another bailout package, and this vicious cycle doesn’t seem to be breaking. The governance bar in the country is still low and the IMF or donor assistance we are seeking would simply help Pakistan overcome its immediate liabilities to its creditors.

However, the yawning trade gap is a matter of greater concern for both its economic managers and the donor agencies. Both differ on the approach to control increasing imports. The IMF wants cut in imports through further depreciation of rupee that would make both the imports and smuggling more costly.

The economic wizards of the government want to curb the imports by increasing import duty and other regulations like opening of letters of credit on 100 percent cash. These measures may not impact the import of luxury cars that the filthy rich segment of the society is prepared to buy at any inflated price.

Instead, these measures would curb import of smaller smuggling-prone items like cosmetics, food products, and milk preparations. The regulatory institutions have failed to curb smuggling in the past as it benefits them as well as the smugglers.

The donor agencies think it would be more appropriate to discourage smuggling through depreciation of rupee that would make these products beyond the means of Pakistanis even for smugglers.

Higher devaluation would bring back competitiveness in local products and would boost exports. Pakistani exports have maintained growth even in current economic downturn because of massive devaluation of rupee. However the impact on imports is not that pronounced due to consumptive attitude of the domestic consumers.

Economic managers of Pakistan would have to fight on two fronts. First they would have to raise the governance bar and secondly they would have to curb consumerism and promote national savings.

In the interim period the economists say the government would have to toe the IMF line to put an immediate stop to consumption and imports till the governance is vastly improved. Pakistan has the lowest saving rate of 12-13 percent in the region that forces it to seek investment from outside. Its home market is small and relatively "inelastic". Its consumptive elite classes usually do not like what the home producers make and prefers imported stuff.

To curb these tendencies the government would have to devise a policy that discourages consumer credit. All successful economies promoted domestic savings by making their financial systems less ready to extend consumer credit. By doing so they forced their citizens to save. To encourage savings prudent economic managers avoid high and unpredictable inflation, which arbitrarily redistributes wealth from savers to debtors and discourages people from holding financial assets.

Citizens must forgo consumption today in return for higher standards of living tomorrow. This bargain will be accepted only if the country’s policymakers communicate a credible vision of the future and a strategy for getting there. It is regrettable that unfortunately the current economic team is yet to spell out its economic strategy.

The planners must realise that IMF’s prescription that calls for further devaluation of rupee would blow up inflation and to deflate this further monetary tightening would be required. The economic managers should not fear running high budget deficits in the short-term as long as they remain fiscally responsible.

All they have to do is ensure the public debt does not get out of hand by ascertaining the economy grows faster than the stock of public liabilities. Real growth is about more than economic efficiency and it also requires committed, credible, and capable governments.