Money Matters

IMF talks: Devil is in details

Money Matters
By Mehtab Haider.
Mon, 04, 19

Pakistan’s economic wizard Asad Umar, who, along with his top aides is in Washington D.C for the annual spring meeting of Breton Wood Institutions (BWIs), had claimed that negotiations with the International Monetary Fund (IMF) for securing a bailout package had entered the final phase.

Pakistan’s economic wizard Asad Umar, who, along with his top aides is in Washington D.C for the annual spring meeting of Breton Wood Institutions (BWIs), had claimed that negotiations with the International Monetary Fund (IMF) for securing a bailout package had entered the final phase.

Now the IMF would dispatch its mission to Islamabad in coming weeks for evolving a staff level agreement on Memorandum of Economic and Financial Policies (MEFP). This upcoming MEFP will have all details and conditions attached to the IMF programme.

But there's many a slip twixt cup and lip as Islamabad’s economic managers will have to really strive hard to strike a staff level agreement at this juncture of our economic history. The IMF that is known for its “one-size-fits-all ” approach will suggest Islamabad to slash down the twin deficits including the budget and current account ones by slowing down the economy in such way that that would definitely result into choking growth and hiking inflation. So Pakistan’s economic team will have to devise a strategy that should aim at avoiding stagflation and achieving stabilisation in such sequencing that the country is able to not only strike macroeconomic stability but also protect the bourgeois and low income groups from further hardships.

With the appointment of Younus Dagha as secretary finance, it is considered that Pakistan’s economic team has been strengthened but Dagha would have to demonstrate his abilities of a jaunty walk in parleys with the IMF for striking favorable conditions for Pakistan and its voiceless people because heavy taxation on the demand of the fund could cause upheaval on the political front following the budget 2019-20.

Pakistan’s economy invariably witnesses reemergence of twin deficits whenever it strikes higher growth for two to three years so the next IMF programme must ascertain why it happens and then come up with a viable plan to rectify this structural weakness on permanent basis. Without jacking up savings and investment ratios this growth cannot be achieved on long and sustained basis. It will be a challenge for the incumbent Pakistan Tehreek-e-Insaf- (PTI) led regime to synchronise the IMF program with plans aiming to boost savings and investments in Pakistan.

All this wish list cannot be achieved without mobilisation of domestic resources both at federal and provincial levels. All governments, irrespective of political divide, in the past have favoured tax regimes that that suck the blood of the salaried class and documented sector and now time has come where the revenue collectors were left with no other option than to broaden the narrowed tax base.

The recurrent emergence of macroeconomic imbalances was a result of following imprudent policies that were allowed to deteriorate in the wake of political adventurism done in this country where instability on political and economic fronts were allowed to occur and now the time of paying its cost had come.

The deficits surged on the back of inability to tackle rising trade deficit owing to variety of reasons including keeping the exchange rate artificially overvalued and capacity constraints to generate exportable surplus. On the other hand, imports increased at supersonic speed and this trade gap widened to $32 billion last fiscal year. The imprudent policy measures in the run up to the election were particularly egregious. The tax amnesty scheme that landed only Rs100 billion added Rs1.75 trillion whitened black money to the economy giving further fillip to aggregate demand.

So did the tax concessions announced in the 2018-19 budget that had no economy-wide or fiscal rationale but resulted in the erosion of the tax base and significant loss of revenue.

The macroeconomic imbalances and the bouts of instability they afflict are caused by deep-rooted structural problems that have gone unaddressed for the last thirty years.

As a result, Pakistan’s economy, the fastest growing in South Asia till the late-1980s, is now a regional laggard. The previous Pakistan Muslim League-Nawaz (PML-N) government promised to address the structural problems to correct the dismal trend. Instead, it left the economy with substantially larger imbalances by pinning it on those who fuelled instability on the political front. However, it was a fact that the promise of structural reform, made in agreements with the IMF, was unfulfilled after completion of last fund program in November 2016.

In the July 2018 election, citizens of Pakistan gave the PTI the mandate to both stabilise the economy as well as address the deep-rooted structural problems. In first nine months, nothing concrete on the economic front was presented by the incumbents. The budget deficit that stood at 6.6 percent of GDP for the last fiscal year was going to witness new heights in absolute terms in the first year PTI-led regime.

The yawning deficits are symptomatic of persistently negative government savings, leading to low overall savings and consequently low investment.

The public dis-saving over the last 5 years averaged 1.5 percent of GDP. In 2017-18, private sector savings amounted to about 12.2 percent of GDP, of which 1.4 percent was preempted by the government to finance its consumption.

A significant part of appropriation of private saving for government consumption takes place through the National Saving Schemes (NSS). These schemes use long-term retail savings to finance short-term government expenditures rather than long-term investment in the country. Consequently, savings in Pakistan, 10.8 percent of GDP, is extremely low, limiting investment and increasing reliance on foreign savings.

Since the early 1980s, the preferred strategy has been to generate economic growth through large-scale borrowing and incentivising consumption.

The GDP growth accelerated from 4.1 percent in 2014-15 to 5.8 percent (now revised downward to 5.2 percent in finalised figures by PBS) in 2017-18. There, however, were two disconcerting features of this accelerated growth.

First, the growth in agriculture, but more importantly in large scale manufacturing (LSM), lagged behind the GDP growth. As a result, the share of LSM in GDP declined from 10.9 percent in 2014-15 to 10.3 percent in 2017-18.

Second, the share of consumption increased from 90.7 percent of GDP in 2014-15 to 94.5 percent of GDP in 2017-18 i.e. economic growth was predominantly consumption driven.

Domestic savings thus plummeted from 9.3 percent of GDP in 2014-15 to 5.5 percent in 2017-18 and national savings declined, from 15.4 percent of GDP to 10.8 percent. This level of savings is less than half of Bangladesh’s, about one-third of India’s and almost one-fifth of China’s. Nonetheless, domestic investment showed some improvement (from 15.7 percent of GDP in 2014-15 to 16.4 percent) propped up by foreign savings (as seen in the rising current account deficit).

Without placing a well-thought-out strategy on the negotiation table, the incumbent regime’s wish of declaring this IMF program (if an agreement is reached) as the last of Pakistan, will remain a fantasy.

It necessitates a rigorous homework that leaves no loophole unplugged. A patchwork approach will not deliver any dividends for the country and its people.

The writer is a staff member