Embracing a new dawn

The International Monetary Fund (IMF), the lender of the last resort, in every engagement, tries to manage Pakistan’s recurring balance of payments crisis by almost always pushing for austerity policies. Instrumentally, programmes with the IMF have focused on macro stability measures including fiscal adjustment, monetary tightening, devaluation, and price hikes. The impact of these adjustments has been harsh on the less fortunate in our society.

Historically, after inflicting intolerable pain on the citizenry, governments abandon the symptomatic treatment halfway into the life of a programme as conditions get tougher to implement. Political expediency entices governments to then push stimulus-fueled growth through expansionary fiscal and monetary policies. Pakistan’s import-led growth model causes yet another balance of payments crisis – as the essential deeper reforms elude the policymakers. This flair for discarding prudence ensures Pakistan’s trajectory back to the doorsteps of the IMF every few years.

Unfortunately, the economy remains in a perpetual state of muddling through, with fragile macro-fundamentals and external support to keep the boat from sinking. Pakistan has somehow surrendered to this undesirable equilibrium. It is presently availing its 23rd IMF facility in the shape of a Stand-by Arrangement (SBA). And looking towards a new one.

Relying on bailouts, debt monies, and external advice has left a deeper scar. The country’s thinking and governance capability have severely eroded over time. The ideological dictums of development practitioners of building good institutions and getting the policy right have largely ignored the role of building human agency in Pakistan. The more discouraged think of the country becoming a kakistocracy.

The same period has witnessed the tides of time turn for many a nation in Asia – a story of success almost entirely crafted through self-prescription and innovation by some exceptional policy leaders. Pakistan’s transition to economic freedom and sovereignty, and weaning itself off the IMF drip is also intimately linked to crafting its serious strategy of reform. Pakistan’s destiny for better or worse will be determined by its ability to engage a set of smart policymakers – minds that can conduct a macroeconomic diagnosis and envisage, write, and execute a credible homegrown overhaul plan. This is now a necessary condition.

The country has to believe that good economic theory applies to Pakistan as much as it does anywhere else. In economic policy terms, at the minimum, channeling investment in productive sectors, managing high consumption levels, some kind of market orientation, international trade, and some macroeconomic stability, are prerequisites for long-term prosperity. Pakistan has missed out on most of the above.

We remember the nerve-racking first half of FY23 – overshadowed by an intermittent relationship with the IMF. Pakistan struggled to secure the 9th review with the IMF in the last programme which was eventually abandoned. The delay hurt dearly. Foreign reserves held with the State Bank of Pakistan plummeted to an uncomfortable low of $2.9 billion on June 20, 2023, consequently, the rupee lost 22 per cent in value in FY23, and inflation rose to 29 per cent as ordinary folks paid through their nose.

The dilly-dallying option about entering a new programme with the IMF is no more. The external vulnerabilities require keeping the IMF umbrella intact for a few more years. Professional policymakers should be spending endless hours designing a smooth transition from the current nine-month SBA to a longer-term Extended Fund Facility (EFF) with the IMF. The current SBA ends in April 2024.

This is essential to avoid a bumpy ride in the first half of 2024. One has observed that countries which use their national plan as the basis for designing a Memorandum of Economic and Financial Performance do better with the Fund. That’s how Pakistan should approach the next EFF. The design of the EFF and many additional reforms leaning towards structurally altering the economic landscape are crucial.

However, aid programmes alone are never the determining factor for prosperity hence not a push for substantive change. Economies only transform with accompanying longer-term remedies. Tragically, at nearly 7.5 per cent of GDP in FY23, Pakistan’s high federal fiscal deficit is a serious drag on the economy. It is a difficult area and remains unaddressed for too long.

Crucially, fiscal prudence can help free up resources for the private sector and raise productive investment. Here again, the IMF must be convinced that remodeling public and tax expenditures, and sharing subsidies with provinces, rather than raising taxes on those already paying, is the route to meaningful fiscal adjustment. Trapped in a cycle of debt, the county’s case for reprofiling public and IPP debts, and undertaking debt or development and environmental swaps is strong. Smart debt management can free up financing space and avoid the asphyxiating effects of austerity.

The good news is that, with the right reform interventions taking hold, life will become less painful for the underprivileged. A well-organized economic overhaul will question privileged groups’ interests and shift the economy to competitiveness. It will restrict state largesse, concessional financing, and exemptions.

Economies function most efficiently when governments concentrate on a well-organized provision of public goods, and let the market allocate resources in the private sector. Pakistan longs for a seminal investment and growth architecture redesign. This will require detailed work on a sustained productivity agenda, intent to deregulate, improvement of financial intermediation, and policies of divestment and foreign direct investment in export sectors.

However, economic reforms at the national level will bring selective productivity gains at the micro level. Evidence suggests that substantial changes initiated by reforms at the micro level of the economy across corporates, firms, and individuals who work on assembly lines are indispensable for raising the competitiveness of most industries. These changes will require patience. They will also require path-breaking digital infrastructure support by the state.

Local doctors have to manage both the macro and micro operations skillfully. Deeper reforms are likely to make deficits sustainable and growth more resilient. Beyond the EFF, this work should sustain the economy on its own merits. Many of the intellectuals with whom I am lucky to brainstorm would argue that I have narrowly focused on an economic agenda for revival. They are quite right in their observation. We know that deeper social issues of quality education, gender mainstreaming, and population management need utmost care. No longer bound by the intricate web of policy patchwork, work in these areas would become possible.

It is time for Pakistan to break the shackles of economic dependency. With every new dawn, we have to blossom some hope in the minds of many talented young people who are thinking of emigrating. Leaderships have to reimagine Pakistan’s agenda of unimpeded economic growth. They have to convince the 240 million Pakistanis that the spirit of the nation can shine brighter within the next election cycle.

Pakistan’s destiny in the coming years will be defined by the ability and courage of the people we put in important positions. As Iqbal says: “nahin hai na-umeed ‘Iqbal’ apni kisht-e-viran se/zara nam ho to ye mitti bahut zarkhez hai saaqi”.

The writer is former adviser, Ministry of Finance. He tweets/posts @KhaqanNajeeb and can be reached at: khaqanhnajeeb@gmail.com