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July 17, 2018

The cycle of mistakes

Opinion

July 17, 2018

Pakistan is an IMF addict: we have had 12 to 13 IMF programmes in the last 30 years and have spent more than 22 years on a programme (more, if you count the monitoring stage).

So, what will change with another programme? Will both Pakistan and the IMF repeat their past performance and prove their insanity, as per Einstein’s maxim.

The IMF gave us a clean bill of health about two years ago. And yet, we are in another BOP crisis. You can see the exchange rate collapsing. Will the doctor repeat the old medicine?

While the IMF and our policies remain engaged in a dismal dance, the economy, which is beyond the control of the Ministry of Finance (MOF), chugs along, creating a middle class. People are largely better off, despite the shenanigans of the trio (the MOF, IMF and pundits). People have worked hard to build a life for themselves, whether through migration, trading and even informal work at home.

But then, the trio calls the hard work of the people, the informal economy, and wants to shut down what is working in the economy.

What economists should say (and never say) is that the MOF, State Bank of Pakistan and economic policymaking is always in a crisis, even if the country is prospering. An MOF bereft of policy skills is always run by a megalomaniac finance minister (who, for unexplained reasons, boasts of running 10 divisions from planning to statistics) and a controlling finance secretary from the DMG. The economy always remains close to a BOP and a fiscal crisis.

Let’s call it like it is. Our MOF, State Bank and economic policy need an overhaul. Currently, the government is not structured to work on policy in the 21st century. A DMG official shouldn’t make policies in planning, finance, commerce, FBR, industries for at least six months before his retirement.

And the finance minister is just one minister and shouldn’t try to be the deputy prime minister and bully the SBP and ministries such as planning, statistics and economic affairs. She should only be minister for finance. Period.

The pundits/IMF talk about the economy as if the MOF can wave a magic wand to make the economy turn on a dime. Despite many pronouncements and repeated donor policy advice and financing, growth remains below potential; fiscal and BOP deficits remain out of control; and savings and investment remain low. So, what have all these programmes and donor interventions achieved?

Yet, the cavalry in the form of the IMF will be here in September. They will provide temporary relief as always. Sadly, they are incapable of changing the fundamental weakness in the economy: poor policymaking in the country.

The IMF will repeat the same medicine and increase revenues through mini-budgets and random taxes. It will reduce expenditures without analysis. In short, the IMF keeps giving us the ‘austerity’ treatment that Europe has reviled. But austerity has not fixed our problem for four decades. Instead, it has made it worse as haphazard taxation and expenditure cuts erode the capacity of the state and society’s trust in it.

IMF fixes for structural problems were easily gamed by the MOF. The government has never reduced in size. PSEs bleed profusely (Farrukh Saleem gives good figures in this regard). Government expenditures as well as borrowings remain out of control and the IMF has no analysis of why. SROs, despite much effort, remain intact to the detriment of taxes and business competition. Corruption and governance problems continue to grow.

Programmes and groupie economists always focus on the tax-to-GDP ratio as the centerpiece of the IMF programme. Tax reforms make a bigger mess. We have a punitive tax system that belies all principles. There are 60 or more withholding income taxes on various services that the poor pay to never get a refund. Around 70 percent of our revenue is now collected on withholding agents like mobile phones, banks and schools. And the FBR is getting bonuses thanks to DFID-funded research. This tax policy is a drag on the economy, hurting our exports and businesses. But the IMF will give us more.

In the 1990s, I did a paper with Peter Montiel on sustainable deficits to show that Pakistan can sustain a deficit of about five percent of its GDP. The IMF mission objected and maintained a deficit target of three percent in the 1990s. Through hindsight, we can now see that Pakistan never even reached four percent of its GDP despite IMF efforts. Now, the IMF has moved the target for the fiscal deficit over four percent, but without a clear strategy on how to achieve it.

So, be prepared for minibudgets, arbitrary taxes and more borrowing. Three years from now, the MOF will declare a victory and the IMF and World Bank will praise it. But by the next election, it will look for another crisis and a return to the IMF.

The cycle will continue until we change the MOF and SBP, and how we make our economic policies. And the IMF has no way of doing that. Or, as per Einstein’s maxim, it will keep committing the insanity of repeating its past mistakes.

The writer is former deputy chairman of the Planning Commission.

Email: [email protected]

Twitter: @nadeemhaque

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