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May 11, 2019

‘Pakistan braces for very tough conditions as IMF deal long-delayed’


May 11, 2019

LAHORE: Dr. Waqar Masood Khan, former secretary finance, bet on the present government’s resilience to come up with an economic roadmap soon and remove uncertainty that is currently haunting the economy. Following is a first installment of a long conversation with Dr. Khan over some hot economic issues and prospects of a possible International Monetary Fund (IMF) deal.

The News: Should exchange rate solely be determined by market forces?

Dr. Khan: In principle, it is most desirable that all prices should be determined by market forces and exchange rate is no exception.

But one has also to consider the sensitive nature of foreign exchange market and all the central banks, especially in emerging markets, are concerned to induce stability in the foreign exchange market.

And if there is a disorder the central banks should intervene so that speculators would not take advantage and disrupt the market. So, a central bank should have an ability to interfere and bring order into the market in case market forces become somewhat disruptive.

The News: Do you think keeping interest rates higher is the solution to curb inflation?

Dr. Khan: Interest rate and inflation are closely linked. Hence, the central bank thinks fighting inflation is an important policy goal while determining interest rates.

The instrument of interest rate works on the assumptions that if inflation is rising. It is an indication of an overheated economy, which needs to cool down.

Interest rate is a legitimate tool to lower the aggregate demand. But we have to see how inflation is behaving and the central bank will set interest rate policy accordingly.

In my judgment, presently the interest rates are sufficiently high and they are reflective of inflationary pressure which has so far built up. There may be some differences between the IMF and authorities on the issue. My vote is however for maintaining the interest rate.

Last month, inflation has eased up and that supports the case of not immediately raising the interest rate. But let’s see what comes out of a discussion between the two parties.

The News: What is the biggest threat to the economy in short to medium terms?

Dr. Khan: The threat at the moment is instability as we don’t have a clear economic road map that we want to pursue.

We have missed an important opportunity to enter into an IMF program when the present government came to power.

We are negotiating the International Monetary Fund’s program with acutely weaker economy now than it was when the present government was set up.

One example is the performance of the FBR (Federal Board of Revenue) and the fiscal side in general.

They presented a mini budget, saying 1.5 percent will be the fiscal deficit.

And look at the revenue performance that is perhaps the worst show in several decades. With these things, you are negotiating a program with the IMF and your credibility has been compromised. Hence, there is a talk of a very tough program that is ahead of us.

As soon as the program is negotiated, let’s hope certainty would be restored. Going for an International Monetary Fund deal is a right thing but it is equally important how we carry out the program and bring stability into the economy.

The News: Is a bailout deal with the IMF inevitable or there are still other options to ponder over?

Dr. Khan: Not just now, but nine months earlier too the fund program was the only viable option available with the government.

By missing the time, they have added to the woes of economy. Now, finally the government has devoted itself to negotiate a deal with the IMF. Let’s hope the program is worked out.

The News: What could be done to increase exports and decrease imports?

Dr. Khan: Exports cannot be increased in the short term. It is painstaking and slow moving process. Create capacities.

Set up new factories. Expand existing capacities and do research for innovation.

All of these things are vital for increasing exports and it will take time. One thing is sure for going forward and that is we need to diversify our exports.

We need our manpower to completely devote into building new spheres like IT and telecommunication.

These and allied areas have opened up new vistas for developing countries like us.

We have one of the finest manpower comprising of youth in the world.

We should capitalise on our strength. Look at the neighbouring country to see how it has gone into using the IT industry for export expansion.

Furthermore, we should look for the new markets. We have some difficulties in the traditional markets like market access and other preferential access.

The new FTA (free trade agreement) with China is a breath of fresh air.

Let’s hope this market access will allow more exports to China.

Once you control budget deficit, imports will be curbed.

There are no two views on that. Excessive demand primarily emanates from the fiscal deficit.

It is estimated that 7.6 percent deficit will be created, which is huge. If you cut that down and raise taxes and bring deficit lower to 5-6 percent that will help imports come down.

The News: How would you rate the present government’s performance in dealing with the energy sector’s issues?

Dr. Khan: Energy sector is the real backbone of the economy. But, unfortunately energy sector has been putting burden on the fiscal side for over a decade.

There is no tangible progress by the incumbent government. They are only talking about reducing losses through crackdowns on power thieves. There are more fundamental things.

One of the biggest challenges has been circular debt and the present government has not come up with any program as yet to contain it. It could be a breaking point with the International Monetary Fund, which wants to end any addition to circular debt in a year.

We need to take some very fundamental decisions to make energy sector viable.

And as long as energy sector remains in the hands of government, I see no reason to have hopes about its correctness.

It should be handed over to private sector or at least management of public sector enterprises should be handed over to professionals from the private sector.

At least, the federal government should come out of these entities, which should be handed over to provincial or local governments so their affairs could efficiently be handled for services delivery.

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