Perish or perform

Dilma Rousseff, the former Brazilian PM and economist, when visiting Spain in 2012, amid the global financial crisis, told the Spanish media that the model of austerity which was previously called ‘adjustment’ had bankrupted Latin America in the 1980s. She said that no good can come from it if there are no incentives for growth and investment.

Rousseff’s statement is a classic depiction of how IMF programmes are carried out in Pakistan. Even the current programme lacks ownership, realistic assumptions, transparency, collaboration among stakeholders and built-in flexibility of targets and policy options. In his paper, comparing lessons from the Asian Financial Crisis of 1997 to the Global Financial Crisis of 2008, the Japanese Ministry of Finance’s senior economist, Shinji Takagi, argues that the IMF had magnificently carried out bailout programmes in European economies. He asserts that the thrust of these programmes were similar to all other programmes, with fiscal and monetary tightening, along with banking reforms at its core. What differs is that these (the European) programmes were different in philosophy.

Linking this to our case, the problem is that where on the one hand, the programme is not negotiated well, on the other, it lacks ownership. Programmes are negotiated behind closed doors with economic correspondents keenly looking out for bits and pieces which trigger speculation and uncertainty.

In Europe, however, after the breakout of the 2008 crisis, the governments of Latvia and Ukraine after negotiations with the IMF announced that the recession was not only inevitable but would be prolonged. Iceland’s IMF documents conveyed that the focus would initially be on bank restructuring but would then shift to containing fiscal deficit as it would widen in future. Hungary declared that the size of their public sector would shrink.

The mere mechanism at play in their programmes was honesty. Investors were disclosed beforehand that the worst is imminent and it is a better strategy to let bad news flow in the market than if the market discovers it itself.

In Pakistan, to some extent the strategy has been adopted but the false promises of giving 10 million jobs, five million houses, quick rebates to businessmen, no further devaluation of currency along with many other blunders and lack of transparency have created more uncertainty – and hence downfall.

The list of woes is long but we need to look towards possible solutions as there still could be hope. Pakistan recently entered an IMF programme with a complete absence of local ownership. Neither parliament nor the business community was consulted; if the PTI government wants another term they have to take the opposition on board. Even if it costs them their primary manifesto’s promise of accountability, the major element in turning around the economy should be taking all opposition parties on board. And won’t a booming economy get them another term?

Two, the business community has suffered much and cannot bear further surprises. Even if it means short-term loss, they have to convey to the business community ‘the-still-kept-in-the-bag’ surprises. Since Bangladesh is becoming more of a favourite and is now even exporting robots, businessmen need to be told of all surprises they can expect; else they’ll look towards Bangladesh and other avenues.

Three, the IMF statutes forbid capital controls but capital controls on capital account are permitted (though not on current account). If European programmes were granted that access, we need to explore the merits and demerits of this option too.

Four, in several IMF programmes private-sector involvement has proved to be a success. Korea in 1997 had a failed programme but was able to resolve the crisis much more quickly afterwards with private-sector involvement.

Five, I would reassert that greater collaboration among stakeholders is important. In case of lost investor confidence both local and international investors flee. The IMF programme then is catalytic and is aimed at running a programme which retains them. In this case, the core objective of the program – adjustment – is compromised.

Simply put, the choice is ours, do we look forward to a programme which has dual objectives of a divergent nature or are we aiming this programme to be our last? For our woes the IMF is not be blamed, since the remedy lies within. With this rent-seeking economy run by bureaucrats who have no knowledge of the economy, we will be back at the IMF’s door come the next government. Our government should look to the academia for policy advice, take the advice of grey-haired economists who serve in every EAC and last of all, take heed to their institutional reforms advisor’s advice.

Dr Ishrat had on July 30, 2018 said at the Wilson Center that the then incoming government leader, now PM, should “swallow his pride, suppress his ego and create an atmosphere of buy-in by all political parties.” The takeaway for readers in the power corridors is simple: perish or perform.

The writer is a financial analyst.