The last fiscal year concluded with a high fiscal deficit (6.8 per cent of gross domestic product), current account deficit ($17.99 billion or 5.7pc of GDP) and trade deficit ($37.6bn or 12pc of GDP). In the face of plummeting foreign exchange reserves and a rapidly deteriorating exchange rate, the next government is likely to seek another International Monetary Fund (IMF) bailout package, which will be the third in the last 10 years.
But if the past is any guide, an IMF programme only provides a respite from the burgeoning macroeconomic problems and the malady continues to lurk beneath the economic facelift. Does the fault lie with the remedy prescribed by the Fund?
Let’s begin by looking at the impact of the last two IMF programmes on the economy. In November 2008, Pakistan signed a two-year Stand-by Arrangement (SBA) with the IMF for $7.6bn assistance, which was later enhanced to $11.3bn. However, the programme terminated prematurely with only $7.27bn disbursement as the government could not take the agreed reforms.
When Pakistan went to the IMF, the balance-of-payments (BoP) position was precious. At the end of 2007-08, major macro-economic indicators were these: GDP growth 5pc, fiscal deficit 7.6pc of GDP, trade deficit $21bn or 12.3pc of GDP and current account deficit $14bn or 8.47pc of GDP. At the end of October 2008, foreign exchange reserves had depleted to $7.31bn and the exchange rate had nosedived to Rs81.7 per dollar.
The IMF conditionality provided for scaling down fiscal and current account deficits, discouraging government borrowing from the central bank as a source of deficit financing, maintaining high interest rates, exchange rate flexibility, increase in the tax-to-GDP ratio, elimination of power subsidies and a drastic cut in the subsidies provided to public-sector enterprises (PSEs).
The fiscal deficit was to be reduced to 4.2pc of GDP in 2008-09, and then to 3.4pc in 2009-10. However, 2008-09 and 2009-10 closed with a fiscal deficit of 5.3pc and 6.3pc, respectively. Likewise, 2010-11 closed with 6.5pc fiscal deficit against the revised 4.7pc target. Though the fiscal deficit targets were not achieved, the gap was significantly brought down from 7.6pc during 2007-08. However, cuts in the fiscal deficit were made possible in the main by slashing the development spending.
During 2008-09, the current account deficit was curtailed to 5.3pc of GDP ($8.8bn) and further to 2.2pc ($3.9bn) during 2009-10. In 2010-11, the current account surplus of $437 million (0.1pc of GDP) was recorded. The trade deficit declined to $17.13bn in 2008-09 and further to $15.6bn in 2010-11 as exports went up to $24.81bn. However, the principal cause of the improved current account performance was workers’ remittances, which rose from $6.45bn in 2007-08 to $11.2bn in 2010-11.
The rupee stabilised and at the end of 2008-09, one dollar was worth Rs81.48. During 2008-09, the economic growth rate fell to 0.4pc, one of the lowest in Pakistan’s history. A modest economic recovery was made in 2009-10 as the growth rate increased to 2.6pc and further to 3.6pc in 2010-11.
In September 2013, Pakistan signed another agreement with the IMF, called the Extended Fund Facility (EFF), for a $6.12bn loan. The conditionality was more or less the same as in the case of the SBA in 2008. At the end of 2012-13, two months before the EFF agreement was signed, major macro-economic indicators were these: economic growth 3.7pc, fiscal deficit 8.2pc of GDP, trade deficit $20.49bn or 8.9pc of GDP, current account deficit $2.89bn or 1.1pc of GDP, foreign exchange reserves $6bn and the exchange rate was Rs99.7 per dollar.
In 2013-14, the growth rate accelerated to 4.1pc and kept on increasing, reaching 5.8pc in 2017-18. Likewise in 2013-14, the fiscal deficit was brought down to 5.5pc of GDP and further to 5.3pc and 4.6pc in 2014-15 and 2015-16, respectively. However, 2016-17 again saw a surge in the fiscal deficit to 5.8pc. The last fiscal year closed with an estimated fiscal deficit of 6.8pc.
IMF assistance will serve as a bailout, not a development package
The current account deficit marginally increased to 1.3pc of GDP in 2013-14 before falling to 1pc in 2014-15. In 2016-17 and 2017-18, the current account deficit of 4.1pc and 5.7pc, respectively, was recorded. The trade deficit declined to $19.96bn in 2013-14, but kept on increasing thereafter until it reached $37.6bn in 2017-18.
At the end of 2013-14, one dollar was worth Rs98.9 and Rs101.8 at the end of 2014-15. After remaining relatively stable for nearly three years, the rupee has shed its value almost 22 percentage points since December 2017. Foreign exchange reserves went up to $9bn at the end of 2013-14 and further to $18bn at the close of 2015-16. Thereafter, the decline in reserves set in. As on July 13, reserves available with the central bank had come down to $9.06bn.
Thus, fiscal and current account deficits, foreign exchange reserves and exchange rate positions improved in years immediately following the start of IMF assistance under both SBA and EFF. However, the momentum was not maintained and the high deficits-low reserves situation returned. One notable difference was that whereas the economic growth rate had shrunk in the wake of the 2008 IMF programme, it accelerated after the 2013 programme. One reason may be lower oil prices since 2013.
While assessing the IMF recipe, a few things must be borne in mind: one, the Fund’s assistance is a bailout and not a development package. The foremost purpose is to ward off a BoP crisis. The conditionality that accompanies IMF credit seeks to address the vulnerabilities that set off the crisis.
Two, the IMF prizes stabilisation over growth. Its prescriptions with regard to the fiscal deficit and monetary policy tend to put the brakes on the growth rate. Economic development, however, requires sustained growth. When growth shrinks, investment goes down, jobs are lost and incomes fall. As the economist Joseph Stiglitz puts it, “Stabilisation policy cannot be separated from growth policy. Failure to stabilise may hurt growth, but stabilisation, in the traditional sense of the term (price stability and fiscal adjustment), does not necessarily lead to economic growth.”
Three, trade and economic liberalisation prescribed by the IMF does not address the structural or supply-side constraints, with the result that they persist, hindering sustained export growth.
At the same time, the IMF programme provided the economy an opportunity to take some difficult but fruitful measures, such as widening the tax net and restructuring PSEs. But that opportunity was lost.
Published in Dawn, The Business and Finance Weekly, July 30th, 2018
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