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The new Camelot

Updated September 06, 2018


IMRAN Khan has asked us to wait for up to three months for any visible ‘results’. I think we should be prepared to wait longer than that, perhaps even up to one year since visible results in the world of policy can take their time to appear.

But long before results, there are plans and their implementation. And long before the plans, there is the policy direction. And long before the policy direction, there are the visible indications of what is being mulled in the new Camelot. It is certainly too early to expect results, and too early to expect a full-blown plan for the profound changes we have all been promised. But it is not too early to search for a policy direction coming out of the new team, and nowhere near too early to start gleaning what such a direction might be from the visible signs of what is being worked on.

What is being discussed in the new Camelot? What sorts of themes keep making an appearance in their public pronouncements? Who is meeting with whom? Who are they seeking out for advice? What questions are they asking? All of these things, and much more, matter in these early days and each of them reveals the state of play inside the new court.

So what do the early indications tells us? They tell us that there appears to be a rift of sorts in the new Camelot. Let me explain.

It is too early for results, but high time we had visible indications of where the new Camelot intends to steer the country.

Everybody knows that there is a massive and growing current account deficit in the economy. This means the economy is burning foreign exchange reserves at a pace faster than it can pull them in, through exports, remittances, foreign investment, etc. The depleting foreign exchange situation is at the heart of the challenge faced by the new government. Nothing new here, since every government has found severely diminished foreign exchange reserves upon its arrival. Question is, what will they do about it?

The most obvious answer is to do what every previous government has done upon coming to office: go to the IMF for a loan, then spend the next three years (where they had three years in office that is) implementing the conditions outlined in the programme. Here is what many people are not fully getting about this option: when you go to the IMF, all control over your own revenues and expenditures is taken out of your hands. There follows a rain of taxes, sometimes with innovative-sounding names like a ‘carbon surcharge’, and equally deep expenditure cuts. Then the exchange rate is adjusted downward, sharply, and interest rates are hiked. Between them, these measures stall the growth process, thwart investment, fuel inflation and burden the masses with a sharply higher cost of living. Taken together this package of policies is called ‘demand compression’ in the boring lingo of economics, which is the substance of a policy direction they call ‘macroeconomic stabilisation’.

Demand compression is the soup where austerity is the aroma. It is what you have to undertake when your economy has too many of the wrong kinds of deficits. When the fiscal deficit, as a percentage of GDP, is larger than the economy’s growth rate, or the current account deficit which measures the inflow and outflow of foreign exchange is similarly too large, then you have to undertake stabilisation through ‘demand compression’. The simple and rather cheap points that Imran Khan has been trying to score via his austerity stunts thus far are small potatoes compared to what is coming his way.

All governments that administer this package of policies become unpopular in a very short period of time. There is only so much hype that the masses can swallow when the burden on them is increasing. And this is where the early, nascent signs of a rift in the ranks of Khan’s team seem to be appearing.

There is one faction doing the rounds which is claiming that none of this is necessary. They are claiming that all you have to do is focus on recovering the looted wealth stashed abroad and you can fill all your deficits painlessly. To make their case, members of this faction are taking their case to the airwaves, appearing on various talk shows, and selling a highly misleading cocktail of assertions regarding the amounts stashed abroad, as well as the ease with which they can be brought back given the new laws that have been passed in various countries. ‘No need to bow before the West,’ they say, ‘We have the strength in our own economy to stand on our feet and hold our head high.’

This is powerful rhetoric. Who wants to bow before anyone? And who doesn’t want to stand on their own feet and hold their head high? But is there a shortcut to getting there? Is there a way to get this done without a macroeconomic policy direction that does not involve, at least in the initial few years, some painful decisions? That is the question.

What is important to note is that more often than not, it is the words and ideas of the ‘recover-the-looted-wealth’ faction that we keep hearing come out of the mouth of Imran Khan. The other faction, which is working on the outlines of the stabilisation programme, is about to find its strength increase manifold once the new Economic Advisory Council gets a chance to meet, since it is unlikely they will endorse any ‘recovering-looted-wealth’ drive as a policy direction.

The decision made by Imran Khan on gas prices seems to suggest that he is not averse to making painful decisions. Or it can suggest that those who can get the Khan’s ear carry the day, meaning he is impetuous. Yes, it is too early for results, but high time we had a discernible policy direction, clarity on style of decision-making, and visible indications of where the new Camelot intends to steer the country.

The writer is a member of staff.

Twitter: @khurramhusain

Published in Dawn, September 6th, 2018