Beyond stabilisation

February 08, 2019


The writer is a senior research fellow at the Institute of Development and Economic Alternatives, and an associate professor of economics at Lums, Lahore.
The writer is a senior research fellow at the Institute of Development and Economic Alternatives, and an associate professor of economics at Lums, Lahore.

THE debate in macroeconomic and policy circles is currently stuck on trying to decide whether or not Pakistan should go to the International Monetary Fund for another programme. But this is generally, a useless debate. The real issue is why we need to go to the IMF so regularly. Why do we get into the problem of unmanageable foreign currency and fiscal deficits so often that we have to seek the IMF’s help every three to five years or so?

The IMF was created to help countries in crises. So, going to the IMF should not be an issue, given the crisis situation we are in. But, with or without the IMF, once we have stabilised the macroeconomic situation and managed to acquire a certain degree of control over the trade and fiscal deficits, then what? The control is going to come at a heavy price. Pakistan will have to contract aggregate demand significantly and, consequently, growth will be a lot slower over the period we are stabilising the economy. But then what? As soon as we start letting demand increase and try to get Pakistan on to the growth path, will the imbalances not resurface again and create another crisis?

We have already started implementing demand compression measures. The interest rate has been hiked a number of times, the rupee has been devalued, certain import tariffs have been raised, expenditures, especially development expenditures, have been cut, gas/electricity tariffs have been raised and additional revenue measures on the tax side have also been announced.

The economy has shown some response to these measures. We will have to wait a little to see if these measures will be enough. But, given the slow response of the economy, it seems that the current steps are not enough and we will have to implement even sharper measures to rein in the twin deficits.

The state seems to lack the will and the skill to manage structural reforms.

The IMF has been recommending some of the same policies. There might be disagreement — and this is surely an important point to negotiate — over the speed with which adjustment should take place and over how much any particular variable should be moved, but there is agreement on the overall policy direction that Pakistan should take.

Irrespective of whether we get IMF funds or not, Pakistan will have to borrow money internationally to ensure we can survive the adjustment period. The IMF’s stamp of approval will allow Pakistan to secure better terms from other lenders as well. IMF money, a few billion dollars and released in small tranches, is not of much importance for Pakistan but the Fund’s stamp of approval is.

The bigger worry, though, lies elsewhere. We have, historically, been able to stabilise the economy whenever we have faced a macroeconomic crisis. And this has been quite often. But we have been, every time without fail, unable to turn that stabilisation into sustained growth. We have not been able to find the path from stabilisation to growth. This has been the cause of repeated crises for us. Will this time be a repeat of the past?

The main problem here is that our economy needs very basic structural reforms. Successive governments have been unable and/or unwilling to risk carrying out basic reforms. The needed reforms are going to be quite disruptive and they require a lot of management skills and competence. The state seems to lack the will and the skill to manage such reforms.

These reforms are also quite micro. We are talking about basic changes in how we tax and whom we tax. We have to get our property rights regime overhauled. It includes deep reforms in contract enforcement, rule of law and access to justice. Bureaucracy needs very deep reforms. The regime of subsidies needs to be overhauled. Entrenched interest groups, whether they are industrialists, agriculturalists or traders, need to be toppled from their position of privilege and power. The military needs to be taken out of commercial activities or brought under the same rules as civilian businesses.

Old and outdated rules and laws need to be changed. This is true of most of our laws but it is also true of the way the state does its business and hires and manages its people. In other words, the state needs, to put it mildly, rebooting after major changes have been made in its ‘programmes’. And it is going to be a hard reboot. Is the state ready for this? Is this government, which has come with public expectations of change, ready for this?

These changes, if implemented, will have lots of losers and gainers. The losers will resist changes as much as they can. The government will need allies to implement change and compensate or resist losers. Given the current political scene, allies are not easy to come by for this government. How can the agenda of reform survive in such conditions? Even the debate on the mini-budget was hard for the government to manage. If major reforms are presented in such conditions, how is the government going to manage these?

The needed structural reforms will also need very detailed plans for change and they will need high levels of competence for the state machinery to be able to implement these reforms. Leave aside issues of competence, meaning if we can get good reform plans in place, the bureaucracy, currently, stands politicised and disheartened. The threat of NAB and judicial overreach has paralysed decision-making. How can this bureaucracy be expected to shepherd major structural reforms?

There is the issue of sequencing too. Not all reforms can or should be undertaken at the same time. Should bureaucracy reforms come before all else? But if that is the case, the time of each reform should be carefully worked out. Currently, we do not see any plans in place.

The government is still stuck on issues of stabilisation: to go to the IMF or not. This seems to be quite a non-issue. The real issue is about structural reforms. If the assumption is that these reforms are going to be easy or automatic once stabilisation has happened, we could not be more mistaken. We have stabilised the economy many times before. We have never been able to implement deeper structural reforms. A lot more focus of the government should be on working out the plans for these reforms and how they are going to be sequenced and implemented.

The writer is a senior research fellow at the Institute of Development and Economic Alternatives, and an associate professor of economics at Lums, Lahore.

Published in Dawn, February 8th, 2019