Economic fantasy?

July 30, 2019


The writer is a Senior Fellow with UC Berkeley and heads INSPIRING Pakistan, a progressive think tank.
The writer is a Senior Fellow with UC Berkeley and heads INSPIRING Pakistan, a progressive think tank.

MUCH like a chronic drug addict, we are back with IMF doctors for our chronic fiscal and external deficit ills. The blame for the original ills lies clearly with patients. But just as medical doctors can face malpractice charges, so must IMF doctors if they cause harm.

IMF programmes are reviled widely for forcing stabilisation that hurts the poor, but rarely leads to durable and equitable growth; they even reduce growth prospects. States approach the IMF when facing huge external deficits. Sadly, IMF programmes do not focus well on finding durable solutions, and stray into issues not directly linked with them. This keeps states like Pakistan facing chronic external deficits. All these issues plague the new programme and the 2019-20 budgets derived from it. But so wild are key targets that we may not even attain stabilisation aims this time.

The IMF-dictated budget carries an FBR tax revenue target of Rs5.5 trillion — 35 per cent higher than last year’s. Pakistan saw annual tax revenue increases of around 20pc in recent years, even when the economy grew at above 5pc. How can one expect a 35pc increase with the economy set to grow at only 2.4pc? Worryingly, the budget aims to achieve this large increase more via regressive indirect taxes, which are aimed to rise by 40pc vs only 25pc for direct taxes.

The large increase in revenue targets leads one to hope for higher development and social outlays. But a review of outlays quickly dashes these hopes. Of the nearly Rs1.8tr increased overall outlay over last year, nearly Rs1tr will go towards debt servicing, mainly due to high interest rate hikes imposed by the IMF. So the unreasonable fiscal targets have mainly been set up to finance unreasonable interest rate hikes.

IMF programmes do not focus well on finding durable solutions.

Similarly, the IMF expects export revenues to increase by 8pc this year when they actually fell over last year. For taxes, we at least see much noise and chaotic effort in the FBR, but few actual results.

These wild targets make one wonder whether it was adult, serious economists on both sides who developed them after looking hard at the economy. Since one did see such economists on both sides of the table on TV, one wonders what led them to develop such wild targets. What will happen once they are not met: another abandoned IMF programme and crisis or IMF waivers? This may depend on how our ties go with the US.

There is much euphoria over Imran Khan’s success in resetting ties with the US. Fans claim that Khan charmed the US into eschewing its ‘do more’ mantra. More realistically, the mantra would have been repeated in private instead of public after we agreed to do more, given the economic and FATF crunch. So while IMF may hold its quarterly programme reviews, the real decisions may occur in parallel US reviews on doing more on regional peace and terrorism.

These harsh policies will hurt poor people badly. The well-respected economist Dr Hafiz Pasha says eight million persons may fall into poverty over the next two years, despite the cosmetic increases in social programme outlays. The depressed local demand, high interest rates, high and rapid increase in taxes, and higher imports costs will also make it tough to restart growth, despite IMF claims. The interest rate hikes to control inflation seem very inept as such hikes work well if inflation is demand-driven and consumer demand is debt-driven. Neither is true here.

The tax hikes should also have been phased in more slowly given slow growth. On the two occasions Pakistan managed to ignite growth quickly after IMF programmes, it was not mainly due to the programme’s suc­­­­cess, but exogenous factors, ie major US aid after 9/11 and CPEC in 2015. Un­­less Pakistan regains its CPEC momentum soon, growth may remain anaemic.

Finally, the structural programme conditions seem too weak and indirect to durably resolve our fiscal and external deficit ills. The only measure to increase exports is devaluation which hasn’t helped.

But most worrying is the loss of economic autonomy. Ishaq Dar was called a Western economic hitman by hawks. While many of his policies were flawed, they were the opposite of the harmful ones Western powers and the IMF force on poor states, eg free exchange and high interest rates. We now have two people running the economy who were hastily brought in from abroad, have the profiles of economic hitmen and are following IMF policies, though they may not be economic hitmen.

No state has prospered after losing economic autonomy. Unluckily we could not craft sensible policies even when we had more economic autonomy under the PML-N. Thus, our medium-term economic prospects look bleak unless we redo the programme with US help by ‘doing more’ and develop a sensible indigenous economic plan.

The writer is a Senior Fellow with UC Berkeley and heads INSPIRING Pakistan, a progressive think tank.

Twitter @NiazMurtaza2

Published in Dawn, July 30th, 2019