AS large parts of the economy grind into recessionary conditions, the clamour for policy focus on growth is increasing. However, the government’s policy mix is constrained under an IMF-led stabilisation programme, with no space for a stimulus in either fiscal or monetary policy. Under the current programme, the government is bound to achieve fiscal consolidation over three years of almost 6.5 per cent of GDP — the highest reduction in the fiscal deficit in Pakistan’s history over a similar time span.
Under the IMF stabilisation framework, short-run economic growth is not collateral damage — it is virtually ground zero, the epicentre of policy focus. Achieving a sharp correction in the external current account imbalance in the shortest possible time requires an equally sharp compression in imports. The contractionary policy mix adopted as a result leaves businesses struggling for survival — via the sucking out of purchasing power and the overall increase in cost of doing business (on borrowing, imported inputs and energy use).
In its latest monetary policy statement, the State Bank appears to indicate an abandoning of its unrealistic and overly optimistic assessment of growth prospects for the current fiscal year — something I have been pointing out for the last several months. With near-term growth prospects bleak, and unemployment and high inflation imposing a punishing burden on large swaths of the populace, there is a clear need for a policy framework that delivers less pain while achieving the broad aims of not just stabilisation but wider reform.
Pakistan needs a return to high rates of economic growth, but only one that is sustained, sustainable, export-led, jobs creating, and inclusive — rather than the four-year boom-bust cycle the country has been trapped in ie a better quality of growth. To achieve this requires serious structural as well as institutional reform — some of the very measures such as documentation and widening of the tax base that are contributing to challenging business conditions and pessimistic investor sentiment. So what can the government do differently, to ease the pain?
Jobs preservation can, and should, be a focus along with reform.
First and foremost, policymakers need to recognise that while large-scale job creation is not possible at the moment, the policy focus can be reoriented towards jobs preservation. This requires a rejection of an important element of the implicit underpinning of the neoliberal framework that IMF programmes are built upon: the Schumpeterian concept of ‘creative destruction’.
While the slogan ‘never let a good crisis go to waste’ is apt for many practices and constructs that get countries like Pakistan into recurring economic crises, it should not necessarily apply wholesale to private firms. Pakistan’s economy may be statist in terms of the policy footprint and a fairly large operational control of the state sector, but it is nonetheless predominantly owned and managed by the private sector. In addition, the economic crisis that Pakistan experienced in 2018, or indeed the one in 2008 or earlier, had less (if at all) to do with inefficient firms than with a rank bad policy framework imposed upon them. So why should private firms that did not directly benefit from the inappropriate policy framework bear the cost?
In response to the Great Financial Crisis of 2007, countries ranging from the US to Singapore sought to insulate businesses from the effects of the recession by a host of heterodox policy measures. The US government pumped nearly $700 billion in fiscal stimulus measures alone in response to the recession, over and above the aggressive and unprecedented expansion of the US Federal Reserve’s balance sheet. Measures taken included recapitalisation of financial institutions, capital injections in the Big Three auto companies as well as insurance firm AIG, launching programmes such as ‘cash-for-clunkers’, cutting payroll taxes, and extending unemployment benefits. An expanded public works programme to create jobs was also launched.
Similarly, Singapore adopted maintaining citizen employment during the crisis as an explicit policy goal and launched a ‘jobs credit scheme’, effectively temporarily subsidising the wage cost of firms.
While Pakistan cannot match the scale of such measures given its fiscal constraints and public debt level, the foregoing presents examples of precisely the kind of bold thinking and heterodox policies that are required. Some possible measures that can be undertaken include:
— Extend energy tariff subsidy to indirect exporters/export sector supply chain.
— Underwrite fresh loans to SMEs.
— Provide interest rate subsidy on new loans/expand access to concessionary finance.
— Swap existing high-cost loans with subsidised credit schemes for certain high spillover sectors (with high linkages and employment intensity, for example)
— Ensure access to credit for credit-constrained SMEs.
— Ensure timely release of tax refunds due.
— Provide tax credits for new investment.
The government can link support via the foregoing measures to full documentation of firms that apply, thus creating an incentive for undocumented firms.
Instead, the government has recently retroactively rescinded the subsidy on electricity tariff for the export sector, as well as the tax credit for importing machinery. This move represents the very antithesis of the bold and forceful policy framework required at this stage of crisis containment.
The incentives will have a large fiscal cost. Where will the money come from without jeopardising the fiscal targets under the IMF programme? One source can be the public-sector development programme. By deferring non-essential projects, a portion of the PSDP can be reallocated to absorb the costs of the subsidies involved. This may require tweaking of the rules of business governing the PSDP and a via media should be sought. Another source can be savings accruing to the budget from a lowering of the policy rate in due course.
The bottom line is that Pakistan needs a bolder, more heterodox policy framework, as opposed to the orthodoxy of the Bretton Woods Institutions, to meet the challenges thrown up by the economic crisis as well as its management under the IMF programme.
The writer is a former member of the prime minister’s economic advisory council, and heads a macroeconomic consultancy based in Islamabad.
Published in Dawn, January 31st, 2020