AS much as through good fortune as deft economic policymaking, a rare window of opportunity has presented itself to finally move the economy out of prolonged stagnation and onto a much-needed higher growth path. There is no guarantee that it will be sustainable — for political courage is needed to carry out the accompanying deep-rooted structural reforms — but the revival of growth will make these reforms much more palatable.
To appreciate this opportunity, it is important to realise that, throughout our economic history, the binding constraint on economic growth has been an unsustainable current account deficit, which has bought to an early end any growth spurt the economy has witnessed, especially over the last three decades. In the resulting recurring stop-go cycles, periods of little or no growth have grown longer and spurts of growth correspondingly shorter.
Another important reason for the prolonged stagnation has been Pakistan’s on-again-off-again relationship with the IMF. This has generated a lack of overall trust among foreign and domestic investors and multilateral donors. Abandoning programmes halfway (and sometimes soon after they were started) has given the country a reputation of shying away from difficult economic decisions and needed reforms, and of reverting to populist policies once a semblance of economic stability emerges. They look to the IMF being on board, therefore, as a guarantee that the necessary economic policies are on track.
Two developments have taken place — one pleasant and the other less so for some — that provide us with the necessary conditions to overcome both these binding constraints.
How do we ensure growth revival built on a sustainable, efficient and stable foundation?
The first is the turnaround in the current account, which has narrowed over the last 18 months and now shows distinct signs of remaining in an affordable range. This has resulted primarily from a steep devaluation, the extent of which I have disagreed consistently with, although it has paid off, the proof being that the currency has appreciated in recent weeks after having fallen to an all-time low. The other has been remittances, which have risen significantly despite all projections to the contrary. This has been attributed to a shift in remittances that were sent through unofficial channels now being sent through official ones due to the travel restrictions imposed by Covid-19.
The second is the revival of the IMF’s $6 billion three-year programme that has been in abeyance for almost a year. This has set alarm bells ringing, with many fearing the worst as prices of public utilities (fuel and power) will rise as subsidies are reduced, thus further burdening lower-income groups. The generous concessions to exporters and the manufacturing and construction sectors may also come to a sudden halt.
Yet one must not underestimate, in this period of considerable economic uncertainty, that being under IMF tutelage and support offers considerable advantages, including the capacity to attract foreign investors and bolstering overall business confidence. Also, with large repayments due on our mounting debts, the necessary borrowing from international markets will be available at much lower interest rates as well as the additional $1bn to $1.5bn of support from the IMF itself which should become available over the rest of the year.
But won’t the revival of the IMF programme and its accompanying conditionalities kill off any hope of an economic growth revival that the healthy current account situation offers? Yes, it could happen but, I hasten to add, only in a situation similar to pre-Covid-19 times. The IMF is far more sensitive to the economic havoc caused by Covid-19 and the dire necessity of rekindling growth, especially in developing countries where millions have been thrown into joblessness and fallen into extreme poverty and malnutrition, besides the very large numbers that have sadly died of the disease.
The Pakistani economic team that has negotiated the revival of the IMF programme is also fully aware of the adverse economic and political costs of reigniting severe stagflation. It would surely have ensured that the signed conditionalities do not trigger such an outcome. Here, it will be important to ensure that the forces that have ignited this growth revival and which will fuel this growth further, are not dampened.
How then do we ensure growth revival built on a sustainable, efficient and stable foundation?
First, we must avoid any abrupt changes in the current fiscal and monetary policy regime, including the somewhat over-generous concessions to our manufacturing and construction sectors. In this crunch, under no circumstances should the incentives offered to exports be withdrawn at least for another 12–18 months, even if they are gradually taken away from the construction sector. At the same time, we must remain flexible enough to adjust the policy mix to ensure that the current account deficit does not widen.
Second, while the overall reforms need to be across the board to revive investment and improve competitiveness, given our lack of capacity we must prioritise our economic reforms programme and concentrate on two or three areas that will yield the highest return: generating more revenues, curtailing the circular debt (which will entail hardship), and taking some hard decisions to stop public-sector enterprises from haemorrhaging.
Third, we must concentrate our remaining limited resources on boosting agricultural productivity, including bringing the private sector into agricultural research, especially in developing new seeds for our major crops.
Finally, this government has done more than any previous dispensation in providing direct support to the poor through the Ehsaas Programme. It must now deliver on its promises to provide the poor with new and liveable housing. Here, a switch to improving their existing dwellings could provide quick dividends through innovative schemes and loan guarantees.
This may be a chance for the current finance minister to undo the perception that ‘Pakistan never misses an opportunity — to miss an opportunity’.
The writer is a professor at the Lahore School of Economics and former vice chancellor of the Pakistan Institute of Development Economics.
Published in Dawn, March 5th, 2021