Stabilisation, default and autarky

Published May 27, 2022
The writer is a former deputy governor of the State Bank of Pakistan.
The writer is a former deputy governor of the State Bank of Pakistan.

ARE there common elements in the three seemingly disparate situations mentioned in the title of this piece? Perplexingly, yes. Take autarky first. This is a nationalist concept of an ideal, fully self-sufficient country that consumes what it produces; without any imports, exports, foreign investment or indebtedness. Autarky lies at the opposite extreme of free international trade and finance. No country fits this Robinson Crusoe picture of the economy today.

Even North Korea, the most isolated country, has extensive trade relations with a few countries, including Russia, China, and India. As there are gains from trade between individuals as well as nations, economic arguments for autarky are weak. A nation, however, must strike a balance between dependency and autarky in light of its domestic and geopolitical situation.

Are we as a nation self-sufficient, or dependent on outsiders? This may seem like an absurd question, given our elevated levels of imports and indebtedness. We are a big nation, and our politicians sometimes invoke (in their speeches, but rarely through actions) the need to move towards autarky to lessen dependency on foreign institutions.

What kind of pol­icy actions are needed to reduce dependency? Most of these actions lie, ironically, in the macroeconomic stabilisation that is derided by them. Stabili­sa­tion policies help a country move towards greater self-sufficiency by tightening financial belts and reducing trade, fiscal and other deficits, thus paving the way for lowering debt in relation to the economy’s size. So, stabilisation is a move towards autarky, whether it is under a home-grown or IMF programme.

Stabilisation programmes driven by the IMF are governed through the Articles of Agreement. According to Article I (v), one goal of the Fund is: “To give confidence to members by making the general resources of the Fund temporarily available to them under adequate safeguards, thus providing them with opportunity to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity”. This means IMF lends temporarily under adequate safeguards. Safeguards demanded by a lender are to ensure that it will get its resources back on time, and other objectives of lending will be met. This is one reason why IMF programmes are labelled as very rigid — because their flexibility is constrained by the needed safeguards. Although this approach cannot be termed irrational, it remains problematic.

Take the recent case of Sri Lanka, which last month announced a default on its external debt pending an IMF rescue. A week later, the IMF tweeted, “The IMF and a Sri Lankan delegation held initial technical discussions on a possible IMF-supported programme. Rapid progress in restoring debt sustainability would allow for deeper Fund engagement and reduce the hardship faced by the people of Sri Lanka.”

It indicated that initial talks could not ensure adequate safeguards needed by the IMF to provide its resources. This sounded like the IMF’s objective had failed. The objective is stated in Article I (v) — providing Sri Lanka “with opportunity to correct maladjustments in [its] balance of payments without resorting to measures destructive of national or international prosperity”.

This failure has resulted in the destruction not only of Sri Lanka’s prosperity but also a political crisis that has led to bloodshed.

If our authorities keep believing that our economic and financial condition is not as bad as Sri Lanka’s, then their inaction is likely to prove risky.

The Sri Lankan authorities could not undertake tough stabilisation measures despite the IMF Executive Board’s assessment in March 2022 that “… the country faces mounting challenges, including public debt that has risen to unsustainable levels, low international reserves, and persistently large financing needs in the coming years”. Sri Lanka is going through extreme stabilisation imposed by default. With the beginning of the default and till the time Sri Lanka secures financing, it will be forced to tighten its belt to a punishing extent. In hindsight it appears that Sri Lanka would have been better off accepting IMF conditions, because by not doing so, it is undergoing far harsher conditions imposed by default. During this period, Sri Lanka has been compelled to move towards less dependency but at an exorbitant cost that includes the loss of many lives. Default does unleash forces leading to nationalistic objectives of achieving a little more self-sufficiency, but at the cost of extreme national distress. It is, therefore, often said that ‘default is not an option’.

Default was not an option for Sri Lanka. But when debt starts becoming unsustainable, it automatically becomes the only option. Are we learning any lesson from Sri Lanka’s experience? If our authorities keep believing that our economic and financial condition is not as bad as Sri Lanka’s, then their inaction is likely to prove risky, both politically and financially. No government would want to preside over a default. Default is an extremely bitter pill to swallow. It is, therefore, better to take a less bitter pill by voluntarily imposing fiscal consolidation and to move incrementally towards self-sufficiency. Debt dependency, unfortunately, requires debt sustainability or its continuity. Debt shackles are not easy to break. Doing so requires long-term patience as we gradually reduce our aggregate consumption in relation to the size of our economy and increase our savings and investment.

Pakistan’s total debt and liabilities to GDP ratio declined from 93.8 per cent in June 2020 to 86.2pc in June 2021. Due to this improvement, the February 2022 IMF Staff Report for Pakistan found its public debt to be sustainable. It, however, highlighted “the risks to debt sustainability from delayed implementation of fiscal and structural reforms and from the continuation of low growth”. A new assessment of sustainability will depend on the updated debt figures (not yet available), FY22 GDP (which has so far grown by 6pc) and the government’s ability to secure financing from IMF, friendly countries, and multilateral institutions.

All this is still possible if the government takes difficult measures that it has so far avoided. Who is going to implement tough fiscal tightening? Will this job be left to an interim set-up? A rapid incremental move towards self-sufficiency is still possible irrespective of whoever implements the stabilising measures. Confused signals are, unfortunately, coming from various voices in government. Import-banning gimmicks won’t consolidate the fiscal position. Time is of the essence where taking decisions is concerned. Sri Lanka sadly missed the opportunity. Are we ready?

The writer is a former deputy governor of the State Bank of Pakistan.

rriazuddin@gmail.com

Published in Dawn, May 27th, 2022

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