Sway of the national consensus
The oft-repeated calls for evolving a charter of economy may not have been heeded to by those who matter, but national consensus has surfaced on the need to moderate the stipulated reforms agreed with the International Monetary Fund (IMF) because of the pain it has inflicted on businesses and citizens alike. The consensus has been reached not by a formal agreement but by independent voices converging on a single demand.
The whole lot of politicians across the political divide, independent economists, the business community and the PTI’s top political leadership want a breathing space to revive economic activities and save the common citizens from galloping inflation, rising poverty and surging joblessness.
Perhaps, more worrying is the observation of a former federal finance secretary: “the very structure of the Fund’s programme envisages no economic growth in the next three years.” Notwithstanding the notable progress in implementing the stabilisation programme, many see the outlook for economic growth as hazy.
Even those who share the objectives of the programme do not agree with the way it is being carried out. Strange as it may sound, not a single leading independent economist in the country has supported the front-loaded IMF stabilisation agenda. For example, no one has bought the idea that tax revenues could be raised by the budgeted 45 per cent in one year when the highest ever annual increase in the past was recorded at 21pc.
Not a single leading independent economist in the country has supported the front-loaded IMF stabilisation agenda
A good programme or policy is one that can stand the test of practical applicability. And political capital, as well as political will, is required to assume strong ownership of the difficult reforms and implement them effectively. Even the IMF has been keen that the PTI-government seeks consensus on the reforms agenda, particularly for required legislations.
According to the IMF mission leader, Pakistan has made considerable progress in its programme for the past 18 months ending December 2019. These encouraging words also indicate that the final agreement on targets for the next few months, which, according to the IMF mission chief, remained elusive in talks between the two sides in Islamabad, are likely to be settled soon. The head of the mission, however, cautioned that only steadfast progress on programme implementation will pave the way for the IMF Executive Board’s consideration of its review.
The media reports suggested that IMF staff was not comfortable with the Federal Board of Revenue’s (FBR) proposal to lower tax revenue targets and the government’s decision to freeze energy prices. Some unconfirmed reports suggest that the mission is reported to have agreed to reduce by 11pc the budgeted estimates to a target of Rs4,900 billion. That is Rs200bn more than the FBR’s proposal of a 15pc cut.
Power secretary Irfan Ali informed the Senate Standing Committee on Power earlier this month that the government is now working on a plan for charging electricity to consumers at annualised average rates for 18 months. The IMF staff did not reject the proposed plan, he said, adding, that the mission was ready to discuss it further. Mr Ali also stressed that the increase in electricity charges was not a solution as it negatively impacts economic growth and consequently, energy consumption.
Prime Minister Imran Khan has directed concerned authorities to find ‘out of the box solution’ to cut gas and power tariffs. Under public and political pressure, the prime minister is also recently reported to have indicated to trade and industry representatives that interest rate would come down soon.
“The IMF chooses an easy way by prescribing high-interest rates rather than serious fiscal reforms,” says former State Bank Governor Dr Shamshad Akhtar. Talking to a journalist she further observed: the pace and sequence of stabilisation without adequate emphasis on growth hurts the prospects of sustainable recovery and development. “Stabilisation should come with growth-oriented policies so that lags are avoided.” And addressing a seminar, Macroeconomic Economic Insights CEO Sakib Sherani said the need for speed is self-defeating.
But the IMF has its own views. Keynote speaker at a seminar on “Managing Crises in Emerging Markets,” organised jointly by the State Bank of Pakistan and the Pakistan Business Council (PBC), IMF Deputy Director Athanasios Arvanitis said, there is no magic bullet for lifting emerging economies out of the balance of payments crisis. He argued that there is often a desire to delay the necessary adjustment, but delays make the crisis bigger, and reducing imbalances is difficult and carries an upfront cost.
However, the points of view of mainstream political parties and the IMF mission differ sharply. PML-N MNA Dr Aisha Ghouse Pasha informed newsmen that the parliamentarians told the visiting IMF staff that their prescriptions about the United Nations Sustainable Development Goals and trade improvement appeared genuine but impossible until Pakistan was under the IMF Extended Fund Facility.
The parliamentarians got no answers from the IMF staff when they took up the issue of rising inflation, following increasing gas and power rates, forcing more people in the poverty trap, PPP Senator Farooq H Naek, Chairman of the Senate Finance Committee, said. The Sensitive Price Index on a year-on-year basis went up by 16.38pc in the week ending February 13.
Presenting the views of a reforms-exhausted business community at the seminar at the State Bank, PBC’s Ehsan Malik highlighted the skewed tax burden on the manufacturing sector and the need to put in place a national tariff policy that prioritises the promotion of industrialisation in the country instead of revenue generation.
In fact, empirical records show that most countries which were successful in tackling fiscal deficits had focussed more on shedding the government’s fat rather than merely raising tax revenues. In Pakistan, there is much potential to cut federal government expenditure that includes transferring federal departments to budget surplus provincial governments as envisaged by the 18th Amendments, restructuring bleeding state enterprises, privatisation, and eliminating circular debts. But for some improvements in reducing circular debts, no noticeable progress has been made to stop this drain of taxpayers’ money.
Observing that stabilisation is still very vulnerable and that it is not clear when various government reforms will start bearing fruits, Dr Akhtar says it is early to say when economic growth will appear on the horizon.
Published in Dawn, The Business and Finance Weekly, February 24th, 2020