WEB DESK: Is the leopard changing its spots? When some IMF wall ahs referred to us as a one-tranche country it was more than a jocular aside.
In none of the nine IMF interventions between 1988 and 1999we played out the innings. The more recent experience, however, seems to buck the trend. Since the 2000 Stand-By Arrangement, heavily spiced with prior actions and performance criteria, we have welcomed the IMF three times and at least twice it ended with both sides garlanding each other.
Or have we got into a platonic relationship with the IMF, with the lovers bearing the pangs of separation only to reunite, when all is forgiven and you start all over again? Like vines twisted together, since 1988 we have been out of the Fund’s embrace but only briefly.
Or is it in the design of IMF interventions: to cure the symptoms but never the disease; perpetuate the dependence? One would have imagined that all these ennobling epithets – structural adjustment, stand-by, extended facilities – meant medication was working and no further visits to the doctor required.
Or is it politics trumping economics? There is a clear pattern: reach out to the IMF when in trouble and return to political profligacy when out of it. Besides the chronic political instability of the times, both Benazir Bhutto and Nawaz Sharif bucked because of the perceived political cost. Musharraf hastened the exit, choosing not to withdraw the last two instalments, in the name of regained ‘economic sovereignty’, because politics was heating up. With the final review of the current facility done and the last tranche released where do we go from here?
IMF by definition is a bitter pill. Nurtured on the Washington consensus of liberalisation, privatization, and deregulation, it demands belt tightening and structural reforms. Both go against the political grain, more so when it is not a particularly smooth sailing and the electoral clouds are gathering.
Will the government largely follow the path charted out by the Fund, or exploit the space to buttress its political fortress?
One has to give it to the Accountant. Against all odds, and undeterred by the armada of criticism – some for the sake of it – as well as the unhappiness of some of his cabinet colleagues, he remained resolute in steering the economic ship with a vision that seems to have paid dividends.
On the fiscal side, expenditure has been largely controlled, especially subsidies, and to an extent the burden of the loss-making state-owned enterprises. With the impressive revenue growth weighing in, he has been able to contain the budgetary deficit to more than a reasonable extent.
Monetary Policy has been steady. Inflation at record lows allowed SBP to reduce interest rates to levels that should tempt investors.
He has a lot to show for the external sector as well. State Bank’s liquid reserves are at an all time high, with comfortable import coverage. The current account deficit is at manageable levels, and the exchange rate has remained stable. The default fears of four years ago have evaporated. But in success often lie the seeds of failure.
On the fiscal side debt servicing is likely to remain the sword of Damocles slashing away at the savings from roll back of subsidies and tight expenditure controls. Privatization looks stalled, and partial off loading of government equity will not be enough. Withholding and consumption taxes have run their course and the remaining tax exemptions are now like crumbs on the table. Further growth in revenues would require a gigantic effort (necessarily focused on direct taxes) and robust GDP growth. The former looks politically unpalatable; the latter would require a substantial fiscal stimulus for which there is no money. With only one budget to go before the scheduled elections is more borrowings – to meet political aspirations and manage respectable growth – written on the wall?
On the external front the bailout capacity of Remittances looks challenged. They are likely to plateau out if not decline. Prospects of higher development assistance flows don’t look rosy. More commercial loans will be like playing with fire. The only cost-effective way out is Exports and Foreign Direct Investment. For neither any serious spadework appears to be in sight.
The elephant in the room is growth, to create jobs and get votes. And we are not talking about growth over the longer-term but between now and the elections. Conventional wisdom tells us growth follows macroeconomic stability. The IMF has dutifully certified us; but there is a caveat: stability can be lost much faster than it is gained if you go off the straight and narrow. So how do we achieve growth without abandoning fiscal discipline?
Agriculture is unlikely to create any new direct jobs, even if it rebounds; Services should not – already its disproportionately high share is out of sync with our dismal literacy rate and impoverished infrastructure. The CPEC will take time to brew. It is the construction and manufacturing sectors, both with high job elasticity, that hold the key. But property tax issues and our low savings and investment rates cast a shadow.
So how will the Accountant pull it off? How will he satisfy competing demands? Political compulsions advise against tight fistedness as well as reforms that could hurt the power brokers. Growth too would require a loosening of the purse strings. Fiscal latitude, however, will exact a high price in terms of macroeconomic balances, and force more borrowings. If the government borrows more there is that much less left for the private sector, which you are counting on to produce the growth numbers. The resultant ‘non-creation’ of jobs feeds into political compulsions and the greater debt burden into balancing the budget!
Some vicious circle! The Accountant has several things going for him. He means business. He has a flair for bringing opposites together. He has the experience and the skills, and lady luck seems to be fond of him. But going into the elections, with an economy that is still ‘work in progress’, will put him to his severest test yet, with many whispering the magic of Keynesian fiscal multiplier that we hope he pays no heed to.
The Accountant has missed no pulpit to declaim his ‘Charter of Economy’ from. Will he now walk his talk and not sacrifice the economy at the political altar?