Pakistan’s IMF experience

In my long experience of electoral politics, there are few instances when I found the voters more consumed by gloom as they are now, their hope in the future sapped. For their economic loss, they blame the minority at the top who make all the decisions, with outside advice. Our troubles though are not of the IMF’s making. They are the outcome of political choice.

No one envies the government’s job of tackling the hard economic conditions. It is a test for the most astute and daring – and they are trying. We are in a period of adjustment. Inevitably that leaves many people upset.

Yet, adjustment must come with the promise of a better future. For over a decade, the government of Pakistan’s economic policy has impoverished the people, hollowed industry and stalled agriculture. The people, especially the youth, have lost hope. We can no longer ignore the possible threat to social stability.

In the six IMF deals since 2000, the government has focused on stability but not on increasing private investment or job creation. Usually, adjustment programmes aim for both.

As a result, with Pakistan in and out of IMF programmes, growth rates have been flat or negative. There is a high budget deficit, low exports and a lack of jobs for the youth. Saving and investment are down. Credit to the private sector has fallen sharply. Pakistan has produced no new product for export and going up the value chain is an unrealistic hope. In fact, our main exports are still what they were two decades ago. Agriculture saw a good year, on a low base after the floods, but it has seen ten years of decline. Struggling industries are closing down.

High cost of capital, power and other services inhibit private activity. Firms continue to deal with the barriers posed by poor governance. IT offers hope, but it is still small. The sector needs more public investment for quality training and infrastructure.

The biggest concern is that debt levels, especially foreign debt, have spiraled. Gross public debt is 75 per cent of GDP. Total foreign debt is 43 per cent of GDP. We are in a debt trap, borrowing to pay past debt. In fiscal 23, foreign debt servicing, interest and principal, was $20 billion, 63 per cent of total exports and 5.5 per cent of GDP. That year, we paid foreign creditors $4.4 billion in interest alone.

In FY24, the government will pay an astounding sum of over Rs7 trillion in interest to creditors at home and abroad. The amount is over 50 per cent of total federal expense and may end up being more than the net revenue. There is nothing left to spend on human resource or infrastructure. Experts call for urgent debt management to exit the dead end in which we have landed.

Despite the high debt stock, infrastructure services are way short of IT or the industry’s need to boost productivity. Nor is there a fall in poverty or progress in social indicators. This is an economic policy designed to fail. With no lessons drawn, the expressed intent is to do more of the same. Each year debt servicing needs will become higher. No amount of tax measures would help. It is like a dog chasing its tail.

The government’s illusory hope that taxes would help avoid the IMF in the future is a pipedream. The only way to avoid more of the IMF is growth in GDP and exports. The only path present policies guarantee is one of more poverty and low GDP.

Of course, fiscal stability is important. Any prudent leadership would want that, even without outside prompting. The government though takes the most inept route. It cuts growth-inducing spending and splurges on non-productive interest and subsidies. That is why we are forever stuck at the fiscal stability stage and do not transit to growth. And so, before one IMF programme ends, the government of Pakistan begins to prepare for the next one.

The economy does not produce enough to repay loans. So, we borrow more. It is a drain on the economy when tax money that could improve lives or increase investment goes to creditors at home or abroad.

There is a method to this sorry tale. Decision-makers prefer not to disturb the free ride enjoyed by some in the economy. They would rather pile debt on debt and pass the burden of staying afloat on those without a political voice. We are knowingly in a vicious cycle of debt and taxes that gets worse each year.

There is no evidence of any change in policy or habit. We still plan to borrow and tax more. There is not enough stress on investment and export. Also, fiscal profligacy continues. In between two IMF programmes, the government got a huge supplementary grant for security needs and to pay subsidies to IPPs. Can such whims and fancy allow the economy to improve?

Structural adjustments have pros and cons. The government has made that discussion superfluous. Its execution in our hands means adjustment for most and largesse for a few.

There is a limit to this strategy. For a nuclear weapons country to amass so much debt is risky and unviable. The time for real reforms is now. It cannot wait.

The government must have a growth strategy with the IMF programme its one part. In the government’s narrative, the IMF programme is an end in itself. There is no known plan for paying back the debt.

Rather than the erratic execution of structural reforms, our economy needs structural transformation. The latter is a long-term plan for step-by-step industrialization. Under it, the economy would produce more goods and services for export by slowly going up the value chain.

The SIFC is the best institution for formulating and executing a parallel growth strategy by bringing all stakeholders on board. During a period of adjustment, the government’s space for action is small. Yet, we cannot allow another three or more years of a slow economy. The danger of social instability is too high.

There are essential steps the government must take. It must limit spending. Go for debt management to lower interests, revisit power policy to control subsidy, reduce DISCO losses and privatize PSEs. These steps could free up Rs1 trillion or more yearly to offer well-considered incentives to the private sector. Part money must also go to HR, R&D and infrastructure.

The government must make the tax burden fair and not allow a free ride to any group. Provinces need to also increase their revenue.

The government has done well to control imports. The test is to do so while not letting total demand drop. Within the economy’s wiggle room, the government must improve conditions for private industry. Access to capital is critical. We must revive DFIs. There should be deep and broad consultation with the private sector to decide on incentives for them.

Also, there is a need to vitalize SMEs in cities and villages. They do not need much capital, energy and technology. SMEs increase the income levels of small entrepreneurs and workers, which increases demand in the economy for goods produced at home by other industries.

Our leaders seem out of ideas. Rather than echo the tired old mantra of foreign experts, we expect original ideas and bold efforts from them. Their failure is not just of economic policy but of politics and courage. It is their inability to imagine a progressive self-respecting society.

The writer is chair and CEO,

Institute for Policy Reforms. He has a long record of public service.