To IMF or not to IMF?

In its first six months, the Imran Khan government has been unable to resolve the question of whether to go or not to go to the IMF. All manner of laughable statements have come out of the economic leaders in the government and their advisers – “We don’t need to go to the IMF if we ban cheese”, “We can borrow our way out of our problems for our problems are only current financing”, “With Borrowing, the IMF will reduce any conditions.” These statements merely show the lack of understanding of the IMF in the government.

As always, the government has relied on amateur committees (read: talk shops) where people come for tea, and float in and out to consider this existential question. But the answer remains elusive.

So, let us clear the confusion.

Q1: Should we go to the IMF or not? The government should have gone immediately as it came to power. The reason is simple and lies in an understanding of the global architecture. The IMF by global consensus is the lender of last resort. Its blessings and certification are necessary for continuation of aid flows and retaining the confidence of international markets. If the situation were normal in Pakistan, such a certification would not be necessary. But with low and declining reserves, markets are jittery and hesitant to deal with Pakistan. Strong decisive action is necessary with or without the IMF. However, the reason for creating the lender of last resort was to calm jittery markets with an IMF certification.

The government should never have accepted the PML-N election budget. It should have been prepared when it came to power, and presented a full budget with IMF blessing in September or October with a clear message that an outgoing government has no right to present a budget and tie the hands of an incoming government. The two minibudgets and useless tinkering were unnecessary. Sadly, the government missed a chance to show decisive leadership.

Q2: But Mahatir did not go to the IMF? Indeed, he did not. Neither did he beg to put off reform. For anyone willing to examine the situation, he took the IMF medicine - exchange rate change, reducing deficits and undertaking reform – but refused to go to the IMF. He did all that was necessary to put Malaysia on track. Yes, his personal credibility and strong policy action kept the IMF away.

Q3: Friendly countries have come to help Pakistan and that will allow us to negotiate better with the IMF? The cold hard truth is that no country helps another without a return. We need to be clear what future liabilities we are creating to get these loans today. Apart from foreign policy and security commitments (which could be costly in the long run), we need to be aware that as announced these loans have to be returned next year.

The reason for going to the IMF is not to borrow money but to adopt a comprehensive set of policies to address the problem of declining reserves and widening deficits. Whoever designs a set of policies to deal with the ongoing haemorrhaging of the economy (the widening twin deficits and declining reserves) will have target a return to normalcy (manageable deficits and a build-up of reserves) in a reasonable timeframe of 3-5 years. Ultimately, the books must balance. Haemorrhaging can’t continue.

Markets watch arising problems and are eager to see a credible solution. Borrowing today to repay next year while problems persist is no solution. When anyone (IMF) prepares and adjustment programme, they will have to plan policies that will include repayments on these borrowings. Much more may need to be done if the situation worsens.

Q3: The IMF has not been the solution in the past. Will their policies not hurt Pakistan? Yes, Pakistan has been in an IMF programme repeatedly. Over 32 years in the last 40 years – and yet achieved no lasting solution to its deficit problem. Yes, IMF programmes have been expedient and unwilling to touch deeper structural issues. That is the IMF’s fault. But all our governments have also not been ready to take any tough decision. They have always been eager for begging rather than solving problems.

To date we have clung feverishly to the Raj – unwilling to tax agriculture, retaining colonial lifestyles including gifts from the exchequer without due process, maintaining subsidies for the rich, stripping all systems of merit, and allowing social, judicial and governance capital to depreciate. All commentators echo a sense of despondency with the government’s inability to develop a state and its policy.

All this has nothing to do with the IMF. These are secular trends that we and our governments have fostered. Unless we are able to develop a modern functioning state, economic policy will never be properly made.

The IMF or no donor or external friend can help us with putting our house in order. We have to build a modern state and a modern society that is responsible and ready to participate in the global economy of the 21st century. Without that, we will continue to bleed and require the IMF again and again.

Q4: So what would you suggest for economic policy? Negotiate a fund programme at the earliest to calm market perceptions of Pakistan. The fund wants a credible set of policies with a goal to reduce deficits in the fiscal and the current account and build up reserves. There are many ways to do this. Negotiating is about convincing the IMF that we have a set of policies that will get us to the goal in a short period of time – no more than three years.

Sadly, our economic ministries lack the capacity to do this, given that we have never prioritised thinking in our government and that the government hires no economists.

My own programme would be to develop a system where the exchange rate can never be overvalued by the whims of one man, no matter who. A policy for exchange rate management should be put in place that focuses on the build-up of reserves and not on losing reserves as in the past decades. Over a year, we should develop a serious tax policy reform to simplify taxes by removing withholding taxes and all presumptive taxes. Such reform would also remove all exemptions and get rid of the ability of the government to give exemptions. Taxes are for all, no exemptions. There should be four taxes only: i) income tax with progressivity; ii) corporate income tax in line with the rest of the world; iii) GST with a lower rate than the current – say eight percent but with careful implementation that widens its use and prevents avoidance; and iv) a sensible tariff system devoid of regulatory duties and large exemptions and penalties.

I would also propose a system which would eliminate subsidies except for those targeted toward the poor. The government should also stop all commodity procurement that ties up bank credit to the tune of Rs400 billion and provides budgetary subsidies to rich farmers. No more procurement prices.

We should commit to an independent public-sector expenditure review commission through a panel of local experts (no more than five) to review public-sector agencies and expenditure processes to curtail waste. Members of this commission would be paid and in office with staff and budget and with powers of inquiry and getting testimony.

The government should develop a power market with decentralised DISCOs and GENCOs that are managed and operated on a profit-making basis. Defined subsidies may be given but the circular debt will be eliminated through governance and metering reform. In three years, most prices will be market determined in the power market.

The PSEs will be combined as intended by the government but with an independent holding company. But then key here is going to be the extent of autonomy given and the kind of management that is put in there. Professional management with complete autonomy to restructure, liquidate and manage investments for yield and growth will be critical.

To be continued

The writer is former deputy chairman of the Planning

Commission.

Email: nhaque_imf@yahoo.com

Twitter: @nadeemhaque

Website: http://development20.blogs pot.com