No point in blaming the IMF – Part II

More from Dr Meekal Aziz Ahmed (NEWS)

A word about privatisation about which Mr Raza Rumi talks as through it was an unmitigated evil. Personally I have no strong views about privatisation but it is appropriate in some cases. Is there any reason why we steadfastly refuse to privatise PIA? None, except there won’t be jobs for the boys and all those freebees PIA staff, the defence ministry and the Civil Aviation Authority boys enjoy in those new slumber seats, bumping revenue passengers off the plane. Mr Rumi must have noticed that the first thing new governments do when they take power is to announce that PIA will not be privatised.

He resents the thought that the IMF will monitor the programme closely. Why shouldn’t it? The IMF does that everywhere with countries that use its resources, and in accordance with well-accepted procedures. They have a full-time resident representative office in Islamabad, established at our request and with our approval, and we are obliged to provide all data the IMF may need which is pertinent to monitoring the performance of the adjustment programme.

Let me mention a point with which I completely agree with him. This is with regard to open debate on the programme in the Senate and the National Assembly. I fully concur with this suggestion. Indeed, I would go further and suggest that the Letter of Intent that Pakistan signs with the IMF on the programme should be published in newspapers and talked about in the media, academia, and so forth. Shaukat Aziz published all programme documents under great protest when he realised there was no option and the IMF would not yield. This practice should be continued. But publication and open discussion will be strenuously avoided because the boys in the ministry of finance who, along with the State Bank, are the key players in the negotiations with the IMF, prefer to keep the programme under wraps, so that no one knows what has been agreed to and how much we may have compromised our room for economic manoeuvring. Worse still, the line ministries, on whose behalf policy commitments have been made, have no idea what is expected of them, because they were never consulted nor involved in programme negotiations. Nothing empowers the bureaucrat like secrets.

Conspicuous by its absence in his article is any mention by Mr Rumi of tax revenues. Since he thinks cutting spending is a bad thing, I would have thought he might concentrate on boosting tax revenues. I had hoped he would have vigorously argued the case for meaningful taxation on agriculture incomes, the stock market and the rich barons of real estate. I am sure he will agree that broadening the tax base to include sectors which are exempt and/or under-taxed might not be a bad idea and is, in fact, long overdue.

The fact that one million people out of one hundred and sixty five million in Pakistan don’t pay income tax might also deserve some critical scrutiny. Of those who do pay income tax, probably all, except government servants, under-file. We might have a look at that too.

Without such aggressive base-broadening, the hope of raising the tax/GDP ratio to 15 percent, as Mr Tareen says, will remain a pipe dream. The IMF will want, and has always wanted, Pakistan to tax all the sectors I have mentioned above in the interest of equity. They have always wanted Pakistan to get rid of all the concessions and exemptions we give to the rich and powerful. We, on our part, have and will continue to resist all of this fiercely, trotting out one lame excuse after another about “ground realities.”

The IMF should make an assessment of the likely yield from these revenue-enhancing measures. It should also quantify the cuts on the spending side, with no exceptions and no “holy cows.” The IMF should put this all together in an adjustment programme and make sure we collect these taxes and cut the spending we have promised. If the Pakistani authorities refuse, or are disinclined to proceed this way, the IMF should tell them there will be no bailout, and walk away. For once, the Pakistani government may be frightened into implementing serious fiscal reforms and stop pussyfooting around.

During programme implementation, if there are egregious, unsubstantiated revenue or spending deviations, the IMF should abandon the programme and go back to Washington, not keep resetting the targets and letting us off the hook. If the IMF plays tough, and does not back down, Pakistan will have no choice but to do the right thing. For too long it has been the other way round. The IMF has patiently listened to our long-winded explanations of why we cannot do the right thing, and has then backed down. This has to change.

How rapid should the adjustment be? This is an issue that worries Mr Rumi.

It is a fair question. Since we are dealing with economics and not a controlled experiment in physics, the pace of adjustment can only be a matter of judgment and careful consideration of what is doable. It stands to reason that a less steep downward trajectory of adjustment, which Mr Rumi would like to see, will take more time to correct our unsustainable imbalances and bring inflation down. It will simply prolong the agony of returning the economy to a more stable path.

A sharper adjustment would yield quicker results but will be more painful.

Finding the right balance between these two extremes involves a bit of fine-tuning and guesswork which economists are not very good at. They always seem to get it wrong but we can hope for the best.

Will all this adjustment affect growth and exacerbate unemployment and poverty? Of course it will. As usual, it is the poor, the unemployed and the impoverished who will suffer the most for the profligacy and irresponsibility of the rich. This is not something new. Yet, one can only hope the growth slowdown will be short-lived, the economy will quickly stabilise, and the conditions will be propitious for an economic upswing, supported by a cautious and judicious loosening of macroeconomic policies.

On the question of the short-term impact of adjustment on growth, let me mention one point that our policymakers don’t seem to get. Early and timely adjustment is always preferable and can be expected to have a mild impact on growth and employment. The longer you wait and the more serious the economic situation becomes, the more drastic the measures you need to take and the greater are the sacrifices in terms of growth. Is this so difficult to understand?

We have procrastinated for six months over whether we should have an adjustment programme or not, with or without the IMF, clinging to some misplaced notion of national pride and protecting our economic sovereignty.

Finally, a last point. Mr Rumi thinks wistfully of the Chinese, Iranian, and Saudi handout route so that we can stay away from the clutches of the IMF. He cannot be serious. No one is going to dish out money to Pakistan without some assurance that it will be spent well and within the framework of some sort of economic reform programme. I think we need to put this flawed idea to rest which has been such a letdown and caused us great embarrassment.

Let me conclude by saying that I have argued for three decades in government service and in the IMF that Pakistan should make its own adjustment programme and present it to the IMF for financing. It should be our programme. In truth, we have never done this, except superficially, and I cannot understand why.

I suspect it is a combination of laziness, not caring, and technical incompetence. After all, our best and brightest economists, sadly, stay away from government.

(Concluded)

The writer has a doctorate from Oxford University and has worked at the Planning Commission and the IMF




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