Discipline crucial
by
Javed Hafiz |
The International Mon-etary Fund (IMF) is all set to approve a $7.6 billion short-term loan for Pakistan. To tide over immediate liabilities, $3.2 billion will be provided soon and the rest over the next 23 months. The loan carries an interest rate of 3.51— 4.51 per cent and is to be repaid between 2011-16. IMF is the lender of last resort for the member- states. Most countries prefer bilateral or multilateral assistance outside the IMF framework as the later imposes strict conditions which may be politically difficult to carry out. For example, the IMF usually asks for doing away with the subsidies which, in most developing countries, is seen as an anti-poor measure. IMF also imposes strict monitoring to ensure that it gets back its funds. It was established after World War II, at the Bretton Woods conference, to offer balance of payment support to countries in dire need in order to ensure their macro economic stability.
In December, 2004 Prime Minister Shaukat Aziz declared that Pakistan had said good bye to the IMF programme. In 2006-07 Pakistan posted an economic growth rate of 7 per cent. In 2007, Pakistan received record volumes of direct foreign investment. In October 2007, its foreign exchange reserves stood at $16 billion which is now less than $7 billion. Last year, Pakistani stock exchanges were booming and now they are virtually closed. What accounts for this dramatic change? There are a number of factors leading to this sorry state of affairs and the foremost, in my opinion, is economic mismanagement by the present government. Is it the beginning of an economic meltdown of Pakistan? I do not think so.
Agriculture is still the mainstay of the Pakistani economy and economies with a strong agricultural base do not evaporate so easily. Even now the remittances from Pakistanis abroad are on the increase. Private sector credit has also not shown any decline in recent months. And export earnings, despite serious adverse factors like energy shortages, have not decreased. It is a very resilient economy. And now with a significant decline in oil and edible oil prices, the import bill this year will be much lower, improving the balance of payment position. In fact, there are clear signs that the worst may already be over for the Pakistani economy. Inflation has been effectively reduced in the last couple of months. Load-shedding is almost absent in bigger cities. But why was Pakistan obliged to go to the IMF?
A number of negative developments account for the sorry state of the economy in addition to the perennial habit of not cutting the coat according to the available size of cloth. This year, political considerations have taken precedence over economic management. What else explains the present size of the federal cabinet? The first federal cabinet, headed by Liaqat Ali Khan, was composed of six ministers. For reasons, the PPP leadership has not inspired popular confidence. Zardari’s return to Pakistan was based on the infamous NRO which gave amnesty to those facing serious corruption allegations. The judicial crisis has also not been fully resolved. A society that condones corruption and gives the impression of less than 100 per cent independent judiciary cannot attract much foreign investment. Suicide bombings and the poor law and order situation have made things worse. In this kind of a situation even friends of Pakistan are waiting for the financial discipline to be imposed by the IMF before they make solid commitments.
One thing good about the IMF package is that it will bring some kind of discipline to the improvident fiscal and monetary policies. For this they will position experts in Pakistan to monitor and guide. This discipline will inspire greater confidence in the friendly countries to come forward and help Pakistan. Talking of financial discipline, it has to be practiced by all, government and the citizens. The tax-GDP ratio in Pakistan is around 10 per cent, the lowest in Saarc region. In the mid 1990s, Khalid Ishaque, a prominent lawyer in Karachi, used to pay more income tax than all the parliamentarians of Pakistan put together. While the government earns less due to tax evasion, its expenditure has doubled in the last decade. The budget deficit now stands at an unacceptable 7 per cent. The IMF loan is not for free. Pakistan will have to pay an additional $2 billion between 2011-16 per annum to service this debt. But if this whopping sum could teach us financial discipline, I think it would be worth it.
On the negative side this arrangement is that it can introduce recession in the Pakistani economy. The State Bank has already increased the discount rate to 15 per cent. Who would like to do business with bank loans carrying 18-20 per cent interest rates? Short term inflation may have been roped in but long term inflation is a clear possibility due to higher costs of production. India went to the IMF in 1991, repaid the loan in a few years and never went back. This testifies to better financial discipline in India. There is no reason why Pakistan cannot learn and practice that discipline.
Javed Hafiz is a former Pakistani ambassador to the Sultanate
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