EDITORIAL (August 20 2008): Mohsin Khan, International Monetary Fund's (IMF) Director for the Middle East and Central Asia categorically denied that Pakistan had requested any loan from the IMF. He added that Pakistan would not require IMF assistance in the next 10 months, or till the end of the current fiscal year, with two provisos: the government must succeed in slashing expenditure, inclusive of subsidies on oil and products, and accesses other sources of funding to offset falling reserves.
This advice conforms to basic tenets of economic theory: a sustainable budget deficit and adequate foreign exchange reserves are critical to cauterising weak macroeconomic fundamentals, like a falling external rupee value, rising rate of inflation, and promoting investment, both foreign and domestic, in an effort to increase productivity and propel the Gross Domestic Product growth.
The question, however, is whether this is doable. Can the government, for example, slash expenditure and generate other sources of funding to strengthen its reserves position? Slashing expenditure, especially on subsidies, constitutes one of the most unpopular decisions that can be undertaken by an elected government, especially given the inflationary pressures that have forced many of our low income earners to a below subsistence level income. This, in turn, has led to a rise in the number of suicides as well as a rise in the number of parents leaving their children on the doorstep of charities etc.
Be that as it may, the government has reduced subsidies on oil and products and even though there is general anger against the decision of the government to continue to increase the price of oil and products in spite of the rather significant decline in the international price of oil, the fact remains that from the point of view of economic policy focused on reducing inflation this is a bitter pill that the people of this country will have to swallow for some time to come. To neutralise the effect of rising oil prices on the very poor the government has decided to extend subsidies to those living below the subsistence level through the issuance of Benazir cards and food stamps that would provide some support to them in their effort to make ends meet. Targeted subsidies are always to be supported over and above general subsidies like an across the board subsidy on the price of oil.
With respect to Mohsin Khan's statement about the need to access sources of funding that would offset falling foreign exchange reserves, the recent statement by Naveed Qamar, the Finance Minister, is significant. He stated that Pakistan was expecting around 3.5 billion dollars by the end of September out of which one billion dollars would be released by international financial institutions (IFIs), a fact reconfirmed by Mohsin Khan, and the remaining 2.5 billion dollars from remittances.
The State Bank of Pakistan reported that total remittances received (July-April) 2007 were $5.3 billion - an increase of $868.96 million over the corresponding period last year; and if this trend continued remittances would rise by $5.8 billion by the end of June 2008. However if the 2007-08 trend continues till the end of September 2008 then the remittance income would be around 1.4 billion dollars by the end of September and not the extremely optimistic figure quoted by the Finance Minister of 2.5 billion dollars. Nonetheless even the 2.45 billion dollars by end of September from the IFIs as well as remittance income will provide significant support to our foreign exchange reserves.
An eroding rupee has dramatically raised the government's foreign debt servicing payment and that of course will increase the pressure on expenditure. For Mohsin Khan to state that the rupee should be allowed to settle at its true market value maybe sound like an advice for a country that is in the throes of a downward business cycle rather than one which has weak macroeconomic fundamentals all around.
This is attributed to the rape of the economy because of heavy subsidies and corruption of the former government but also the National Reconciliation Ordinance that has resulted in the de-freezing of accounts with the departure of billions of dollars from the country's banking system. One would hope therefore that the Pakistan government would formulate its own prescriptions instead of relying on the standard normal ones proposed by IMF that have generated controversy in other countries. For this, it is required to think out of the box and a complete change of economic managers/advisors is required.
