Tuesday, November 04, 2008
LAHORE: Pakistan is paying the price for bad governance allowing the International Monetary Fund and donor agencies to impose harsh conditions as its regulatory institutions are weak and corrupt.
Economists say IMF or donor assistance would simply help Pakistan meet its immediate liabilities to its creditors. However, the yawning trade gap is a matter of greater concern for both its economic managers and donor agencies.
The News has learnt they differ on the approach to controlling increasing imports. IMF wants a cut in imports through further depreciation of the rupee which would make imports and smuggling more costly. On the other side, Pakistans economic wizards want to restrict imports by increasing import duty and imposing other conditions like opening of letter of credit on 100 per cent cash margin. However, these measures may not impact import of luxury cars as the rich class of the society will buy the vehicles at any price.
These steps may curb import of smaller smuggling-prone items like cosmetics, food products and milk preparation. But regulatory authorities had failed to check smuggling in the past. Donor agencies think that it would be more appropriate to discourage smuggling through rupee depreciation which would take these products out of the reach of people. Experts of World Bank and other donor agencies are discussing currency depreciation with local businessmen privately.
They point out that a big cut in rupees value would bring back competitiveness of local products and would boost exports. The countrys exports have risen even in the current economic downturn because of a fall of the rupee. However, the impact on imports is not significant due to the appetite of domestic consumers.
Local economic managers would have to fight on two fronts. First, they would have to raise the governance level and second they would have to check consumerism and promote savings.
In the interim period, the economists say the government would have to toe the IMF line to put an immediate halt to excessive consumption and imports till governance vastly improves. In a poor country like Pakistan, they point out, domestic demand is no substitute for the liberal global market. Pakistan has the lowest savings rate of 13.9 per cent in the region which forces it to seek investment from outside.
Its home market is small and relatively inelastic as elite classes usually do not like what the home producers make and prefer imported stuff.They point out that all successful economies promote domestic savings by making their financial systems unwilling to extend consumer credit. By doing so, they force their citizens to save.
Senior economist Naveed Anwar Khan says in order to encourage savings prudent economic managers tackle high and unpredictable inflation, which redistributes wealth from savers to debtors and discourages people from holding financial assets. Citizens, he adds, must forgo consumption today in return for higher standards of living tomorrow.
This bargain will be accepted only if the countrys policy-makers float a credible vision of the future and a strategy for getting there. But unfortunately, he says, the current economic team is yet to spell out its economic strategy.
He says the IMFs recipe of a weaker rupee would trigger inflation and to control this it has advised further increase in discount rate. The economic managers, he suggests, should not fear for a high budget deficit in the short term as long as they remain fiscally responsible.
All they have to do is to ensure that public debt does not get out of hand, by ensuring that the economy grows faster than the stock of public liabilities. Growth, he says, is more than economics, it requires committed, credible and capable governments.
