After World War II, economists and politicians created the International Monetary Fund (IMF) to help keep the international financial system stable. From the outset, the Fund's specific roles were to promote balanced growth of international trade, provide funding to countries in economic distress, and safeguard income levels necessary for people to purchase essential goods and services.
The IMF provides credit to countries facing a balance of payment (BoP) crisis. Under a stand-by arrangement, an IMF member country is provided a specified amount during a given period, usually in tranches, subject to the borrower's compliance with performance criteria and other conditions embodied in the agreement.
Typically, IMF conditionality regime stipulates reducing fiscal deficit, devaluation of the domestic currency, a flexible exchange rate, liberalisation of trade and investment regime, privatisation of state-owned enterprises, tightening of the monetary policy and overall de-regulation of the economy. These targets not only lack a sound economic basis but prompted cutbacks in public spending on health, education, and other vital services that poor and vulnerable populations rely on governments to provide.
It does not really matter what the intentions of the IMF are. The fact is that the Fund is not a charity institution. Regardless of its noble claims of strengthening countries, it is at the end an institution working in its own interests, and one should not be naive enough to either deny or criticise that. The loans may be meant to stir up the economy, but history has shown us the failures of this policy.
One cannot blame the IMF for the Pakistan government's own ineffectiveness. Borrowing to develop, and then borrowing again to finance the previous borrowing, is a policy that can now be called a failure, as we have no development, but only borrowing bills to show for it.
There is only one reason for Pakistan's failed policies, be it related to development, trade or investment and that is over reliance on external sources of financing. In a globalise world, transactions with other countries are a compulsion. External Finance has been a major constituent in development. No doubts there. However, Pakistan has been over enthusiastic about it. It cannot be the sole mode of survival.
Pakistan needs to survive on its own, and then use the best economics has to offer to interact with the rest of the world. External finance should be an opportunity for growth, not a necessity for survival.
THROUGH THIS ARTICLE I WANT TO SUGGEST A FEW THINGS: One of the aspects which needs to be focus is defaulting. Pakistan owes its foreign debt to a trade deficit, foreign commercial banks, international bonds and the IFIs. The worst that can happen if there is default on the foreign commercial banks and International bonds is that Pakistan loses credit worthiness and the foreign banks don't want to have anything to do with it.
It loses all confidence in the International Bond market. If the local currency depreciates due to the flight of capital, it may cause cost pushed inflation as the prices of imports rise. However, the inflationary control measures taken through the tight monetary policy by the central bank will to a great extent offset this. The one advantage: it saves Pakistan from the IMF.
The price seems big, but compared to the other costs, it's the minimum. The world recession already means decreasing investment globally. The instability and insecurity means bailing out investment, no matter what rate of interest you offer, because no investor wants to invest where there is risk to property. The investment in the past few years was mostly on FMCGs {Fast Moving Consumer Goods} so it cannot be used for sustenance.
Pakistan can compensate for the loss in growth by simply building ie encouraging saving, discouraging expenditure and supporting private investment. Despite the credit trustworthiness issue, local investors may still be persuaded with subsidies, tax incentives and support schemes. Foreign investment is important in a global world, but if letting go of it means relief from the IMF, it's the lesser bitter pill to take.
Trade is also an important aspect to be addressed. There is a trade deficit of $3.522 billion (FY08). Unfortunately that would have to be paid. Pakistan needs to curtail its imports, but for the current period, it cannot afford to do this. Oil, machinery, iron and steel remain the biggest imports. Pakistan is dependent on its imports and, therefore, cannot endanger the supply, or raise their prices.
If Pakistan is ready to lose out on investment, it would need to have the trade door still open for it to interact with the rest of the world. Current account default would be a trade suicide, one that cannot be afforded under any circumstances. How it is done with no foreign exchange reserves is a bigger challenge. Go for bilateral funding, use up money from the domestic debt, and take out whatever Pakistan can from wherever it can to finance the deficit.
In May 1998 the government had gone to the extent of freezing the foreign currency accounts. Even if such dire action cannot be called for, at least some action needs to be taken to make this a priority. The trade deficit could be decreased by: increase in exports and decrease in imports. Pakistan's current major exports include cotton, so measures should be taken to increase the quality and yield, but it cannot be done because fertilisers are imported from Morocco.
More sports goods or leather items cannot be exported either, because the machinery comes from China, and Pakistan cannot make its own capital goods because the iron and steel has to be bought from Japan. So the only way to increase exports is to also increase imports, as all the raw materials for exports are imported. Decreasing the trade deficit is not that simple after all!
-- Pakistan will have to increase both the value and threshold of its exports. Its largest trading partner is the European Union, and United States is the single country to which it export the most. Therefore there is a dire need to increase the trade diversity (trade with more countries).
-- Pakistan's exports have been limited to a few items. Over the years it has faced immense competition from countries, including China, India, Korea, and Taiwan. Trade has grown for its rivals, but with hardly any effort to improve the quality or yield of its own exports, and has been left behind in the competition.
-- Investment should be made in Research and Development, focus should be on finished products instead of unfinished crude goods, brands should be introduced and exporters supported through reduced taxes, schemes etc.
-- The imports should be minimised. Oil, steel or iron are necessity but the latest cars, mobile phones and watches are not. A free hand should be taken to tax the luxury import items (it will help ease the fiscal deficit too). The Be Pakistani Buy Pakistani Scheme should be revisited. Another important aspect to be addressed is fiscal deficit. The ever-increasing fiscal debt causes further borrowing from the IFIs.
-- Instead of borrowing from the Central Bank; the Government should opt for direct public financing if it has to borrow. It does not have an adverse effect on interest rates and, therefore, investment. The monetary base is not affected by the deficit funding and therefore it does not cause inflation. Most importantly, it makes the Central Bank independent and does not dictate or affect the Monetary Policy. Borrowing from the Central Bank causes inflation.
-- The government expenditure should be reduced ie expenditure by the government (ministers in big cars, huge entourages, political dinners and functions at the Presidency) not the public spending. Given the political economy of Pakistan, if there are to be any drastic cuts in public spending, these have to be on subsidies or development expenditure.
The government has already eliminated oil subsidy and announced to phase out power subsidy by the end of the current fiscal year. The size of the public sector development programme will also be trimmed. Removal of oil and power subsidy and cuts in development spending will hit hardest the poor and low-income sections of society.
The rulers should bring back their deposits from foreign banks, cut their expenditures and also forego their stipend for the days they availed leaves. The fiscal deficit is a tragic 122 billion (FY08), the least that can be expected is a cut down on the Jiye Bhutto monuments. The common man should be empowered. Income disparity is one of the biggest problems. It is not enough to generate wealth, the effect has to trickle all the way down.
-- Agriculture sector should be developed as it remains the largest in the economy. While industrialisation, investment etc accumulate wealth for a certain class, agriculture benefits the common man. It is also the rare case where there is no reliance on imports for its development and a competitive advantage can be gained in its trade (this will also help with the current account deficit). Investment should be made in R&D to improve yield.
-- Investment should be made in cottage industries rather than waiting for the big factories to open up. Employment should be created for the common man and Vocational/technical training should be provided. Pakistan has plenty of labour, but it has to be trained to be more productive.
It will also affect export favourably. Development will not come about by distributing small amounts of cash as pocket money to the poor; it will come about by giving a man a job that allows him to improve his standard of living. Attempts should be made by the government to bring the people on board and create a sense of unity to face the economic challenges through schemes/campaigns.
-- Campaigns should be launched to achieve policy incentives. For example to encourage using public instead of private transport to save on fuel, buying local goods instead of imported one, saving more, conserving energy etc. The sense of alienation should be removed.
Imposing these policies is the only way for long term sustenance. Short term growth may be effected but compared to the conditions that accompany the IMF loan; it's a price worth paying. There is a need to cut down on defence budget and reduce the fiscal deficit. The increase in tax, including the GST, is all to be borne by the lower and middle classes, while the rich and elite enjoy a regressive taxation system.
The government wants to take the loan and bear the price in the short term, and then introduce development programs for growth purpose. The same strategy should be kept; only pay the price in terms of default in the capital market. Stop using the IMF as a ventilator every time external finance fails us. This should be turned into an opportunity to develop basic infrastructure, redistribute the wealth and put local resources to use.
