The IMF’s sterile statement - Dr Muhammad Yaqub
On December 17, the Executive Board of the IMF concluded the 4th and 5th review together of the EFF arrangement and approved disbursement to Pakistan of two tranches of loan amounting to $1.05 billion. This amount is approximately equal to the repayments made by the PML-N government to the IMF in the last several months.
Those repayments had fallen due for a loan taken by the PPP-led government under a standby arrangement that enabled it to avoid a balance of payments crisis during its tenure without taking politically difficult economic reform measures.
The loan being taken by the PML-N government under the current EFF arrangement will have to be repaid by the next governments but enables the present finance minister to brag about building up foreign exchange reserves, and make claims that it reflects sound economic management by the PML-N government. The reality is that the PML-N government is engaged in reckless foreign and domestic borrowing and sale of profitable national assets to meet the budget and balance of payments deficits. This is the way our governments have behaved for the last 40 years and have driven the economy close to bankruptcy.
The sad part of the story is that the IMF has regularly given its blessing to the patchwork done by every government, leaving the structural problems unattended. Its unprofessional approach has been driven by many factors including the dictates of its larger shareholders to promote their own security and economic goals, the career ambitions of its staff working on Pakistan that is best served by maintaining an operational programme and its own financial interests.
In the process, instead of being helpful in restoring long run viability of the economy, the IMF has been responsible for enabling the successive governments to survive on borrowing and postpone the difficult economic policy reforms. The same is being done by the IMF under the present EFF arrangement.
The concluding statement of the First Deputy Managing Director (FDMD) of the IMF on the state of the economy after the completion of the 4th and 5th review of the current EFF is a whitewash of monumental proportions. It supports the PML-N government for its reckless path of fiscal and monetary indiscipline and accumulation of foreign and domestic debt.
The statement is devoid of any factual information or policy analysis and consists of meaningless generalities with each general statement being qualified by the use of ‘ifs and buts’. Nevertheless, an attempt is being made below to highlight some aspects of the statement, reserving the final judgment to the release of the staff report on the economy which hopefully will have some data and analysis in defence of the statement of the FDMD.
First, in his view “macroeconomic indicators are improving but significant risks to the economy remain”. There is no information in the press release as to which ‘indicators’ are improving and no mention of what are the ‘significant risks’ being faced by the economy and what to do about them.
Second, the FDMD makes a contradictory statement about the fiscal situation. According to him “fiscal consolidation is broadly on track but the authorities must be prepared to take further action”. No fiscal facts or fiscal policy reforms are mentioned. If the fiscal situation is indeed being consolidated, why point out the need for more action and if there is a need for more action then by definition the fiscal situation is not on track.
Third, monetary policy has been judged as ‘prudent’ without giving any basis for such a judgement; at the same time there are several concerns mentioned that cast doubt on the ‘prudence’ of monetary policy. Moreover, if liquidity is being injected at three times the rate of growth of output, which economic principles would support the notion that monetary policy is prudent or that the economy is moving towards monetary stability?
Fourth, there is a declaration that “structural reforms are progressing” but there is not a single piece of evidence to that effect. In fact, the three structural imbalances between the required rate of investment and the current rate of domestic savings, between imports and exports and between total public sector expenditure and total government revenue continue to widen.
Fifth, there is an assertion that the government’s “commitment to privatisation is strong but potential difficulties remain”. Commitment means nothing if not backed by a steady stream of decisions to reach the goal post – and the government has so far done nothing except sell some profitable assets to finance the wide budget and balance of payments deficits.
Finally, the IMF statement is silent on the stagnation in exports, widening of the current account deficit, overvaluation of the nominal and real effective exchange rates, slowing down of growth in credit to the private sector, expansion of the underground economy and increase in income inequality and corruption.
We know from the data available from elsewhere that the fundamentals of the balance of payments have deteriorated. This is shown by the widening trade and current account deficits, declining direct foreign investment and rising foreign debt liabilities. Our government is not willing to use the exchange rate policy flexibly to improve exports or to reduce under-invoicing of exports and over-invoicing of imports. Capital flight has been legalised for the benefit of the rich and powerful.
Monetary expansion is taking place at an excessive rate adding to the build-up of inflationary pressures even if some price relief has come in the form of lower world oil prices. Public-sector enterprises continue to bleed adding to the contingent liabilities that are kept out of the budgetary statistics. There is no improvement in the tax-to-GDP ratio while mega projects involving huge expenditure commitments are being inaugurated by the prime minister. Circular debt continues to accumulate and the government budget financing is at the mercy of foreign funding and domestic bank borrowing.
If the FDMD is impressed by build-up of reserves and a lower budget deficit being presented by the Ministry of Finance and his own staff, he should know that the former reflects more external inflows and the latter some figure fudging, and not any real improvement in the fundamentals of the economy.
The reality is that the economy is in deep difficulties and patchwork is being used to cover up the deeper wounds that need surgical operations for their treatment. Our budget deficit, if calculated correctly, is at an unsustainably high level. But the rich and powerful are not willing to allow tax reforms that could consolidate the tax base, document the economy and raise the tax-to-GDP ratio.
The underground economy in the country has become larger than the formal economy and the self-interest of the ruling elite stands in the way of measures to contain, if not dismantle, it. Our ruling elite will not take measures to reduce the income gap between the haves and have-nots. The central bank has become so weak that it is not in a position to contain excessive money growth and conduct a monetary policy that promotes private sector investment and lowers the demand-pull rate of inflation. The poor, who are in majority, are unable to assert their right to install a government that looks after their economic interests rather than those of the minority of the rich.
In the above situation, the fake certificate of good health being provided to the government by the IMF is helpful for more foreign borrowing to solve the short-term liquidity problems of the government but adds to the long-term insolvency of the country.
The writer is a former governor of the State Bank of Pakistan.
On December 17, the Executive Board of the IMF concluded the 4th and 5th review together of the EFF arrangement and approved disbursement to Pakistan of two tranches of loan amounting to $1.05 billion. This amount is approximately equal to the repayments made by the PML-N government to the IMF in the last several months.
Those repayments had fallen due for a loan taken by the PPP-led government under a standby arrangement that enabled it to avoid a balance of payments crisis during its tenure without taking politically difficult economic reform measures.
The loan being taken by the PML-N government under the current EFF arrangement will have to be repaid by the next governments but enables the present finance minister to brag about building up foreign exchange reserves, and make claims that it reflects sound economic management by the PML-N government. The reality is that the PML-N government is engaged in reckless foreign and domestic borrowing and sale of profitable national assets to meet the budget and balance of payments deficits. This is the way our governments have behaved for the last 40 years and have driven the economy close to bankruptcy.
The sad part of the story is that the IMF has regularly given its blessing to the patchwork done by every government, leaving the structural problems unattended. Its unprofessional approach has been driven by many factors including the dictates of its larger shareholders to promote their own security and economic goals, the career ambitions of its staff working on Pakistan that is best served by maintaining an operational programme and its own financial interests.
In the process, instead of being helpful in restoring long run viability of the economy, the IMF has been responsible for enabling the successive governments to survive on borrowing and postpone the difficult economic policy reforms. The same is being done by the IMF under the present EFF arrangement.
The concluding statement of the First Deputy Managing Director (FDMD) of the IMF on the state of the economy after the completion of the 4th and 5th review of the current EFF is a whitewash of monumental proportions. It supports the PML-N government for its reckless path of fiscal and monetary indiscipline and accumulation of foreign and domestic debt.
The statement is devoid of any factual information or policy analysis and consists of meaningless generalities with each general statement being qualified by the use of ‘ifs and buts’. Nevertheless, an attempt is being made below to highlight some aspects of the statement, reserving the final judgment to the release of the staff report on the economy which hopefully will have some data and analysis in defence of the statement of the FDMD.
First, in his view “macroeconomic indicators are improving but significant risks to the economy remain”. There is no information in the press release as to which ‘indicators’ are improving and no mention of what are the ‘significant risks’ being faced by the economy and what to do about them.
Second, the FDMD makes a contradictory statement about the fiscal situation. According to him “fiscal consolidation is broadly on track but the authorities must be prepared to take further action”. No fiscal facts or fiscal policy reforms are mentioned. If the fiscal situation is indeed being consolidated, why point out the need for more action and if there is a need for more action then by definition the fiscal situation is not on track.
Third, monetary policy has been judged as ‘prudent’ without giving any basis for such a judgement; at the same time there are several concerns mentioned that cast doubt on the ‘prudence’ of monetary policy. Moreover, if liquidity is being injected at three times the rate of growth of output, which economic principles would support the notion that monetary policy is prudent or that the economy is moving towards monetary stability?
Fourth, there is a declaration that “structural reforms are progressing” but there is not a single piece of evidence to that effect. In fact, the three structural imbalances between the required rate of investment and the current rate of domestic savings, between imports and exports and between total public sector expenditure and total government revenue continue to widen.
Fifth, there is an assertion that the government’s “commitment to privatisation is strong but potential difficulties remain”. Commitment means nothing if not backed by a steady stream of decisions to reach the goal post – and the government has so far done nothing except sell some profitable assets to finance the wide budget and balance of payments deficits.
Finally, the IMF statement is silent on the stagnation in exports, widening of the current account deficit, overvaluation of the nominal and real effective exchange rates, slowing down of growth in credit to the private sector, expansion of the underground economy and increase in income inequality and corruption.
We know from the data available from elsewhere that the fundamentals of the balance of payments have deteriorated. This is shown by the widening trade and current account deficits, declining direct foreign investment and rising foreign debt liabilities. Our government is not willing to use the exchange rate policy flexibly to improve exports or to reduce under-invoicing of exports and over-invoicing of imports. Capital flight has been legalised for the benefit of the rich and powerful.
Monetary expansion is taking place at an excessive rate adding to the build-up of inflationary pressures even if some price relief has come in the form of lower world oil prices. Public-sector enterprises continue to bleed adding to the contingent liabilities that are kept out of the budgetary statistics. There is no improvement in the tax-to-GDP ratio while mega projects involving huge expenditure commitments are being inaugurated by the prime minister. Circular debt continues to accumulate and the government budget financing is at the mercy of foreign funding and domestic bank borrowing.
If the FDMD is impressed by build-up of reserves and a lower budget deficit being presented by the Ministry of Finance and his own staff, he should know that the former reflects more external inflows and the latter some figure fudging, and not any real improvement in the fundamentals of the economy.
The reality is that the economy is in deep difficulties and patchwork is being used to cover up the deeper wounds that need surgical operations for their treatment. Our budget deficit, if calculated correctly, is at an unsustainably high level. But the rich and powerful are not willing to allow tax reforms that could consolidate the tax base, document the economy and raise the tax-to-GDP ratio.
The underground economy in the country has become larger than the formal economy and the self-interest of the ruling elite stands in the way of measures to contain, if not dismantle, it. Our ruling elite will not take measures to reduce the income gap between the haves and have-nots. The central bank has become so weak that it is not in a position to contain excessive money growth and conduct a monetary policy that promotes private sector investment and lowers the demand-pull rate of inflation. The poor, who are in majority, are unable to assert their right to install a government that looks after their economic interests rather than those of the minority of the rich.
In the above situation, the fake certificate of good health being provided to the government by the IMF is helpful for more foreign borrowing to solve the short-term liquidity problems of the government but adds to the long-term insolvency of the country.
The writer is a former governor of the State Bank of Pakistan.
