Administrations the world over focus on keeping their economy well oiled. In times of a recession, be it the outcome of a normal economic cycle or due to other external or internal factors including a pandemic, responsible governments’ begin implementing expansionary policies that include a lower discount rate that fuels private sector credit and productivity and lower taxes that increases householders disposable income and facilitates the productive/corporate sectors.
Growth as an objective requires fine-tuning of policy measures after taking account of differences between countries premised on their different socio-economic conditions and considerations; as well as different time periods as the economy of a particular country may undergo a change over time or in other words, a prescription that worked a decade or so ago may not work today.
The preferred prescriptions in developed countries reflect the economic agenda of the ruling party and broadly speaking the Republicans/Conservatives favour reducing taxes on the corporate sector to incentivize productivity with gains trickling down to the poor. Labour/Democrats favour higher taxes on the rich to fund higher government spending on social and physical infrastructure as well as more labour friendly policies. Imran Khan while in opposition favoured the Labour/Democrat approach while his administration is supporting the Republican/Conservative model. The Pakistan Tehrik-i-Insaaf (PTI) would be quick to point to the rise in allocation for the Ehsaas programme from 120 billion rupees when the party took over power to around 200 billion rupees in the current year’s budget as proof that its focus is on the poor – a 66 percent rise. Critics downplay this rise by pointing out that inflation especially food inflation remains in double digits and the private sector has not given any pay raises in the past two years due to a significant decline in output (large scale manufacturing output is in negative territory for the past year and a half). However, the system of social security payments to the poor, the vulnerable and the unemployed is well established in the West irrespective of which party is in power.
The Ehsaas programme is well in line with the International Monetary Fund (IMF) objectives; on 12 May 2019 the IMF uploaded a paper titled “Strategy for IMF Engagement on Social Spending” which was approved by its Board and it noted that “social spending issues intensified over recent decades—especially in the aftermath of the global financial crisis—reflecting concerns about rising inequality and the need to support poor and vulnerable households. Social spending is also a key policy lever for meeting the global commitment to support inclusive growth through the 2030 Sustainable Development Goals (SDGs) and for addressing emerging challenges from demographic shifts, technological developments, and climate change… . Analytical work has highlighted the relationship between inequality and growth, the important role of social spending in promoting sustained and inclusive growth, and the resource requirements for achieving the SDGs in education and health. Accordingly, the IMF surveillance and lending operations have increasingly emphasized inclusive growth, including through the use of social spending “floors” in IMF-supported programmes. There has also been enhanced engagement on inequality issues in surveillance, as well as increased technical assistance to expand fiscal resources available for social spending.” This explains why the Fund in its first review of the ongoing programme (December 2019) sought a commitment from the government that the budgeted allocation for Ehsaas/social spending would be met during the year.
The ability of an economic team to take decisions independently in debtor countries like Pakistan is therefore impacted not only by the administration’s political considerations but also if the country is on an (IMF) programme as loan assistance is unlikely unless specific policies are adjusted to those advocated by the Fund. Pakistan referred to as a perennial IMF borrower is currently on a 39-month 23rd programme wherein for the first programme year (2019-20) the growth rate was projected at 1.5 percent (against 3.3 percent the year before) and again at 1.5 percent in the current year in spite of significant loosening of the contractionary policies in the first year in the aftermath of the pandemic – discount rate reduced from 13.25 percent to 7 percent, and fiscal incentives, including a reduction in electricity tariffs, were extended to the productive sectors in general and the construction sector in particular.
The question that arises is whether the Fund’s focus in its lending programme is on a very narrow definition of the much used term ‘economic stability’ that delegates a low priority to growth – a term much in use by the economic team leaders Dr Hafeez Sheikh and Dr Reza Baqir. The Fund in its Articles of Agreement notes the following as one of six objectives: “to facilitate the expansion and balanced growth of international trade, and to contribute thereby to the promotion and maintenance of high levels of employment and real income and to the development of the productive resources of all members as primary objectives of economic policy.” As per Graham Bird (University of Surrey) and Dane Rowlands (Carleton University) while the Fund argues that “economic adjustment should be undertaken in ways that are not destructive of national prosperity…the popular view is that the IMF prioritizes macroeconomic stability and the balance of payments over economic growth, and, along with others, the Meltzer Commission (2000) argued that the Fund should withdraw from lending to LICs (Low Income Countries) largely because it was seen as being ineffective.” The ongoing Fund programme in Pakistan indicates the accuracy of this statement. The balance of payments/current account has remained a major priority of the Fund/economic team leaders while growth, pre-Covid19, was projected at 4.5 percent in 2021-22, and 5 percent for the remaining two years of the programme or pushed to the third year of the programme.
Claims of borrowing only to pay back loans taken by previous administrations are challengeable as domestic debt rose from 16.5 trillion rupees in August 2018 to 23.7 trillion rupees by September 2020 (the government has yet to release more up to date data) and foreign loans have risen from around 95.3 billion dollars in 2018 to more than 118 billion dollars today with around 5 billion dollar new loans acquitted to fund the primary surplus target agreed with the IMF. This raises the specter of a debt trap and as stated by the Fund “adequate capacity to repay and debt sustainability will depend on strong policy implementation and the adequate execution of the existing financing commitments.” The government’s reliance on commercial loans of 10 billion dollars in two and a half years has surpassed all previous records.
To conclude, there is a need to focus on growth in the next fiscal year and while one would have to wait to see what has been pledged by Pakistan’s economic team leaders to the IMF under the agreement on second to fifth reviews, yet one can only hope that they have negotiated better from the perspective of the people of Pakistan than they did during the loan agreement (July 2019) and first review (December 2019).
Copyright Business Recorder, 2021
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