Omer Javed |
Half-hearted Attempts will be Harmful to the Economy
First of all, let’s be clear, are IMF programmes for money or for obtaining policy input? It is like we do not have economic policy brains in Pakistan; so basically money. It is not to say that there is not much to learn about particular policy solutions from the multi-country experience of International Monetary Fund (IMF), in which case what we should have been seeking with them was technical assistance.
The problem with regard to going into an IMF programme is that it puts a responsibility on the government to negotiate out the neoliberal aspects of these programmes, and which are unfortunately many. While the status quo parties in government in the past, in general — which basically looked at IMF programmes as a tool to obtain easy money for going through the motions of appearing to be doing something for the masses over their term, giving themselves in turn time to continue to find ways to fill their own pockets and their conniving economic elites — PTI led government if it wishes to differentiate itself in this regard (and which I think it does) will have to be really creative in its programme negotiations to crowd out the highly likely recessionary impacts of any particular IMF programme.
IMF programmes in general in the past have been criticised to being one-size-fits-all, and for this reason, the government will have to ensure that all policies being negotiated under the programme are in line with indigenous needs and realities.
This at the same time leads to another problem, and which is that in the absence of doing the hard reforms on the institutional or supply side of the economy, means that whatever macroeconomic consolidation has been reached during the programme quickly withers once the programme ends.
This is because the ‘effects’ or the macroeconomic variables being targeted in the programme on the demand side of the economy, without improving the institutional environment — and which includes markets, especially commodity and financial markets, because these have important bearing for economic growth, macroeconomic stabilisation, including the build-up of foreign exchange reserves — and the organisations on the supply side, means that the ‘vehicles’ or institutions and organisations, in terms of their capacity, incentivisation, and regulation will not deliver the needed outcomes in the shape of improved macroeconomic and economic growth situation, and that too in an overall sustained and equitable way, so that stability and welfare gains are reached appropriately.
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The PTI-led government soon to start the IMF negotiations should approach them with policy preparation and thinking on these lines.
1. Spread the policy milieu being negotiated under the programme to both demand and supply side policies, which primarily means to convince IMF that the programme should focus on both structural adjustment, and also institutional development; where the latter is seen in the broad sense of heterodox ways of thinking, including for instance (among other aspects), institutional — and behavioural economics perspectives.
Moreover, this should include bringing better governance and incentive structures — positive incentives through the provision of needed subsidies, tax relief, and negative or disincentivisation in the shape of regulations, fines, etc — for the markets; including introducing some sort of hierarchy into the markets where greater intervention is warranted/needed.
Also, it may also make sense to go for a particular IMF lending window, which does not require ex-ante actions to be met by the government before the first tranche is released.
2. The programme should focus beyond the usual narrow application of social protection to a broader welfare programme, so that both adequate distributional consequences of economic growth, and hedging the vulnerable could be ensured.
3. Historically speaking, programme discussions with IMF were basically carried out between the federal government and IMF; but then after the 18th amendment to the constitution, any analysis of fiscal federalism will indicate that fiscal deficit and saving-investment gap — both of which lead to shrinking of development spending space and macroeconomic imbalances, including current account deficit — are an outcome of decisions mainly by the provincial governments.
Hence, it is important for the federal government to include, at some appropriate level, the participation of the provincial governments to ensure a much-needed inclusion of their perspective in programme negotiations — since they are one of the main stakeholders — so that there is adequate buy-in of the programme once negotiated.
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In the past, lack of such consensus meant that the pace and extent of macroeconomic adjustments agreed in the programme were not met, since one of the reasons being a lack of willingness on the part of provinces on these conditionalities to start with.
Moreover, with PTI-led government’s intention to give more fiscal powers to the upcoming local governments, it is but necessary to envisage a framework in the programme negotiations or in the government’s own internal discussions, whereby it should be made clear how to bring on board local councils so that there is one united effort by all the three tiers of government (and the private sector) towards meeting the overall conditionalities of the IMF programme.
4. What kind of amount of front-loading the government should be looking at is also important; at least this much to cover the most urgent financial needs. Also, it may also make sense to go for a particular IMF lending window, which does not require ex-ante actions to be met by the government before the first tranche is released. This is simply because, and for this reason quite self-evident anyways, the given the current quite low levels of foreign exchange reserves, there is simply not much time with the government in this regard.
Half-hearted attempts will be harmful to the economy; and will increase economic uncertainty, giving in turn mixed signals to the foreign and domestic investors.
5. Moreover, the government should only commit to do only that much that they can reasonably do; especially specifically with regard to making bold claims on setting unreasonable revenue collection targets through administration measures since the Federal Board of Revenue needs a lot of reform before it can take on such challenges.
Also, the government should take on board both the cabinet, and its own and other coalition parliamentary members into confidence with regard to the aspects being discussed in the IMF programme, so as to avoid future frictions on the programme package; in terms of both the legislative and implementation aspects. In this regard, it would sense that the government also take on board the private sector to create a broad consensus on programme conditionalities.
6. Rationalising the pace and extent of adjustment is also very important; mainly because it should balance the supply side measures to come along and soften the brunt of demand-side programme conditionalities on the vulnerable, and business and investor confidence in general.
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7. Overall, IMF programmes in general in the past have been criticised to being one-size-fits-all, and for this reason, the government will have to ensure that all policies being negotiated under the programme are in line with indigenous needs and realities.
One brainwave to mention here: analysts, anchors, and policymakers need to understand that it is the people who in the broader sense should fare well, and the macroeconomic accounts and stock market indices are just a limited window to knowing how well the economy is performing for the people in general. So it is important that all stakeholders should see and discuss the IMF programmes specifically, and policy in general from this perspective in mind.
Overall, the element of learning during programme implementation should be made inherent to the negotiated programme itself, to make it a more practical IMF programme.
Moreover, to focus on a matter specifically under focus these days, that is the sharp depreciation of the Pakistani rupee against the US dollar: here the State (or central) Bank of Pakistan should worry and take measures about the negative shocks to the value of our currency in the overall managed float exchange rate regime the country subscribes to, but the matter of greater concern for all the stakeholders is to (a) regulate against speculative practices of foreign and domestic portfolio investment, (b) improve export performance, and create incentives to have foreign exchange invested locally and retained from flight abroad, (c) to reduce saving-investment gap, since it also contributes to current account deficit, and (d) to improve both governance environment and incentive structures, since they positively impact the areas mentioned above and remittances. So measures in this regard should also be included in the IMF programme and policy in general.
Any future programme with the IMF should internalise aspects on the lines indicated above by the government. Most importantly, the government should negotiate an IMF programme with full vigour and try to implement it to the fullest on what it has signed up to do. Half-hearted attempts will be harmful to the economy; and will increase economic uncertainty, giving in turn mixed signals to the foreign and domestic investors.
At the same time, since exchanges in the economy between all economic actors are never static, and the impact of policy usually comes with a lag, and where expected economic outcomes may not be realised as against the policy assumptions envisaged during the programme negotiations, therefore it is important that there is also room kept for revisit of the programme; in turn, re-establishing the limits of reform policy intervention where needed, among taking other policy actions differently. Overall, the element of learning during programme implementation should be made inherent to the negotiated programme itself, to make it a more practical IMF programme.
Omer Javed holds Ph.D. in Economics from the University of Barcelona, Spain. A former economist at International Monetary Fund, his work focuses on institutional and political economy, macroeconomic stability and economic growth. This article was first published in Pakistan Today and has been republished with author’s permission. The views expressed in this article are author’s own and do not necessarily reflect the editorial policy of Global Village Space.