Dr. Omer Javed |
Now that the PTI led government has approached the International Monetary Fund (IMF) formally for negotiating a programme, indeed very little is left to the imagination as to what will happen next- the usual negotiating steps will follow. Yes, the stock market volatility increase during the past few days could be somewhat attributed to two main reasons- where I say ‘somewhat’ because so many factors determine the behaviour of portfolio investment- being (a) sharp depreciation in the value of Pakistan Rupee against the US dollar, and (b) uncertainty caused by delay in obtaining support for build up on the falling low levels of foreign exchange reserves, in an overall situation of high current account deficit and external debt repayments.
Having said, on both counts something could be said on how far the current government was responsible, and that is on both counts the government—and in my opinion rightly given the history of low performing IMF programmes in Pakistan and developing countries generally— wanted to delay exercising the option of going to the IMF only after it was not possible to get foreign exchange cushion from other sources, including countries having historically strong relations with Pakistan.
To add further, specifically on the issue on currency depreciation, apart from the falling external reserves in Pakistan, there has been a similar slide in various emerging markets like Turkey and India, among others, on account of stronger US dollar- at the back of recent policy rate increases by the US Federal Reserve (their central bank), after many years of quantitative easing, mainly due to falling unemployment, return of inflation to the overall normal level, and a quick pace of economic growth – where also, this depreciation has led to making external debt of many of these emerging markets quite unsustainable, which is generally in US dollar-denominated terms. The trend of policy rate hike in the US has led to a sharp fall in investment in equities there, and the shift has been towards rising returns on bonds in the US.
The reason for highlighting this is because it holds relevance for PTI lead government’s announced plan to float a ‘Diaspora Bond’ to raise debt, whereby given the current scenario this may not be such a good time, as the above details are quite indicative of the flow of funds towards US bonds at the back of increasing interest rates on them.
Another important thing for PTI led government to remember as it launches a housing programme, and in parallel enters an IMF programme- which given the current macroeconomic imbalances situation will ask for sharp increases in policy rate until the needed adjustment is reached over the short to medium term- PTI will have to keep in mind that the interest rates negotiated with the local commercial banks through their announced land related authority, should not be pegged to the policy rate one to one, since it may lead to repayment risks for the already low-income households with little hedging, and could cause a banking liquidity crisis. And this may not be covered by collateral in the shape of government land for building houses; not to mention the hardship it will bring on the lower to middle-class people for which this housing plan has been envisaged.
So it is very important that the PTI be creative in its programme negotiations with the IMF so that it can continue with both the build-up of external reserves and also go forward with its welfare programme it has indicated in its manifesto. For doing this it cannot remain satisfied with a standard structural adjustment oriented overly demand-management IMF programme, which sees a little role of focus on the supply side or institutional reform.
But before talking about certain areas— the inclusion of which will lead to a programme that is more tailor-made for the current economic issues facing Pakistan— it will make sense to say something to positively influence policy debate in Pakistan on print and electronic media, may that be by politicians, economists, or media personnel. Barring few exceptions, there is a need to approach issues in a knowledge-oriented, logically articulated, open-minded plural sense. There seems to be more a race to show the other person or party down, without digging deep collectively as to what are the downsides and upsides of policy in general and in an IMF programme, that need to be avoided/corrected.
Hence, for example, the two main strands of thought coming from economists in media is (a) going to the IMF is like going to a ‘doctor’ for the economy, and we should do as the doctor says as much as we can, because it is very difficult to be more knowledgeable than the doctor with regard to curing the economic diseases, and (b) that given the stressed relationship between Pakistan and US for some time, and also because the rate of adjustment of economic imbalances is generally quite sharp and hurts the vulnerable, an IMF programme to be avoided, and if not possible, to limit it to a possible short-term (a year perhaps) Standby Arrangement (SBA), and not a longer (generally around three years) Extended Fund Facility (EFF) like programmes.
Having said, the politicians, where the opposition basically to score points, and the government mostly to just settle the score, have not invested enough to getting ‘into the meat’ of the issues with regard to the IMF programmes (and generally as well), and which is (a) why an IMF programme has performed below par over the years in Pakistan and in other countries, and (b) to deal with which what should be the policy stance of government going into the IMF negotiations.
Here, sadly media has also not shown meaningful homework to ask deep questions, and to influence the conversation in that light, and has not invited economists from a wide range of economic school of thought (or simply, opinion) to take forward the discussion more meaningfully. Hopefully, points to ponder by all concerned.
Coming back to the two strands of economic arguments, Is IMF really that credible doctor- especially given its Neoliberal tilt of underlying thought process, and which has been amply reflected in programme after programme- or do we have other voices locally and internationally, in academia and in professional corners from the field of economics, that have been raising alarm over the one-size-fits-all kind of overly demand management policies of IMF, which have continued to see a broader institutional development quite exogenous to the production function (or economic growth) and macroeconomic consolidation; and have not learnt much from heterodox research of the past three decades or so (and coinciding with a time of increasingly heavy involvement of IMF with developing countries) that indicate that institutional reform is essential in any country including (and more so because of the initial low level) developing countries, to see any reform go through successfully, and through such odds as lack of incentives (subsidies, regulation, etc.), governance challenge and corruption.
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Hence, apart from the geo-strategic and other on-the-surface reasons, this philosophical underpinning of IMF programmes has hardly been raised on electronic and print media, by either of the three groups- media, politicians, and economists- and rarely adequately to highlight as the main reason why going to the IMF should be so alarming, to say the least. Hence, given this underlying Neoliberal philosophical underpinnings of IMF thought process that it is important for PTI-led government to plan accordingly for creative negotiations with the IMF, since it has decided to go the IMF as other options could not come up to be availed, and for media, economists, and politicians (among others) to help them prepare for it.
This directs the thought process of this article to the point of indicating the ways in which PTI could be creative in its IMF programme negotiations. Referring back to the strand of economic thought- a shorter period SBA will allow government to stabilize and obtain foreign reserves cushion, and resume thereafter supply sided expansionary policy stance- needs to be stood with another reality (to which that strand surprisingly also alluded to but does not think through enough apparently) to understand that a shorter period SBA will be very recessionary- because of the high pace of adjustment through mainly frequent raises in both policy rate and for example energy tariff rates, to reach the macroeconomic consolidation results in a shorter time period, both in terms of economic growth and employment level.
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This will also reduce progress on of PTI’s announced plans of increasing employment (ten million jobs over the next five years), and houses for the low income households (to the tune of five million over the next five years), mainly at the back of rise in mortgage loan rates, since usually linked with policy rate and which is likely to rise quite frequently for countries with such macroeconomic issues as being faced by Pakistan, through the longer-term treasury bills rate; in US for example mortgage rate is linked with the 10-year T-bill.
Household construction will become all the more costly, and in turn, difficult in such a programme or for that matter any usual IMF programme, because one of the conditionality to adjustment generally in exchange rate depreciation, which would lead to high pass-through or high imported inflation, in addition to rise in prices of variables like transportation, cement and energy costs.
Therefore, other lending windows of IMF need to be explored, and conditionalities adjusted through negotiations with IMF under the following thought process so that the objectives necessary for our indigenous economic needs could be met. At the same time, we should tell the IMF that if they want us to generate the capacity to payback and also not have to come back to IMF in the future, then lessons need to be learnt from previously unsuccessful IMF programmes, and internalized in the overall direction of understanding indigenous needs. Hence, the following should be stressed and kept in mind while negotiating the IMF Programme:
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1. We need not just structural adjustment but institutional development, and that too by approaching institutional reform from the broader perspective of institutional economics/heterodox economic thinking, and not the narrow way of seeing them, as IMF does according to their own manual: as individuals and corporations.
This shift of IMF programme on institutional development makes sense because economic literature during the last three decades or so is quite unanimous in indicating that improvement in institutional quality leads to both improvements in macroeconomic imbalances and economic growth. And on the other hand, the research also indicates that countries with weak institutions, could only sustain any benefits of macroeconomic consolidation reached during the IMF programme till the time they continued to receive foreign exchange support from IMF, but since the institutional base was weak, therefore, similar cushion could not be built up and retained after the programme ended. In many countries in fact, study shows that the post-programme macroeconomic situation soon turned even worse than the time of pre-programme, mainly because the below par governments (to say it is a very mild way that is) of developing countries did not feel motivated, with access to borrowed IMF finance/funds, to even retain the level of institutional quality, let alone improve it. Hence, the current PTI-government will have to avoid falling into the trap of moral hazard and adverse selection of policy choices and not do hard economic/institutional reform, both through and outside of the IMF programme.
2. To balance demand and supply side policies, for which programme should not be broad brush for the whole economy, but creative economic policies need to be put in place in the IMF programme conditionalities, to both correct macroeconomic imbalances, and also to hedge the lower income classes through supporting them to reach higher employment rates, and overall make greater development spending in the social sectors like education and health. This is also important to do since one-third of our population is below the level of absolute poverty, and also to remain on track towards meeting the Sustainable Development Goals of the United Nations, where we lag a lot due to the low level of historical investments in areas of human development.
3. To not just look for social protection but the IMF programme should cater to broader welfare needs, on the lines similar to for example Scandinavian countries, not necessarily at their current stage of involvement in this regard, but from the time of early twentieth century when they were similar to Pakistan in terms of extracting lower taxes, limited welfare benefits and being a predominantly agrarian economy. In particular, for example, the National Pension Act of 1913 and the Poor Relief Laws of 1918, both of Sweden could be a good starting point to reflect as much as possible in IMF programme conditionalities.
4. To fix markets especially financial markets so that price signals, income inequality, and poverty could be reduced by increasing access to credit by the private sector, by removing asymmetry of information in for example stock markets, etc.
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If these four objectives, among others, could be negotiated into an IMF programme, then the PTI government could actually fulfill a lot towards its manifesto objectives and save the vulnerable from the recessionary impacts of the macroeconomic adjustment of an otherwise typical IMF programme. At the same time, shifting the focus of IMF to this agenda could be easier than for example the 1990s, because there has been a strong backlash on IMF programmes from heterodox economic research, basically in terms of their inability to deal successfully and thereafter deal with their Neoliberal brand of IMF programmes in general, and in particular with regard to the Global Financial Crisis of 2008, and because of the rise of many Latin American economics outside of the IMF programmes, by shunning the Neoliberal policies, and since all of this has also been reflected somewhat in IMF’s slow shift away from the Neoliberal thought process.
This has been reflected most recently in the nomination of their next Chief Economist (to follow the current Dr. Maurice Obstfeld) in the shape of Dr. Gita Gopinath, whose research work in the fields of monetary policy, exchange rates, and public debt is known to be quite influenced by the heterodox economic approaches, and shows good understanding of emerging markets needs, in turn evidently influencing IMF’s thought process in these areas.
To undertake the IMF programme and to achieve most of the above mentioned objectives (among others) through introducing creative/heterodox policy in the programme, Pakistan could move towards traditional IMF programmes/lending windows- with which it is more familiar with and has adopted in the past- like Extended Fund Facility or the Poverty Reduction and Growth Facility.
At the same time, it would make more sense for Pakistan to negotiate towards more recent lending windows, which in the own words of IMF are augmented to include the lessons learnt from Global Financial Crisis of 2008, and its impact on low income countries, and include (a) Extended Credit Facility, (b) Standby Credit Facility, and (c) Rapid Credit Facility, all of which currently charge zero interest, and (d) Poverty Reduction and Growth Trust, which finances the concessional element of lending to the low income countries. Here, once again it needs to been seen as to which programme allows a reasonable ‘adjustment speed’, and which can be best tailored to achieve the objective indicated above (among others). Moreover, the details on interest payment and repayment schedule are indeed also important aspects to look into with regard to each lending window. Negotiations on reaching a good result for Pakistan in these two aspects will also be important determinants of a successful IMF programme discussion.
Last but not least, the above thought process needs to spread on both print and electronic media so that it could be picked up by the corridors of power. The hope should be that if, for example, Turkey can pay back all IMF debt and call it quits (at least for now), which in the 90s was suffering from the deep economic crisis, then so can we. But this can be done when all stakeholders will rise above their petty and selfish concerns, and put the country first. All of this needs consensus- the design of a workable IMF programme and its successful implementation, and overall to take the country towards sustained and equitable economic growth.
Omer Javed, Ph.D. Economics University of Barcelona, Spain, author of “The Economic Impact of International Monetary Fund Programs has formerly worked for IMF. He tweets at @omerjaved7. The views expressed in this article are author’s own and do not necessarily reflect the editorial policy of Global Village Space.