EXTERNAL ACCOUNT WOES - SIMPLY TIGHTENING OF BELT WON'T DO

SHAMSUL GHANI (shams_ghani@hotmail.com)
July 28 - Aug 03, 2008

The rocketing oil prices and our princely ways have landed us in a situation where suggestions to tighten our belt appear a bit odd, if not outlandish. After dethroning an autocratic, albeit stable government, we have given democratic lords yet another chance to prove their worth. It is time for them to deliver and their time starts now. We are ready to ignore their first hundred days and count it as their stock taking period. They don't have to figure out the obvious solutions. What is required of them is a will to do something for this country, at least this time. Do away with the feudal system, standardize land holding size, invest heavily in the agriculture and make the country a food exporting economy. Reduce dependence on oil, de-politicize Thar coal issue, and make optimal use of country's hydel, coal and gas resources. Show political maturity and bring back the stability with good governance. Make the outer world feel comfortable with your prudent and transparent ways to attract back the disillusioned investor and the flown-away dollars. These steps will re-stabilize the Rupee and greatly improve the external account position. If the democratic lords fail to do that and once again allow IMF to take charge of our economy ad infinitum, the future of democracy will become bleaker.

Dependence on IMF's balance of payment support program will bring in stiff conditions so detrimental to the health of already bleeding common man. Its insistence on withdrawal of all types of subsidies will further fuel energy and food prices leaving little room for the masses to survive. The cruel steps already taken to withdraw subsidies to energy sector have created mayhem, and withdrawal of subsidy to agriculture sector will irreparably damage the government position in the public eye.

The $14.4 billion current account gap is the highest in our economic history. Thanks to the growing size of home remittances, the gap is much less than what it would have been. The remittances increased from $5,494 million in 2006-07 to $6,451 million in 2007-08. The table below shows comparative figures of external trade account for the last two years.

EXTERNAL ACCOUNT DEFICIT

MILLION US $

 

2006-07

2007-08

IMPORTS

A. Goods

26,989

35,411

B. Services

8,310

9,892

C. Total (A+B)

35,299

45,303

EXPORTS

D. Goods

17,278

20,125

E. Services

4,140

3,590

F. Total (D+E)

21,418

23,715

G. Trade Deficit (A-D)

9,711

15,286

H. Services Acct. Deficit (B-E)

4,170

6,302

I. Trade & Services Acct. Deficit (G+H)

13,881

21,588

THE IMF MEDICINE

During a press briefing, in the month of April, this year, Masood Ahmed, Director, External Relations Department, IMF showed his concern for Pakistan's sagging economy which was the combined result of a "not very significant" economic slowdown and a much alarming inflation that rose from 7 to a high 14 per cent during the last nine months. According to him, the widening external current account and fiscal deficits were the outcome of higher import costs and strong aggregate demand growth. Offering his solutions to the problems, he said, "There is a need for significant tightening of both monetary and fiscal policies geared at bringing down this widening external current account deficit and thus keeping external vulnerabilities in check. To this end we think that fiscal consolidation including through a reduction of energy subsidies would contribute to reducing the external current account deficit and lessening pressure also on real interest rate. And we also believe that it would be useful to reduce and stop central bank financing of the government which has reemerged since October 2007.

It is not surprising if our economic managers, in total subservience to the IMF bosses, have withdrawn subsidy on electricity and petrol and are bracing up for the withdrawal of whatever farm subsidy is allowed to check food inflation. The blindfold following of IMF suggestions will take us no where. We need to hold our masses' interest supreme and try to convince international lending agencies of the ground realities. Excessively tight monetary and fiscal disciplines prove counter productive in certain situations, especially those presently facing us. Our subsidy bill calculates to around two per cent of GDP which is well below the global benchmark percentage. US and European countries feed their farmers with subsidies simply to shield them from international market forces. Given the record of democratic economic managers, the IMF medicine appears inevitable, at least for a short period of time. In case the medicine is to be taken, it should not be at the expense of the common man of this country. IMF should be told that our agriculture sector needs subsidies in higher doses and for a longer period of time till such time the sector starts delivering. The IMF people claim to be considerate. Let us put their claim to test. The sympathy (or apathy) of IMF towards Pakistan can be read between the following lines taken from an article Pakistan And the IMF : A Relation of Trust, by Henri Ghesquiere, Senior Resident Representative in Pakistan, printed in 2003.

"Yet, in Pakistan mistrust of the IMF's intentions abounds. Its three initials evoke economic pain. Many consider the Fund uncaring. They look with incredulity when I assert that the Fund has only one goal in Pakistan: to help the country achieve its full economic potential.

The most expensive debt of Pakistan to the IMF carries an interest rate of less than 2.5 per cent per year and the bulk is lent at 0.5 per cent."