LIVING WITHOUT IMF
SHABBIR H. KAZMI
Feb 20 - 26, 2012
At this juncture, Pakistan has to make a key decision: does it wish to live with or without IMF support? Experts seem to be clearly divided between two distinct groups: one that believes Pakistan has the capacity to live without the IMF and another which propagates that the country can't survive without lender of the last resort. This portends the difference in mindset of people.
While the first group knows that living without IMF is a difficult task, it has the commitment that developing the habit of living within means and exploiting the real potential of the country can its current account be turned positive. This demands political commitment, right policies and implementing those in letter and spirit.
However, the policy planners and advisors to the successive governments have created a phobia that even thinking of living without IMF is wrong. They strongly believe that fixing right targets and achieving those is possible because of the stringent monitoring by the IMF. They are partly right, because till today most of the policies in Pakistan have been influenced or at times dictated by the multilateral lenders. This also gives a chance to critics to say that the IMF is responsible for many of the malfunctions in the economy.
Living with or without the IMF depends on the strength of current account position. Attracting foreign direct as well as portfolio investments, bridging trade deficit and maximizing unilateral remittances are hardly governed by the IMF's conditions relating to its balance of support program. However, it goes without saying that IMF insists on removing structural imbalances affecting revenue collection, payment of subsidies and public sector development program.
It is often said that the institution is responsible for imposition of new taxes or withdrawal of subsidies, which is completely misleading. The Fund wants Pakistan to keep it deficit at sustainable level without jeopardizing its economic growth. It insists on certain level of revenue collection to meet the developmental expenditures. It is another thing that ruling juntas often prefer to impose new taxes only to ensure extravaganzas. However, it may be said that instead of forcing such rulers to abstain from extravaganzas, the IMF must allow them to indulge in overspending despite knowing that it would require imposition of new taxes.
Key indicators of the strength of any country are balance of payment, trade account, inflow of FDI and portfolio investments, aid and grants and remittances. Most of the countries suffer from negative trade balance because their imports are higher than exports due to higher import of machineries and raw materials. This deficit is planned to facilitate creation of new productive facilities and job opportunities. However, Pakistan has been historically borrowing to pay off debts. Over the years, it has failed in boosting exports. Its exports have remained concentrated in few products and markets. Still 60 per cent of the country's export comprises of textiles and clothing and bulk of the proceeds come from less than half a dozen countries. Therefore, if cotton crop is affected due to any natural calamity, exports also go down.
Historically, oil and food constitute a substantial part of total imports. Over the years, Pakistan has failed in increasing indigenous production of crude oil and lately due to the shortage of gas quantum of POL imports has further scaled up. Addition of thermal power plants particularly IPPs and failure to construct hydropower plants has increased furnace oil consumption manifold. Within food category, edible oil import has been a huge burden. In the recent past, Pakistan has been spending around two billion dollars annually on the import of edible oil. The country has failed in boosting production of corn, sunflower, and canola.
Things just do not happen but countries work to make them happen. Failure of Pakistani policy planners is evident from two of the recent decisions.
During the ongoing sugarcane-crushing season, the country is expected to produce about 1.2 million tons surplus sugar. Initially, the policy planners were not ready to allow export of sugar but later on granted permission to export 100,000 tons. To ensure payment to growers, Trading Corporation of Pakistan (TCP) has been asked to buy nearly half a million tons sugar. One completely fails to understand the logic because the country could have fetched minim $500 million from exports of sugar, which could have lessened the burden because this year the country has to pay $1.2 billion to the IMF.
Pakistan has been stuck in a vicious circle and borrowing to pay off the liabilities. It was only during the regime of Shaukat Aziz that Pakistan utilized less than the amount promised under the Standby Facility because the country did not need it. It maybe said that the present regime has also managed to survive despite the IMF refusing to release last two tranches of the stand-by arrangement signed in 2008. However, the condition is real precarious because it seems certain that the country would not be able to pay off the IMF in the years to come.
Experts often ask are the IMF recipes aimed at creating sustainable position. There are two opinions: 1) lender does not want a borrower to get strong enough to live without multilateral financial institutions and 2) it uses copybook solutions, which are not workable in countries like Pakistan. Since the country has huge undocumented segment, people do not face as precarious situation as anticipated by the lenders.
Over the years, experts have been saying that Pakistan needs a homegrown plan. This means solutions have to be found for macro and micro issues facing the country. Bridging current account deficit is still not a big issue provided 1) circular debt issue is resolved, 2) industry specific policies are implemented and 3) focus is shifted away from imposing new taxes to facilitating the business community in creating new productive facilities. Pakistan should work on getting greater access to the existing markets rather than seeking aid and grants. The entrepreneurs must learn to compete rather than seeking favors.