AID OR TRADE: WHICH IS THE ENGINE OF THE ECONOMY?
TARIQ AHMED SAEEDI
Feb 20 - 26, 2012
Pakistan may be thinking about renewing programme of international monetary fund (IMF), though authorities have not applied for a fresh loan so far. The country needed to start repayment of the suspended standby arrangement (SBA) from February. The SBA was stopped before the Fund transferred two tranches ($3.7) of the sanctioned amount ($11.3 billion) to Pakistan.
IMF Executive Board has pointed out the implementation of several reforms by the government of Pakistan including interest rate hike, building market-driven exchange rate system, improving empowerment of the central bank.
According to the transcript of the teleconference on Pakistan in Washington D.C. this month, IMF Missions Chief for Pakistan, Adnan Mazarei said Pakistani policymakers have taken actions but there are 'unresolved structural problems in the energy sector'.
He said the Fund is not an energy expert and nonetheless it believes that withdrawal of subsidies on electricity, which according to it, accounted for two per cent of the national output would help the country solve the energy issues.
In a nutshell, the Fund is creating an impression that Pakistan is in need of its financial support to straighten its macroeconomic imbalances. The financial institution even tried to exaggerate the fiscal deficit issue. Although fiscal indiscipline is a core problem facing the economy, but its forecast that it would hit seven per cent this fiscal year sounded unfounded given the figure of first half of the current fiscal year.
In fact, fiscal deficit came down to 2.6 per cent from 2.9 per cent during July-Dec 2011/12. Economists have observed increment of 0.5 per cent normally in the second half for the last 10 years. So, how come the deficit would scale up to seven per cent?
Authorities also pin hopes on sale of 3G licence that will earn the government $700 to $800 million, receiving of $800 million from PTCL's privatization, release of coalition support fund, and issuance of Euro bonds of $500 million. These expected external flows would likely to reduce the fiscal deficit.
It is also true that foreign investments are showing declining trend while the government has to pay back approximately $1.2 billion this fiscal year in lieu of the SBA. The economic pressures are high. However, does it justify the resort to IMF, which seems oblivious to the impact of its dictates about monetary policy tightening and electricity and gas tariffs hikes on common persons of Pakistan?
IMF has clearly defined conditions of its loans. It is in favour of monetary tightening in view of stubborn inflation in the country and increase in electricity tariffs. Monetary tightening is aimed at to restrain money demand in the economy. Government is the largest consumer of bank finances. Therefore, the stance is logical to discourage this gluttonous appetite and inflation that is an offspring of excessive resource consumption by the government. However, this approach has suffocated the industrial progress. Sadly, discount rate hike did not succeed in making the government net tax evaders and removing sobering flaws in the tax system.
Overseas workers remittances are increasing at a breakneck speed. A monthly average has surpassed one billion dollar. That means a straight $12 billion a year, which is a significant amount. There is a vast room to increase this figure. According to an expert, total amounts coming from unofficial channels/without registration are equal in size. Clocking up the unregistered inflows would lead to high-rise in the foreign reserves and thus winding down pressures on rupee.
Instead of knocking at the door of international financial institutions particularly for overcoming balance of payment crisis, the tenable alternative would also be to improve the external trade, which strengthens the domestic economy.
Pakistan rejoined the strict IMF programme in 2008 when the national foreign reserves underwent serious freefall and dipped to below three billion dollar mark. Until the time where the government realised the immense pressure of adjustment programme on its kitty and thus relinquished it, at least three years had gone by. Had that period-when balance of payment started to come in the stabilization mode, relatively speaking-been taken as an opportunity for external trade policy realignments and implementations, things might have been little different. It is perhaps not a rocket science to reckon with the real issues/barriers hindering the progressive trade relations of Pakistan with other countries.
A plethora of literature has been published in the press with the focussed business community pointing out at the areas that need fine-tuning. Unfortunately, Pakistan's external trade has never been separated from the whims of the internal politics that chalk out the agenda of hate and love trade relations on external front. If, for example, purported public will is against the bilateral trade relation with the neighbouring India, then no matter how helpful that is for building domestic economy, reducing unemployment, and poverty alleviation, it will remain a pipedream. It is noteworthy that nothing such proposal with concrete pros and cons has been discussed in the law-making institutions: parliaments and senate.
Generally, trade communities of both the countries are in favour of growth-oriented bilateral trade relations. That bilateral annual trade value could reach $10 billion mark has officially been recognized. Nonetheless, businesspersons have still to face the hardships to, for instance, acquire visas. There are several nontariff barriers beside tariff restrictions that inhibit fair bilateral trade.
Saarc chamber of commerce industry demands of the governments of Pakistan and India to issue multiple visas to the traders. In this relation, hints of Indian commerce minster during his visit to Pakistan at liberal visa policy are positive. Unquestionably, frequent interactions can help in resolving the issues that seem irresolvable on the surface. Sane elements in both the countries demand of the governments to delink the commercial and economic cooperation from politics.
The recent approval of World Trade Organization (WTO) to European Council's 2010 commitment to Pakistan of giving duty free access to its 75 goods in the European Union (EU) is also seen as a precursor to substantial rise in Pakistan's exports to EU.
The Council promised tariff cuts for Pakistan to help the latter recover from disastrous impact of the floods. Now, if all the 27 member states agree, Pakistan's predefined exports would be allowed zero-duty access in the region for two years, leading to estimated one billion dollars additional export revenue.