Disaster ahead

In my previous three articles (September 17, September 24 and October 1), I have summarised the various aspects of the IMF programme and its likely impact on Pakistan’s economy in general and the people of Pakistan in particular.

Let me make it abundantly clear that given the state of the economy the present government has inherited, Pakistan had little option but to seek IMF assistance to prevent the country defaulting on its external debt payment obligations. The previous regime in five years of its tenure left no stone unturned to brutally damage the economy of Pakistan. The ill-trained members of the economic team who served the regime in different periods have not only damaged the economy to the core but also destroyed key economic institutions in connivance with the political leadership. The present government must be credited for successfully negotiating an IMF programme within the first 100 days of its tenure.

I was perhaps among the few commentators advocating an IMF programme since September 2011. Nonetheless, I am unhappy with the design of the IMF programme. This programme is designed in the worst form of stabilisation of the 1980s vintage which is likely to bring forth nothing but pain and human suffering of colossal proportions. Such a stabilisation policy has failed miserably in Greece and Spain. It has not only inflicted severe pain and sufferings on the people of these countries with some of them battling 60 percent youth unemployment with all its social consequences, but has also postponed economic recovery in these countries despite a massive bailout from the IMF, Germany and France.

These facts are well-known to those who have interest in the world economy. I have been highlighting these issues, but it has failed to catch the eyes of those who were involved in negotiations with the IMF. Although ignorance is generally regarded as bliss, ill-informed decisions bring pain and misery to people.

The bitter experiences of Greece and Spain have forced global leaders to rethink the ‘stabilisation first’ strategy. The G-20 leaders recognised the importance of growth and job creation. In the G-20 summit in early September this year in St Petersburg they declared that robust and job-rich growth, which is inclusive and broad-based would be the focus of macroeconomic policies in the short-run and stabilisation in medium-term. Why have such policies not been prescribed for Pakistan?

Pakistan’s economy has been stuck in a low growth mode (three percent per annum) for the last five years and it is expected to grow in the same range in the next five years as well under the IMF programme. With the population expanding at an average rate of 2.2 percent, real per capita income grew, on average, by less than one percent per annum during the last five years. These are projected to grow by the same rate in the next five years as well.

With the labour force growing at an average rate of 3.5 percent, employment elasticity of 0.51 and economy growing in the range of three percent under the IMF programme, more than five million new job seekers will fail to get gainful employment and will join the league of unemployed in the next five years. These people will definitely seek low paid and vulnerable jobs to survive in the informal sector.

The decline in formal employment and consequent rise in vulnerable employment will contribute to growing poverty and inequality through the falling share of wages in GDP. Given the population dependency ratio in Pakistan where a large proportion of the population is below 15 (43.4 percent) or above 60 (5.5 percent) years, many families would find it hard to meet the basic needs of the members of their households, particularly those of children.

Ignoring growth and employment are in conflict with the IMF Articles of Agreement as well. For example the IMF Articles of Agreement state that “the purpose of this institution is…to contribute…to the promotion and maintenance of high levels of employment and real income and to the development of the productive resources of all members as primary objectives of economic policy” (Article 1.ii)

The IMF programme, as agreed with Pakistan, is a worst form of stabilisation programme in which growth and employment generation have been ignored altogether. Over five million new job seekers will join the pool of unemployed in the next five years, and low paid and vulnerable jobs will increase in informal sector with real per capita income growth remaining flat. Isn’t it a violation of Article 1.ii of the IMF Articles of Agreement?

It is against this background that the programme forces the new government to remove power tariff subsidy in one go and that too in a highly disproportionate manner, ranging from 19.4 percent for rich consumers (701 units and above) to 72.6 percent for low-income group consumers (201-300 units). While oil prices have increased in Pakistan, India has reduced the prices of oil at the same time. Do India and Pakistan face a different price of oil in international market? Or has the Pakistani nation had to pay for the depreciation of exchange rate owing to the IMF programme?

The unprecedented increase in power tariff and unjustified increase in POL product prices in the midst of stagnant real income have broken the back of poor and middle-class households. It has put unbearable pressure on the common man. Such hike in power tariff is not a one-off affair. More tariff hike is in store in the next two years of the programme along with a hike in gas tariff this year.

Depreciation of exchange rate, on the one hand, and pressure to meet revenue target under the programme on the other, will force the government to continue to raise power tariff and POL product prices. The newly-elected government is under tremendous pressure and fast losing its popularity. The government is not seen anywhere; ministers and important party leaders have failed to defend the government policy in media. A democratically elected government may not be able to implement the programme.

It is my sincere advice to both the Pakistani authorities and the IMF to look afresh at the design of the programme. Stabilisation alone will be painful. What is required is to strike a balance between stabilisation and growth for which details can be worked out.

Pakistani authorities need to raise this issue during the next review mission of the IMF (perhaps in late November). The pace of adjustment needs to be reviewed. The programme in its present form will spell disaster for the people and for the government. Both the IMF and the government will be the losers in the event of programme derailment.

The writer is the principal and dean of NUST Business School.Email: ahkhan@nbs.edu.pk –