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Economic policy consensus: Anjum Ibrahim

There are two sides to a coin as they are to any argument – be it the result of informed debate and subsequent consensus or be it the outcome of a spur of the moment decision.

The decision of the International Monetary Fund (IMF) to seek a consensus on its nine-month 3 billion dollar Stand By Arrangement (SBA) from the three national parties (Pakistan Peoples’ Party was taken into confidence though as a coalition partner it raised no objections and therefore did not feature in the ensuing public debate) may have been driven by the need to ensure that all conditions would be met (by all possible administrations till 12 April 2024) and the programme not derailed as was the case with the suspended Extended Fund Facility (EFF).

Be that as it may, multilaterals are mandated to engage with all stakeholders prior to project/programme approval and over the years the list of stakeholders has expanded for greater transparency and accountability to include not only those likely to be directly affected (including consumer groups) but also those who can affect the programme itself (politicians). While previously such engagement was largely behind the scenes yet for the Fund team to do so publicly on Friday 7 July 2023 may have been prompted by the existing polarisation in Pakistan or perhaps was made public by the Opposition party.

The resulting consensus is not to be dismissed as of little account as Pakistani politicians are known to uphold political considerations over economic considerations which accounts for the country’s appalling state of the economy today as well as the signing off on its twenty fourth IMF programme.

The other side of the coin relates to the presupposition of an inherent efficacy of all prior and during SBA conditions, an assumption not backed by the Fund’s history either in Pakistan or in any other country – efficacy defined as turning around poorly performing economies riddled with poor governance and corruption. In Pakistan’s case two additional concerns with respect to the SBA need to be highlighted: (i) the notion backed by economic theory that inflation can be controlled through adjustment of the discount rate is applicable in other countries but not in Pakistan as the bulk of domestic credit is appropriated by the government, which crowds out private sector credit with negative repercussions on growth.

Thus a high discount rate has implied higher domestic debt service payments which, in turn, raises the budget deficit, a highly inflationary policy. Thus the need for the Fund to reconcile its budget deficit figures with its stated support for 22 percent discount rate today – 7.9 percent in 2022, 7.6 percent for the year just past and for the ongoing year it has projected a deficit of 7.5 percent; and (ii) focus on total revenue and full cost recovery in the SBA as in EFF, has implied higher taxes on existing tax payers with about 80 percent of all direct taxes collected in the sales tax mode, an indirect tax whose incidence on the poor is greater than on the rich, and higher utility prices that pinch the lower middle to middle income earners more than the rich. A better pro-poor and people friendly approach would be to insist on the implementation of tax reforms, by widening the net to include traders, rich farmers and those operating in the real estate sector, slashing current expenditure (which bafflingly was raised in the IMF approved 27 June budget as opposed to the 9 June budget by 25 billion rupees) – measures that would surely get a buy in from the general public.

Pakistani administrations have typically followed policy measures under the guidance of the Fund and other donors only to the extent of making adjustments that are easily reversible – discount rate adjustment, rescheduling short-term debt, amnesty schemes that have failed time and again, raising utility rates rather than undertaking structural reforms and generating higher revenue through taxes without altering the predominance of indirect taxes while preserving elite capture in terms of budgeted revenue collection and expenditure priorities. Far-reaching structural reforms in all sectors, including state-owned entities/poorly performing utility corporations were never completed as supported by donors. This was emphasized in a statement by the Managing Director of the IMF dated 12 July 2023 exhorting “accelerating structural reforms.” However, the SBA builds on the EFF while its short duration is geared to avert the risk of default which explains why economists are agreed that a longer term programme will be required as and when the new elected government is in place.

There have also been periodic calls for a ‘charter of economy’. If heeded it would be disastrous for the country as it calls for policy consistency rather than reaching salutary objectives which, as in other countries, are similar across our political divide. Barring the consistent failure of all three national parties to appoint on merit there are some policy decisions favoured by each party that should never be implemented in future.

The Pakistan People’s Party, for example, has been responsible for using state-owned entities (SOEs) as recruitment centres, which account for over-staffing that has led many to run into massive losses. Today around a trillion rupees has to be budgeted for SOE support. Pakistan Muslim League-Nawaz with Ishaq Dar as the Finance Minister is responsible for the economically inane policy of controlling the rupee-dollar parity – in 2013-17 through borrowed external funds which led to the highest ever current account deficit in the country’s history in 2018 and again post September 2022 with appallingly low reserves, leading to a gap between the interbank and the grey market with a consequent 4 billion-dollar loss in remittance inflows. The Fund has not too tactfully referred to Dar’s policies as missteps and to uneven policy implementation as the reasons behind the halt in post pandemic recovery, sharply increased inflation and significantly depleted internal and external buffers.

During the previous administration linking the discount rate to consumer price index instead of core inflation, rescheduling loans at a high discount rate, two amnesty schemes and inordinate incentives to the construction sector sustained the elite capture while raising the cost of living.

To conclude, Pakistan needs a new face to head the finance ministry (be it in a caretaker set-up or the next elected government) with acute knowledge of domestic factors to better convince multilaterals/bilaterals, an international academic background that would allow empirical studies to dictate policy (rather than regurgitating preconceived notions for example privatization is always a better option) and last but not least with the backbone to resist pressure.

Anjum Ibrahim, "Economic policy consensus: Anjum Ibrahim," Business recorder. 2023-07-17.
Keywords: Economics , Economic policy , Public debate , Economic growth , Tax payers , Dictate , Policy , Domestic factors , Pakistan , EFF , IMF

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