Heartless stabilisation

The design of the newly-approved IMF programme for Pakistan is under scrutiny. Many, including myself, believe that this is a 1980s vintage of the ‘stabilisation first’ programme which has already lost its charm, particularly after the recent experiences of several European countries including Greece. There are others who believe that ‘stabilisation first’ is needed to create the conditions for growth and employment in the medium-term.

Pakistan was given a 36-month programme under the Extended Fund Facility amounting to SDR4.393 billion or US$6.68 billion. This amount was equivalent to 425 percent of the Pakistani quota in the IMF. Greece, on the other hand, also faced a serious debt crisis and went to the IMF for a bailout in 2010. The IMF generously offered Euro30 billion to Greece under the Standby Arrangement (SBA) which was 3212 percent of its quota – the largest fund programme ever given to any country in relation to its quota. The bias of the IMF towards developing countries, Pakistan in particular, was quite obvious.

In terms of conditionalities, the IMF’s current programme is far tougher than the previous ones while also being much thriftier in terms of resource as compared with the 2008 SBA given to Pakistan. As opposed to three prior actions, two performance criteria and seven structural benchmarks of relatively benign nature, there are five tough prior actions, five performance criteria and eleven structural benchmarks; nine of them will be attained by the end of June, 2014. The IMF released only $547 million or eight percent of the size of the loan as the first tranche as compared to $3.1 billion or 40 percent of the loan under the 2008 SBA.

It is strange that Pakistan’s foreign exchange reserves declined to a five-year low ie $3.9 billion in the midst of the IMF programme. It is ironic that Pakistan sought the IMF programme to prevent debt default yet it has reached dangerously close to default. Furthermore, there will be net outflow of foreign exchange to the IMF even though Pakistan will still be under the IMF programme.

Pakistan’s 2013-14 budget has witnessed drastic changes after it joined the programme. Budget deficit is reduced by Rs218 billion under the IMF programme; this decline in deficit is brought in by reduction in both expenditure and revenue. Expenditure is reduced by Rs256 billion and revenue is lowered by Rs37 billion. Within expenditure, the public sector development programme is cut by Rs321 billion, while the current expenditure is increased by Rs65 billion. In other words, the deficit has been reduced not by mobilising more resources but by cutting development spending. Where is the quality of expenditure under the ‘stabilisation first’ programme?

I am unhappy with the design of the IMF programme for several reasons. First, this programme is the worst form of stabilisation of the 1980s vintage which has fallen into disrepute as global leaders, over the last two years, have been advocating for promotion of growth and creation of jobs as primary objectives of macroeconomic policies in the short-run and stabilisation in the medium-term from the platform of the G20. Why did such a change in policy prescription not reach the staff level of the IMF?

Second, Pakistan’s economy has been growing at an average rate of three percent per annum for the last five years and is projected to grow in the same range during the IMF programme and beyond. With population growing at an average rate of 2.2 percent per annum, real per capita income would remain more or less stagnant in the next five years.

With the labour force growing at an average rate of 3.5 percent and employment elasticity of 0.51, more than one-half of the new entrants (over two million each year) in the job market will fail to get employment. In other words, more than one million job seekers will join the pool of the unemployed each year and in five years over five million will join the pool of the lost generation. Similar numbers of job seekers have already joined the pool in the last five years.

How long will these people remain unemployed? Naturally, they have been seeking low-paid jobs in the informal sector to survive. There is a limit to how many job seekers this sector can absorb. This is precisely the reason why the country is witnessing an upsurge of crimes in all the major cities. There are troubled areas in Karachi where youth unemployment is between 40 and 60 percent. Educated youth are found to be involved in robbery and street crimes in various cities of Punjab as well.

It is in this background that the IMF programme has forced the government to raise power tariffs in a highly disproportionate manner, ranging from 19.4 percent for rich consumers (701 units and above) to 73 percent for low-income group consumers (201-300 units). The recent unjustified increase in oil prices was apparently meant to take care of the depreciation of rupee caused by the programme.

The unprecedented increase in the power tariff and unjustified increase in oil prices in the midst of stagnant real income have put unbearable pressure on the poor, low-income and even middle-income households. The government is under tremendous pressure and is fast losing its popularity – the results of the by-election in Faisalabad are a classic example.

If the concept of the Laffer Curve is true, the unprecedented increase in power tariffs is bound to reduce revenue of the utility companies. The recovery rate of electricity bills has already dropped from 85 percent to 71 percent, causing a loss of 14 percentage points or Rs140 billion in revenue. After the receipt of electricity bills for the month of October in November, the recovery rate is bound to decline further as people will avoid paying.

The government should review the current IMF programme and raise the issue with the IMF team during their review mission in November. The pace of adjustment, in particular, needs to be moderated. A balance is needed between stabilisation and growth. Reduction in deficit must come primarily from mobilising more resources and not from cutting development expenditure. There should be no heartless stabilisation.

Pakistan must seek IMF resources equivalent to the payment due during the current fiscal year. In other words, it must seek release of at least 50 percent ($3.3 billion) of the size of the programme immediately. Before raising the power tariff the loopholes of power theft must be closed and the heads of Discos and Gencos must be replaced with credible persons. The government must pursue an import compression policy by imposing regulatory duty on luxury imports to improve balance of payments.

These are some of the suggestions that will benefit the programme, the government and the people of Pakistan. The idea is that the cost of stabilisation must be borne by the rich and the powerful, not by the poor and the lower- and middle-income class.

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