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The End of History and the Last IMF

In his 1992 book The End of History and the Last Man Fukuyama argued that following the end of Cold War liberal democracy and capitalism were here to stay. He didn’t think it was a period of history but the end of history; the end point of our ideological evolution.

Well, we all live to learn. The evolution we are witnessing today is political ideology lurching to the right and economic thinking shifting to the left. Fukuyama’s powerful voice is fading into another paean to Utopia, in the spirit of Thomas Moore, Hegel, and Marx.

Asad Umar said IMF 2019 will be the last one; the end of history. Fortuitously for him, he is not around to be held to his pledge. His successor is saying no such thing. Does he know better?

In a narrow technical sense it is not fiscal indiscipline that makes the IMF keep revisiting us. At a cost, heavy one, we can fund fiscal deficit by printing notes and making inflation more bearable through subsidies. Such a ‘stimulus’ will also provide a fillip to growth and jobs.

But this is what makes for an overheated economy – when productive capacity is unable to keep pace with the growing aggregate demand; or when an economy grows at a rate that is unsustainable. It almost invariably leads to recession; the kind of fears we are currently accosted with.

Fiscal ‘stimulus’ can’t work if the external sector is vulnerable. Indeed, it exacerbates these vulnerabilities (hence the argument that our external sector woes emanate from our fiscal irresponsibility). Sadly, we can print rupees but not dollars!

Our net international reserves (SBP gross reserves less outstanding FX liabilities) are minus $ 7.9 billion. Without IMF’s ‘seal of approval’ multilateral flows dry up and even commercial borrowing becomes hard and expensive. How do you finance imports? Remittances help, but are nowhere enough. ‘Friends’ can do a rescue job, but no more.

IMF becomes inevitable.

Why do we look upon the IMF as the poisoned chalice? If it reads us the riot act should we shoot the messenger? Was Asad being realistic when he wanted to seduce the IMF on his own terms? Shouldn’t a lender ensure that he will get his money back?

Since the lender wants his money back in hard currency it looks at your external sector first. It has to make sure that over a period you will have the dollars to retire the loan. If, however, it concludes that the external sector weaknesses are the consequence of fiscal profligacy it has to go into that as well.

It puts to the government “you have fiscal and current account deficits that are not sustainable. What do you plan to do about it?” It is only when the government is unable to come up with ‘home grown’ solutions that the IMF goes into the ‘instruments’, or reforms, if you will.

What choices do we have?

This year’s fiscal deficit is likely to hit around 7.5% of GDP. In the IMF book it has to be brought down by at least three percentage points, albeit over a three year period. How do we do it?

It would require, simultaneously, a huge revenue effort and extensive expenditure cuts. Both require enormous resolve – and spell pain.

The canny Dar managed to get away with it. He drew a lot of criticism for his methods (blocked refunds, wholesale withholding taxes, ‘legalizing’ non-filers) but did manage to double the revenues. This gave him space to go light on the more hurtful expenditure cuts (Defence, subsidies, and State Enterprises), obtain 14 waivers from the IMF, and borrow -some would say with gay abandon.

What space does Hafeez have?

On the expenditure side there are really only two candidates: subsidies and State Enterprises. Development expenditure has already been pared to the bone and Defence has its own dynamics.

Removal of most subsidies will be politically unpalatable, though resolution of circular debt cannot be deferred for long. Any strengthening of oil prices will pose a further challenge. All in all, we should brace ourselves to higher energy bills.

For the loss-making State Enterprises closure is not an option. At best government can fast-track privatisation. Because of the time needed to restructure/ work out modalities in respect of loss making enterprises we expect the government to privatise/divest its holdings in the profitable ones. That will earn some bucks but not enough to offset the losses.

It is the Revenue side that’s going to keep Hafeez awake. After all the efficiencies and roll-back of exemptions the gap will still be sizeable (around Rs 700 billion). Slowing down of the economy and lower imports will make the required fiscal effort that much more hurtful.

Borrowing from the SBP – the compliant lender that the government already owes Rs 3.5 trillion to – will not be an option under the programme. A hike in GST looks imminent; as does the move towards VAT mode.

The real Gordian knot is the external sector. Imports can’t be contained any further and exports are unlikely to take off, despite the current exuberance of the textile sector and the revised FTA with China. Whether a managed float or a free float it is questionable if rupee depreciation will be much help, even if necessary.

Asad did well to resist the ‘Egyptian template’ that the IMF glide path seemed to be gravitating towards. In his being made the sacrificial lamb, for doing what IMF wants us to do more of, Asad’s case has also served to alert the IMF of the ‘do more’ consequences.

IMF must also be going through pangs of conscience: how could the economy be in such dire straits so soon after IMF gave it a clean bill of health? If for no other reason than self-vindication stiff structural benchmarks are likely to dominate the programme, with little room for waivers.

IMF will also have to be cognizant of the atrophied institutional capacity, which has now emerged as a structural impediment. What can they do about it?

Institutional weaknesses, burden of ‘reforms’ falling disproportionately on the poor, government’s yo-yoing cast bad omens. But the most critical is Exports.

Until Exports can be put on a sustained upward trajectory our IMF addiction shall continue. It is not the end of history.


Shabir Ahmed, "The End of History and the Last IMF," Business Recorder. 2019-05-02.
Keywords: Economics , Cold war , State enterprises , Liberal democracy , China , IMF , GST , GDP

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