Pakistan and IMF

Pakistan - IMF PackageNothing to CelebrateS Akbar Zaidi
ALTHOUGH celebrations have already started in Islamabad over the resumption of the IMF $1.6 billion ESAF, this is probably the best time to take stock of Pakistan’s economy which has struggled to cope with events that arose as a consequence of Pakistan’s nuclear tests. While there is little doubt that the resumption of this loan, incorrectly called aid, will have an immediate positive impact on Pakistan’s economy, both in terms of the government and also the private sector, this euphoria is likely to be short-lived.The immediate availability of foreign exchange will ease some pressure on the government’s reserves, and will help in some debt repayment over the next few weeks. The government will welcome this even if the London and Paris clubs agree to concessions in response to Pakistan’s request for debt rescheduling. The private sector should also respond favourably as a commitment from the IMF is usually seen as a positive signal signifying that the rot has been stemmed. Specifically, an easing of the pressure on the exchange rate and a restoration of confidence on the part of the international financial institutions in the economy will give an impetus to business confidence in Pakistan. A likely upgrade in credit rating should also follow.However, this is as far as it goes. All that the IMF loan does is that it allows Pakistan some breathing space over the next few weeks in terms of its balance of payments, and nothing more. The expectations that this package will ‘rescue’ Pakistan’s economy are based more on fiction than on facts. The recent experience of Russia and now Brazil confirms that outside credit is insufficient to shore up investor confidence beyond the very short term and that it will be unable to override key internal structural problems. Nor is this all. In the case of Pakistan, as in the case of a very large number of countries which have taken loans from the IMF, the evidence suggests that things get worse, rather than better, as one would expect. This is the greatest fear arising from adherence to the IMF’s structural adjustment programme.The main component of the new IMF deal, as it has been in the past, is the target for Pakistan’s budget deficit. Currently around 5.5 per cent of GDP, the budget deficit is expected to decline to 3.3 per cent by June 2000, a fall of more than 2 percentage points in 18 months. The lowering of this key statistic will be based upon a host of fiscal measures, which include a rise in the GST, a reduction in non-development unproductive expenditure, restructuring of key public utilities of which WAPDA and KESC head the list, privatisation of financial institutions and a reduction in the federal subsidy for wheat. In addition, the programme envisages a decline in tariff rates, further trade liberalistion, enforcement of a market-based foreign exchange regime and broadening and restructuring of the tax system.Through these measures it is expected that Pakistan’s economy will once again achieve GDP growth close to its historical level of 6 per cent; inflation is also expected to fall to a mere 6 per cent by 2002, and the current account deficit currently in excess of 3 per cent of GDP is expected to fall to less than 1.5 per cent over the same period. It is unlikely that many analysts would disagree with the need for far-reaching structural changes to revamp Pakistan’s economy. With domestic and foreign debt collectively equivalent to around 90 per cent of Pakistan’s GDP, and with interest payments consuming more than half of the country’s annual budget, it is not surprising that the budget deficit continues to be the main focus of the latest IMF package. Also, few would disagree with the need for a better tax system, better public services and better governance, all concerns which form part of the new agreement with the IMF. However, since this is the fourth major agreement with the IMF in a decade, a look at the past would perhaps inform our judgment far better.Since December 1988, when Pakistan entered its first major agreement with the IMF, all governments have been following the broad guidelines of a structural adjustment programme. While the emphasis has shifted now and then, for the most part the basic ingredients continue to be the same. The fiscal deficit has remained the key plank of these agreements, and tariff rates have shown a marked fall from a maximum rate of 225 per cent in 1992 to around 35 per cent today. Privatisation has been actively pursued, with over 70 firms and industries already privatised; two of the five nationalised commercial banks have also been handed over to the private sector. Pakistan’s rupee has continued to be devalued from Rs 18 to one US dollar in 1988 to nearly Rs 50 today. Subsidies have been cut, and administered prices in the utilities sector continuously raised over the last 10 years. Government expenditure has been cut as a consequence of the structural adjustment programmes and the fiscal deficit has been drastically reduced from a high of 8.7 per cent in the first Nawaz Sharif regime in 1990-91 to its low current level of around 5.5 per cent. Hence, quite clearly, over the last 10 years, governments of Pakistan have adhered to the IMF’s structural adjustment packages and the current agreement needs to be seen as a continuation of those agreements. The critical question to ask then is: What has been the outcome of these policies followed on the recommendations of the IMF?Although it is difficult to prove causality, some interesting observations on the economy after 1988 help show how the economy has performed after the initiation of the structural adjustment programme. Firstly, the overall growth rate of GDP has fallen well below trend levels, and appreciably below the average of the 1980s. In the 10 years since the implementation of the programme, in only one year was growth of GDP more than the average of 6 per cent observed since 1977; in two of those 10 years, in 1992-93 and in 1996-97, the growth of GDP was 2.3 per cent and 3.1 per cent, respectively, the lowest in more than three decades. In the 10 years since 1988, inflation was in double digits in eight years, while previously in the 40 years during 1947-87, inflation was in double digits on only seven occasions.The current account deficit, reduction of which is one of the goals of the structural adjustment programme, was more than 4 per cent of GDP in seven of the 10 years; in the period prior to the enforcement of the programme for the eight years, 1980-88, the current account deficit was 3.6 per cent, rising thereafter due to the trade liberalisation reforms. Manufacturing growth rates, which averaged 9.1 per cent during 1980-88, fell to 4.9 per cent during 1988-97, falling to a mere 1.78 per cent in 1996-97, the lowest in the last 30 years. Because of the obsession with the fiscal deficit, public expenditure has been cut, and development expenditure in particular has borne the brunt. From a high of 9.3 per cent of GDP in 1980-81, development expenditure has been falling since and in 1997-98 was only a little over 3 per cent of GDP.Research has shown that after 1988 poverty has returned to Pakistan in a big way, with the number and percentage below the poverty line increasing. Public sector employment, historically an important anti-poverty measure, has fallen, while wages have decreased in real terms: real wages, which increased by 0.7 per cent during 1980-91, fell by 2 per cent during 1991-95; public sector employment is estimated to have fallen by 10 per cent during 1990-93 and 43.2 per cent of workers previously employed in public enterprises were laid off by their new employees. Overall unemployment in occupations with a high incidence of the poor has dramatically increased and real wages of skilled and unskilled labour have sharply declined. In addition, subsidies that were critical to the consumption pattern of the poor have been cut while the burden of indirect taxes on the poorest income group has increased. Not surprisingly, there has been an increase in poverty and inequality, particularly in the rural areas.It is important to emphasise that while these numbers show a very obvious downward trend since 1988 when the structural adjustment programme was introduced, we cannot prove that this is on account of the programme since there are numerous other factors which have also affected the economy – frequent changes in government, a fall in remittances, deteriorating law and order, for example. Nevertheless, given the dramatic changes that have taken place in the economy as a consequence of the programme, common sense suggests that it is more than likely that the adjustment programme had a large contribution to make to this downturn.Little has changed with this new (or restarted) ESAF programme. The conditions attached to the loan are similar to those in the past, as are the main targets and goals. It is unlikely that, as commonly believed, this loan from the IMF will be a panacea for the numerous ills that afflict our economy and society. While restructuring is urgently required, it will need to incorporate far more fundamental changes than those that form the fine tuning of the IMF packages. Numerous writers have argued the need for institutional reform, provincial and local level democracy and autonomy, and a drastic restructuring of the nature of Pakistan’s antiquated state structure. The policies of the World Bank and of the IMF have failed time and time again. Perhaps it is time now to try restructuring and adjustment of a very different nature.
New ReleaseInclusive GrowthK N Raj on Economic DevelopmentEdited byAshoka ModyAvailable fromOrient Longman LtdContact:info@orientlongman.com




CURRENT STATISTICS
Macroeconomic Indicators (10 February 2007)
State-wise Distribution of Bank Offices, Deposits and Credit of Scheduled Commercial Banks: 2005 and 2006
Secondary Market Transactions in Government Securities and the Forex Market - January 2007
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