Economic morass

Advisor Finance Dr Shahid Amjad, on his return from Washington where he attended the World Bank/International Monetary Fund annual spring meeting, revealed in a press conference that Pakistan's economic team had reached an understanding with the Fund for a possible Extended Fund Facility (EFF) of 5 billion dollars. He rightly laid stress on the fact that the actual amount as well as loan modalities would be worked out by the next government itself, if it so desired. Or in other words, he acknowledged that it was not within the purview of a caretaker set-up to take policy decisions that may adversely impact on the economic agenda of the next elected government.
Be that as it may, the fact that the understanding referred to by Dr Amjad was for EFF as opposed to any other loan facility reflects IMF's thinking with respect to the state of our economy. EFF, as per the IMF website, is used to assist countries address their balance of payments difficulties related to structural problems which would naturally take longer to correct than macroeconomic imbalances. The reference to structural problems brings to mind the suspension of the 7.6 billion dollar Stand-By Arrangement (defined as the IMF workhorse to correct balance of payment problems at non-concessional rates though they are lower than what a country would be able to access from private markets) where the Fund's focus is on structural reforms.
There is ample evidence to suggest that the next government would not be able to deal with the economic crisis without approaching the IMF; however, the media briefing by Dr Amjad clearly indicates that the Fund is in no mood to provide any latitude to the next government on the question of structural reforms. Thus we must expect higher electricity tariffs and rupee depreciation, that would erode the value of each rupee earned. This alone would not resolve the energy crisis unless requisite steps are taken to reduce the quantum of subsidy as well as change the energy mix. Only then will be there within two years or so some progress besides tax reforms that would hopefully shift the burden onto the rich thereby dispelling the impression of our major bilateral donors that our elite is exempt from paying taxes and it is Pakistan's poor and middle income earners and the bilaterals' tax payers who fund our budget.
The aide-memoire issued by the Fund, in January this year, also stressed on the need for reforms. In case the Fund does agree to provide 5 billion dollars and a 2 to 3 billion dollars inflow is received from other multinationals (the World Bank and ADB) the reserves would rise to about 13 billion dollars. If our current account deficit remains between three and four billion dollars (even if falling) and the Fund programme is for three years, we shall be back to square one unless we can raise our reserves on our own strength to over 15 billion dollars. But to do so, we would need to undertake reforms. The question that irks us is whether there is indeed some mechanism to perform this task. Depending on Ministry of Finance (MoF) alone to do so has failed in the past and will do so again if we conduct business as usual. Reform, growth policy and budget management may be in conflict at times. Power sector is a typical example of this. The MoF has had to focus on expenditure management and has dragged its feet until political compulsions of the government of the day such as street riots force it release funds. Efforts by MoF to reduce country's fiscal deficit through privatisation of government-owned entities and raise money through the auction for 3G licences have also repeatedly failed. Privatisation Commission feels handcuffed because of Supreme Court decision on the Pakistan Steel Mills case (they can now only attempt to sell government shares through the stock exchange) and MoF is greatly dependent on Pakistan Telecommunication Authority (PTA) to conduct auction for frequency allocations.
Further, most of the time Minister of Finance is busy insulating his ministry against unbudgeted expenditures besides coaxing the Federal Board of Revenue (FBR) to meet the revenue collection target.
It increasingly appears that the country has fallen into a deep hole. MoF has an overarching mandate to hold everyone accountable instead of the autonomy that other ministries and corporations enjoyed prior to Ghulam Ishaq Khan's appointment as the Finance and Commerce minister in 1977. He assumed the position of a de-facto prime minister under General Zia, by bringing Planning Commission and a host of other allied institutions under his wings. With the passage of time, MoF has its finger in almost every pie and has become the face of entire government. Both the Planning Commission and Federal Bureau of Statistics need to be removed from the domain of the MoF. Let FBS provide the data and let PC, after due research come up with a policy that provides reform with growth. After all, the Fund as well as the Bank have technocratic expertise on their staff - which in turn provides a report to their respective boards. These staff members hold discussions with member countries after they obtain data from the borrowing government and then place their proposals before their respective boards. The same approach can be tried in Pakistan. Let the Federal Cabinet directly receive policy options from the Planning Commission to take a decision after obtaining opinions of all concerned ministries, including MoF, on the recommended policy. Their detailed views need be submitted to both the Cabinet, as well as the Council of Common Interest. Provinces now have a major say after the adoption of the 18th Amendment. Remember our failure to adopt an integrated VAT mode for Sales Tax. Their concurrence and acceptance, of any programme is essential before we sign off on a programme.
The first 18 months of a new three-year programme need to be smoothly managed. So the conditions negotiated and quarterly targets fixed in the programme need to be designed in a manner that it is not disrupted. Without growth orientation we would not be able to have forex reserves of over 15 billion dollars. In 2006-2007 forex reserves did touch 16 billion dollars mark on the strength of Foreign Direct Investment (FDI). But all that was pre-Lehman Brothers debacle. Now FDI has slowed down considerably in both China and India - the darlings for foreign investors. The law and order situation coupled with harsh treatment of foreigners in our courts does not provide us confidence in attracting FDI to same level as received six years ago. That leaves us with local investors. Conditions need to be created to encourage them to invest; barriers to entry need to be lowered and regulatory touch has to be soft. Lowering of fiscal deficit through a combination of expenditure control and raising the revenue is needed. Raising the tariff to compensate for cost of electricity or raising the tariff of domestically produced natural gas by equating its price with imported fuel in a knee-jerk fashion may not be palatable to a political government that is answerable to people. Handing the Gencos and Discos to private sector has its own legal limitations. Therefore, to overcome public anger as well as satisfy the courts would need more thought and a more intensive assessment with the development agencies such as: the World Bank and Asian Development Bank. So let us first decide what we need. Then let the technocrats (comprising academics and experts from various fields) recommend policy options with trade-offs. Practicality in policy will only come up in what is proposed after a reality check by experienced technocrats who have experience of fiscal and monetary implementations. Default is also an option but it has its own consequences and its cost can be measured. However, the present drift is not an option as it amounts to doing nothing. Let's conclude this argument with a profound quote: "Better to do something imperfectly than to do nothing perfectly."