The International Monetary Fund's (IMF) report titled Regional Economic Outlook has been released on its website; however its presentation on 29 October in Pakistan has been postponed. The reasons for the postponement, would no doubt, have to do with continued security concerns in Pakistan, with the IMF staff not even holding routine quarterly consultations required under the 7.6 billion dollar stand-by facility in Pakistan.
Be that as it may, the linkage between peace and prosperity is self-evident and was underlined by the IMF Managing Director Strauss Kahn in a speech delivered on Friday, "ultimately peace and prosperity feed on each other. I believe history teaches us this lesson. We all remember how the Great Depression created fertile grounds for a devastating war.
More recently, in many parts of the world, economic instability provoked political upheaval, social unrest, and conflict." It is after all economic deprivation in Pakistan, particularly in the North West Frontier Province and in Federally Administered Tribal Areas (FATA), that provided a fertile ground for the Taliban to flourish.
In addition the world must recognise that the benefits of the ongoing military operations in Pakistan are not limited to this country but are dispersed throughout the world and as such there is an urgent need to support our war efforts financially. The IMF report's key messages are fourfold. First that the global economy is beginning to grow again but recovery will remain sluggish, requiring sustained policy support until the expansion is firmly entrenched.
Thus export growth will remain dampened, which would have negative implications for the Pakistan economy as (i) reliance on foreign assistance for balance of payment support would continue; (ii) the rupee would continue to remain under pressure which would raise the value of imports; and (iii) there will be further negative repercussions on productivity.
Second, the report states that financial markets are expected to continue to improve but remain tight, a fact that would compromise our government's sustained efforts, unsuccessful to some extent, for a rise in foreign official assistance inflows.
Third, expansionary monetary and fiscal policies would continue to underpin global economic recovery but the report advises that to safeguard price and financial stability and the soundness of public finances, credible exit strategies will be required. In marked contrast, Pakistan is supporting a tight monetary policy in line with its commitment to the IMF, a reverse of what the rest of the world is following, which is squeezing out domestic demand.
In addition, a contractionary fiscal policy, as part of the IMF programme, with the objective of reducing unsustainable high deficits of the past has led to stagflation in the country. However, Pakistani stagflation is unlikely to be dealt with purely by following feasible macroeconomic policies and instead requires massive doses of electricity, or increased energy generation, to rejuvenate productivity.
And finally the report states that two factors are required for the medium term, namely, private demand replacing public demand and demand in external surplus economies like China would rise to make up for shrinking demand in external deficit economies like ours. The two factors remain a pipe dream, as far as Pakistan is concerned.
The foregoing reflects an obvious fact: that Pakistan appears to be following policies distinct from the rest of the world and it is doing so, not because of our own home-grown economic pundits, both within and outside the Finance Ministry, but through IMF prescription. So what are the implications of Pakistan following policies at odds with the rest of the world? This implies that the source of our economic ills is distinct from that of the rest of the world.
As a country, Pakistan needs to prioritise three policy actions that continue to be ignored. First, the expenditure revenue equation as envisaged in an unrealistic 2009-10 budget, unrealistic given our serious internal and external resource constraints, must be revisited not on an ad hoc basis but on the basis of long-term sustainability.
Thus in the current year, electricity and water projects may be the only ones that receive allocations, while allocations to other ministries must be the bare minimum. Second, imports need to be massively curtailed and the government must allow only essential imports, for example oil and related products.
Third, private sector productivity must be the focus and to ensure this, the government must allow them a level playing field, not only with respect to other countries but also with respect to incentives allocated to industries being run by the state, civilian or military.
Those economists, who argue that once the global recession is over our economy would also benefit, must remember the word of caution by the IMF "low integration with global economy means losing out on the upside potential." Pakistan has low integration with the rest of the world, which means that we would not only lose on the upside potential but also must take corrective measures that are not in sync with the global economy. The task is indeed challenging for our economic managers, and they have yet to prove themselves equal to it.