EDITORIAL: The much hyped attempt by the International Monetary Fund (IMF) team to seek a consensus on the nine-month (12 July to 12 April 2024) 3 billion dollar Stand-By Arrangement (SBA) scheduled for Board approval on the 12 of July, tomorrow, has elicited comments from political pundits and economists alike.

The Fund’s objective is undoubtedly to ensure that the set of conditions agreed under the SBA will have a buy-in from all those likely to be in government during the duration of the programme – caretakers who have no mandate to impose additional taxes in the event that there is a shortfall in the budgeted revenue measures or fail to adhere to the condition of not seeking any supplementary grant during the year which will necessitate staying within the budgeted amount for each item; or the next possible elected government Pakistan Muslim League-Nawaz (PML-N), Pakistan People’s Party (PPP) or Pakistan Tehreek-e-Insaf (PTI)) to pledge to follow all SBA conditions.

The major flaw in this argument is that all programme conditions, prior as well as those that have been agreed to be implemented once the SBA is approved which will then be uploaded by the Fund after Board approval, are premised on not only the Fund’s in-depth knowledge of the state of Pakistan’s economy (determined after sharing of data) but also of key economic linkages that may be unique to Pakistan.

While data fudging especially those that relate to the general public (inflation and unemployment) are not unusual yet some economic linkages assumed by the Fund for Pakistan are simply not pertinent.

An obvious example is IMF’s insistence that adjusting the policy rate would impact on domestic inflation – an argument based on conventional economic theory that applies to many countries but not to Pakistan.

Raising the policy rate to the existing 22 percent is actually raising inflation indirectly, given that the government is the major borrower, with private- sector credit having contracted in the outgoing year by over 80 percent due to the high policy rate, which in turn raised the: (i) debt servicing component of the budget and therefore the budget deficit, an inflationary policy; and (ii) the government re-injects this borrowing into the economy for current expenditure that again is highly inflationary.

The Fund’s approach is reminiscent of repeated calls for a ‘charter of economy’, whereby a consensus on economic policies as opposed to objectives across the extremely acrimonious political divide has been repeatedly sought mainly by PML-N politicians. And, while the overall stated objective of all political parties is to achieve strong economic fundamentals, yet given the proclivity of our administrations, past and present, civilian and military, to support flawed economic policies and to sustain the elite capture that the country remains subjected to, that have resulted in steadily worsening macroeconomic fundamentals that have reached a crisis point today.

In his maiden speech as leader of the opposition, Shehbaz Sharif, had proposed a ‘charter of economy’, ignored by the PTI government, while Ishaq Dar, as the Finance Minister during 2013-17, repeatedly called for such a charter or accord, yet such calls have raised the hackles of many an independent economist.

Ishaq Dar as the finance minister followed the disastrous policy of keeping the rupee overvalued which led to the highest-ever current account deficit in 2018, and loss of remittance inflows of around 4 billion dollars in 2022-23; the three previous administrations offered amnesty schemes that have acted as disincentives to honest taxpayers, while delays in raising tariffs to achieve full cost recovery by massively raising subsidies have raised budget deficits.

The PPP has been prone to use state-owned entities as recruitment bureaus for its supporters which led to many an entity suffering massive losses that now require subventions from the budget on a regular basis.

There are numerous recent examples whereby all three national parties when in power have taken measures that indicate political considerations are paramount instead of economic imperatives.

At the same time, while many of the structural reforms supported under the Fund programmes must be implemented, if Pakistan is to improve sectoral performance, particularly in the energy and tax sectors, yet not all their prescriptions can be supported.

The way out of this logjam is to appoint a finance minister able to think out of the box, which implies policy decisions based on empirical studies rather than on an IMF prescription – a job requirement that would require an economist, preferably someone from outside the pool of previous finance ministers/advisers as well as retired or serving professionals in multilaterals who are hamstrung by their stints in these organisations and not fully familiar with the peculiarities of the country’s economy and the obtaining ground realities.

Copyright Business Recorder, 2023