During the last 35-40 years, every government that was faced with difficult economic policy choices to overcome a balance of payments (BOP) crisis approached the IMF for a bailout package. The irony is that all the governments held the view that economic policies proposed/to be proposed by the IMF would hurt the people, and will not help the economy, but every government fell in its lap to escape from taking politically difficult economic policy decisions. The result is that, while rulers saved their governments through temporary patchwork, economy continued to fall in a deeper hole from a longer-term perspective.
The IMF on its part used an accounting approach to economic programming while providing financial assistance to various governments. Its standard operating procedure (SOP) was to set quarterly financial targets for the government in terms of various aspects of the budget deficit, government bank borrowing and foreign exchange reserves of the SBP, and evaluated government performance on that basis regardless of the quality of measures used to achieve them.
Bureaucrats quickly developed expertise in window-dressing of economic statistics to satisfy quantitative performance criteria of the IMF, and pleased their political bosses by assuring them that IMF conditionalities could be met without major policy effort. Such a trickery was welcome with open arms by political leaders and military rulers. However, and while serving short-term interests of the ruling elite, such bureaucrats became instrumental in creating deep-rooted long-term structural economic problems.
The IMF staff by and large accepted such statistics without critical evaluation and gave a certificate of good economic health to every government, at least for some time, enabling them to borrow from abroad to meet the urgent financial needs to avert a crisis. As soon as governments were out of a crisis mode, due to inflows of foreign borrowing made possible by operational IMF programs, almost all of them backed out of any real economic reforms under one pretext or the other.
On many occasions, the IMF also gave waivers when the government failed to meet the targets.Thus, the IMF equally shares the blame for accumulating structural economic imbalances while helping to avoid immediate crises.The hide-and-seek game played by the IMF and the governments for the last three decades or so, may have helped in achieving their respective short-term objectives, but has been a major factor for steady deterioration of the underlying economic conditions.
While in opposition, the PML promised to adopt a new approach to economic management that avoided temporary patchwork and was to rely on home-grown program of structural reforms to address the underlying policy deficiencies. However, this promise was forgotten as soon as the PML-N government came into power. It has also adopted the usual IMF program as a way to escape from fundamental policy reforms.
The present finance minister and the IMF have often claimed that the economy is improving. However, if the veneer of patchwork is removed, the reality is that the economy remains trapped in three structural imbalances (a) between the required rate of investment necessary to generate a growth rate of 7-8 percent---- essential to create enough new employmentopportunities to absorb addition to labor force each year---and the domestic rate of savings, (b) between the expenditure needs of the public sector and its tax revenue and (c) between imports and exports. Unless a deliberate effort is made to restructure fiscal, monetary, exchange rate and development policies to gradually reduce these structural imbalances, the country will continue to move from one crisis to another relying on begging and borrowing to avert it with no light at the end of the dark tunnel in which it has been pushed by now.
A rate of investment of about 20-25 per cent of GDP is needed to generate an annual growth rate of around 7-8 per cent on a sustained basis. Assuming that inflow of foreign savings in the form of direct foreign investment and a surplus in the current account of the order of 5-6 percent of GDP can be ensured, the government would need to reorient its policies to about double the rate of domestic saving in order to finance the remaining level of investment. It will require policies that encourage savings and curb consumption both in the private and public sectors.
In the public sector, savings cannot be generated without restructuring of the fiscal policy to raise the tax-to-GDP ratio to about twice the existing level. The base of direct taxes must be consolidated and expanded, the scope of a consumption tax in the form of a VAT must be created, the underground economy should be dismantled and tax administration improved to achieve the required enhancement in tax-to- GDP ratio. An increase in the tax-to- GDP ratio, combined with austerity in current expenditure, is the only viable way to generate public sector savings and reduce budget deficit. Furthermore, the quasi-fiscal deficit of public sector enterprises must be eliminated either by restructuring them to run on commercial basis or by selling them to the private sector.
In the monetary area, three genuine initiatives are necessary to develop a monetary policy that helps reduce the above-mentioned three existing structural deficits. First, the SBP should be made truly autonomous as mandated by the revised SBP Act. Second, its management should be professionalized by appointing competent people on its board and its top management positions. Third, monetary policy and interest rates must be geared to increase financial savings and channel them to productive investments in the private sector. The banking systemought to be rescued from stranglehold of the government to make it effective as instrument of mobilization of financial savings to finance productive private sector economic activities.
In the external sector, it is important to expand exports and contain imports in order to gradually bring the trade deficit to a manageable level that can be financed by remittances and direct foreign investment, rather than by borrowings from abroad.In addition, the balance of payments must record an overall surplus to build up foreign exchange reserves of the SBP without net additional foreign borrowing.
The development strategy would need to be shifted to export expansion and the exchange rate policy used to promote exports rather than to keep debt servicing of the government low by maintaining an appreciated real exchange rate. All avenues of capital flight currently available to the rich people must be plugged and the need for imports due to inadequate domestic production of essential consumer goods reduced.
These are broad parameters of a sound long-term macroeconomic policy framework that can be translated into specific microeconomic policies to bring down the existing gaps between the required rate of investment and the actual rate of domestic savings, between public sector expenditure and tax revenue and between exports and imports. In the absence of major structural policy reforms, there is very little prospect of the economy getting out of the crisis mold in which it is stuck at present.
The IMF equally shares the blame for accumulating structural economic imbalances while helping to avoid immediate crises.