Friday, February 6, 2015

Daily Times Editorial Feb 7, 2015

IMF’s ‘generosity’ Meetings in Dubai between the IMF team led by Jeffrey Franks and the Pakistani one headed by Finance Minister Ishaq Dar seem to have found a remarkable convergence of views on the state of Pakistan’s economy. What amounts to a virtual clean chit has been handed to Pakistan on a silver platter, a development that will probably lead, after the review process by the IMF executive board is completed, to the release of the sixth tranche of SDR 360 million ($ 518 million) of the three-year Extended Fund Facility of $ 6.64 billion. The IMF’s stated view is that the Pakistan economy shows that activity and the external position continue to improve, driven by prudent monetary and fiscal policies, lower oil prices and robust remittances. The financial sector indicators are sound, real economic growth in FY 2014-15 is still expected to pan out at 4.3 percent and headline inflation is low. The external account deficit is expected to narrow to 1.2 percent of GDP despite a decline in exports driven by lower cotton prices and real exchange rate appreciation. These developments, strong capital inflows and the recent Sukkuk placement have allowed the further strengthening of foreign exchange reserves at end-December 2014 to $ 10.5 billion ($ 15 billion if the reserves held by private banks are included). The IMF rounds off its ‘generous’ assessment by stating that the reform programme is on track and all criteria have been met. In other words, all is for the best in the best of all possible worlds as far as the Pakistan economy is concerned. However, the recent problem highlighted by none other than Ishaq Dar about the need to increase the fiscal deficit target to 5.3 percent from the previously agreed 4.9 percent on account of increased expenditures on the National Action Plan and the rehabilitation of internally displaced persons (about Rs 100 billion) found no reflection in the IMF’s prognosis except for Franks asserting that the fiscal deficit target remains what it was despite the reduced tax collection target of Rs 2,691 billion from the previous Rs 2,810 billion (a Rs 119 billion reduction) and that the concerns of the Pakistan government in this regard were still under discussion. The optimistic view is that a combination of revenue measures and expenditure ‘adjustments’ would serve the purpose. Naturally, Finance Minister Ishaq Dar has every reason to be pleased with the findings of the IMF review mission. Nevertheless, one may be forgiven for raising a few quibbles. The reforms programme envisaged an incremental expansion of the direct tax base and therefore, impliedly, lesser reliance on regressive indirect taxation. Had progress in this direction been robust, perhaps the finance minister would not have had to raise GST on POL from 17 to 22 and then 27 percent to make up for the reduced revenue from lower POL prices. Investment in the real economy is hardly inspiring, capital flows revolving mostly around the stock exchange and other speculative activity. In a bid to maintain foreign exchange reserves at the IMF-desired levels, some critics accuse the finance ministry of starving the energy sector of funds, a restraint that arguably led to the recent petrol shortage and contributes heavily to the energy crisis as a whole because of circular debt (state institutions are regarded as the main culprits in non-payment of utility bills, which feed the growth of circular debt). Headline inflation may be low according to official statistics, but the lived experience every day of ordinary citizens contradicts the rosy picture. On the contrary, even lower oil prices have failed to translate into reduced costs of everyday use items, food and other essentials maintaining core inflation at a crippling rate. The IMF and the finance ministry may be cosily in bed with each other and patting each other on the back, but the people of Pakistan may respectfully be allowed to dissent from the ‘best of all worlds’ picture painted. An ideologically driven neo-liberal agenda informs the IMF and our economic managers’ worldview, not a critical and realistic view of the problems of the economy and the woes of ordinary citizens. Shibboleths of this neo-liberal paradigm such as privatisation (‘getting government out of business’) in practice over the years since Pakistan embraced this claimed panacea are mixed at best. Countries like Pakistan need to revisit the received wisdom and utilize their own wisdom to see what is in our best interests without dictation or the vise-like grip of IMF programmes that have proved failures all over the world.

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