Source: http://www.dailytimes.com.pk/default.asp?page=2008%5C07%5C22%5Cstory_22-7-2008_pg7_13
* Dr Meekal review says SBP missed opportunity to act early
By Khalid Hasan
WASHINGTON: The Pakistani economy today faces the looming risk of a full-fledged balance of payments crisis, domestic and external fiscal imbalances that have reached alarming proportions and show no signs of self-correction or correction through policy action, according to an economic expert.
Dr Meekal Aziz Ahmed, who served senior advisor to the IMF executive director dealing with the region and as senior economist with the Pakistan Planning Commission, writes in a brief review of Pakistan’s economic plight that inflation has accelerated to levels never seen before in the country’s history and it is set to rise further, devastating the fixed income groups and the poor. There has been “criminal negligence” behind the power crisis, which has led to untold losses in domestic production and exports. Added to these disasters the country has a food crisis, an oil crisis, an emerging water crisis, not to mention a political crisis. There is agreement among economists, he notes, that Pakistan’s short-term prospects are grim. With economic policies likely to remain broadly unchanged, the economy will continue to slide downward until the country runs out of its foreign exchange reserves. At the point of reserve exhaustion, Pakistan will not be able to pay for its imports or meet its debt service obligations. The country, in short, will be bankrupt, Dr Ahmed predicts.
Dr Ahmed points out that Pakisan’s present predicament did not happen overnight, but is the direct consequence of the government’s “short-sighted and misguided policies” in the recent past, characterised by its single-minded obsession with producing high growth GDP rates, without consideration to the quality or sources of growth which have a crucial bearing on sustainability. Such an economic strategy, largely consumption driven and fueled by cheap credit, rather than being driven by the more desirable route of investment and exports, was, sooner or later, bound to run into resource constraints. Eventually demand would outstrip available capacity, macroeconomic imbalances would widen and inflation will start to turn upwards. The view that today’s economic problems are the lagged consequence of past policies is neither conspiratorial nor does it amount to playing the blame game. There have been long lags between policy actions and policy outcomes and what the Pakistani economy is witnessing today are the lagged consequences of policy actions taken earlier. “The chickens have come home to roost,” he adds.
Dr Ahmed writes that the State Bank’s recent actions to tighten monetary policy reflect a failure to gauge the strength of the inflationary pressures building up and the failure to act in time. Given the long lags in the monetary policy transmission mechanism, the monetary policy should have been tightened much earlier. The State Bank missed the opportunity to act early and responsibly and its belated actions are a classic illustration of “too little, too late”. Dr Ahmed says he is dispirited by what appears to be the State Bank forfeiting its hard-won autonomy. Despite possessing considerable statutory powers, the State Bank seemed to have waited for a nod of approval from government, rather than act in accordance with its mandate and tighten monetary policy immediately. Inflation, many observers believe, is now out-of control, which is troubling because Pakistan has little experience with high inflation and policy-makers may not know how to control it.
According to Dr Ahmed, the new government missed an excellent opportunity to demonstrate that it was taking charge of the rapidly worsening economic situation by failing to devise a bold fiscal strategy aimed at reducing aggregate demand pressures and starting the process of restoring macroeconomic stability. This could have been achieved through the implementation of a sound 2008-09 budget. A tight fiscal stance, desirable in its own right from a macroeconomic standpoint, would have reinforced the tight monetary policy stance. The “awam dost” budget that followed showed that the government was no aware of the crisis towards which the country was hurtling. The budget was a major disappointment, being loose, abounding in exemptions and concessions and amnesty schemes, despite bitter experience from the past.
The poorly thought out plans to “help” the poor are likely to be ill-targeted, costly, and only make matters worse. The tax revenue target is fanciful and completely out of line with what the Federal Board of Revenue (FBR) has been able to achieve in the past six decades. To add to that, the budget expenditures are seriously understated. All this boils down to a fiscal deficit outcome that is likely to be significantly higher than budget projections. Demand pressures will grow, and spill over into the external sector via enhanced imports, the last thing the economy needs. With limited autonomous or induced financing, there is not much left to sell by way of privatization.
Dr Ahmed predicts that the speculative stock market and real estate “bubbles will pop,” creating havoc in the financial sector and wiping out the lifetime savings of small investors. According to some economists, the economy could fall apart as early as December this year or March 2009 by the latest, even with the respite offered by the recent Saudi oil facility. What the economy needs is an immediate and drastic tightening of macroeconomic policies, to be achieved principally through deep and durable expenditure cuts. These cuts have to be real and not cosmetic. They can be implemented quickly. Similarly, quick-yielding revenue measures could also be considered. Pakistan needs to halt adverse trends and start the process of reversing them. Valuable time has already been lost, confidence is being rapidly eroded as reflected in the recent fall of the domestic currency and the stock market, which are symptoms of accelerated capital flight. The government will become unpopular because of the belt-tightening, but there are no other options. Getting inflation under control and back into low single digits will not be easy, he warns. There is no “soft option,” Dr Ahmed adds, no easy way out. He rejects the idea of donor conferences as being unrealistic. Any aid given will be conditional and attached to a programme, which is consistent, coherent and doable, with assured implementation. He suggests that Pakistan should give the IMF a programme which is strong and credible, with appropriate conditionality, and ask the IMF and donors to finance it.
Saturday, August 2, 2008
Thursday, July 24, 2008
Addicted to the IMF
Source: http://thenews.com.pk/daily_detail.asp?id=125888
Part II
Thursday, July 24, 2008
Meekal Aziz Ahmed
There are some other ideas that I wish to comment upon briefly. One economist suggests we let inflation run rampant because it cannot be controlled. Instead we should concentrate on protecting the poor through safety nets. Who the poor are, where they are, how they are to be reached, what kind of safety nets are envisaged and at what cost is left unclear. I, for one, await the implementation of the Benazir Card with trepidation. It will help no one, become a new avenue for corruption, turn into a scandal, and be quietly dropped, having only earned her a bad name.
There are disturbing reports that the government could impose quantitative restrictions on "non-essential" imports, harking back to the closed economy of the 60's. This would be another disaster to add to the list of disasters in Pakistan. The only beneficiaries of such import controls will be bureaucrats, price gougers and smugglers.
An interesting rumour is that the authorities might convince the World Bank into lending fast-disbursing money to Pakistan and also certify that our macroeconomic picture is satisfactory. However, it is not the job of the World Bank to certify any countries macroeconomic credentials. That is the job of the IMF, which has the mandate and expertise to make such a judgement. Would going with the World Bank without the IMF's financial involvement and only a "Letter of Comfort" from them convince donors to offer assistance? It is unlikely.
It is a fact that donors, multilateral and bilateral, have required, indeed have always insisted on, a formal IMF programme as a pre-condition of their pledge of assistance. Since it is the donors who provide the bulk of the financing, with the IMF only putting up roughly 10 per cent of the needed financing, they have an interest in making sure their money is well spent. Moreover, this aid must be spent in the context of some sort of overall programme. Most importantly to donors, the programme should have the formal seal of approval of the IMF on the macroeconomic situation and their financial involvement. Getting donors to pledge resources in the context of an IMF programme is the IMF's "catalytic" role working as it was designed to do.
As far as this writer is aware, there are no known exceptions to the rule of an IMF programme preceded by or concurrent with pledges of donor assistance for balance of payments and budgetary support. This rule is unlikely to change anytime soon. Detractors of this approach will argue that turning to the IMF would be a "disaster" because of the stringent conditions and overly-tight macroeconomic policies they would insist on. In my view, we are already in the midst of a disaster, or more appropriately, many disasters.
A major reason for the seemingly drastic nature of adjustment the IMF imposes is that countries are loath to turn to it until the bitter end and the economic situation has reached dangerously precarious proportions. Pakistan is such an example. Our country has waited till the last minute when the economic situation is on the verge of imploding. One such time was evident when Pakistan turned to the IMF for a bailout following Nawaz Sharif's "yellow cab scheme" which bankrupted the country leaving it with barely $100 million of foreign exchange reserves. This level of reserves was sufficient to pay for a couple of days of imports and no debt service.
The later a country turns to the IMF, the more drastic and urgent the adjustment needs to be. Fiscal and external imbalances are greater and the situation more precarious. In these circumstances, the country needs to pull back harder. In any event, it is true that no country would want to be told that it is courting economic disaster. But, as is often said, the IMF has a propensity to take away the punch bowl just as the party is getting started.
Even the IMF, for all its hard-nosed conditionality, has not been able to get Pakistan to implement serious, lasting economic reform. These reforms are ultimately in Pakistan's own interest and for which Pakistan should take ownership. This can be done by designing its own programme and presenting it to the IMF for financing. The latter for its part should not impose its conditions on Pakistan and in fact it should be the other way round.
To be fair, some good has been done under IMF pressure. However, by and large, Pakistan's track record with the lending institutional has been an embarrassment. It is replete with repeated failure in meeting targets, especially by the FBR, and an approach to economic reforms where they are started and then rolled back. The FBR has also falsified data for which Pakistan paid a heavy fine to the IMF of millions of dollars. In this writer's view, which is based on close and personal observation over many years, adjustment and reform under the IMF in Pakistan has been largely a myth.
If this is so, one wonders what all the fuss is about. If Pakistan has not accomplished much under IMF tutelage in the last fifty years in the context of the repeated use of IMF resources, the IMF could not have had much influence on policy-making. Hence, there would appear to be no reason for the angst about an impending "disaster" if we turn to the IMF. The fact is that the IMF, for all its visibility and power, has not been an important part of our economic decision-making process.
When Pakistan has faced a financial crisis, and there have been many, we seem to want to mend our ways. However we start to falter. As soon as the economy emerges from it's low point and starts to recover, and the reserves start to build up, and confidence returns, and as soon as the IMF programme is over, we stop being responsible. Reforms are undone, some policies are reversed, and anything of substance we may have achieved is lost.
This story has been repeated throughout our economic history. When the IMF programme was completed recently, policies were loosened. If we take inflation as an indicator of how responsibly an economy is run, we have moved from an inflation rate of around three per cent per annum at the time of the IMF programme and stable, to 29 per cent per annum now and rising. While not all of this surge in inflation can be attributed to irresponsible and loose policies, a significant part can.
There are many who feel that what Pakistan really needs is a full-blown crisis, a catastrophic meltdown. It does not need another IMF-sponsored bail-out in which no serious or lasting reforms will be undertaken, leaving the country pretty much where it was before the IMF programme, except with a lot more foreign debt. There are also those who believe the IMF presents a serious "moral hazard". It allows a country to mismanage and take risks because there is an un-spoken assurance that it will be bailed out. The IMF, the champion of sound economic policies, generates perverse incentives and encourages bad policies.
Countries that have successfully reformed, Argentina, Brazil, the Asian Tigers, have done so after facing heart-wrenching crisis and faithfully implemented very tough IMF programmes. They have learnt from their mistakes. Some have implemented reforms without assistance from the IMF, Malaysia being an outstanding example. These countries have no intention of going back to the IMF. In contrast, Pakistan has become what is called a "prolonged user", with no sign of getting rid of its addiction to IMF resources.
It is unfortunate that should such a serious crisis befall Pakistan, it is our poor who will suffer the most for no fault of theirs. They have suffered stoically for six decades, putting their complete faith in successive governments. They have been betrayed each time. The famous statement of Quaid-i-Azam that every successive government in Pakistan will be worse than the one before it has turned out to be correct.
In the meantime, our self-serving elite who hold the fate of our country in their hands and who have the power to change the complexion of Pakistan overnight should they choose, will continue, as before, exploiting the country mercilessly with not a blot on their conscience.
As an economist friend of mine observed, the elite with all their assets held abroad in dollars, and all their liabilities held domestically in rupees, are in an ideal position. They are ready to bolt at the first sign of trouble with their dual nationality passports in hand and enjoy their mostly ill-gotten wealth abroad. Life couldn't be better for these elitists. Only they can sleep easy in Pakistan with their power generators humming through the night.
Concluded
(This is adapted from a paper that he wrote for the Lahore-based think-tank Spearhead Research, headed by General Jehangir Karamat)
The writer has a doctorate from Oxford University and has worked at the Planning Commission and the IMF. Email: Meekalahmed2@aol.com
Part II
Thursday, July 24, 2008
Meekal Aziz Ahmed
There are some other ideas that I wish to comment upon briefly. One economist suggests we let inflation run rampant because it cannot be controlled. Instead we should concentrate on protecting the poor through safety nets. Who the poor are, where they are, how they are to be reached, what kind of safety nets are envisaged and at what cost is left unclear. I, for one, await the implementation of the Benazir Card with trepidation. It will help no one, become a new avenue for corruption, turn into a scandal, and be quietly dropped, having only earned her a bad name.
There are disturbing reports that the government could impose quantitative restrictions on "non-essential" imports, harking back to the closed economy of the 60's. This would be another disaster to add to the list of disasters in Pakistan. The only beneficiaries of such import controls will be bureaucrats, price gougers and smugglers.
An interesting rumour is that the authorities might convince the World Bank into lending fast-disbursing money to Pakistan and also certify that our macroeconomic picture is satisfactory. However, it is not the job of the World Bank to certify any countries macroeconomic credentials. That is the job of the IMF, which has the mandate and expertise to make such a judgement. Would going with the World Bank without the IMF's financial involvement and only a "Letter of Comfort" from them convince donors to offer assistance? It is unlikely.
It is a fact that donors, multilateral and bilateral, have required, indeed have always insisted on, a formal IMF programme as a pre-condition of their pledge of assistance. Since it is the donors who provide the bulk of the financing, with the IMF only putting up roughly 10 per cent of the needed financing, they have an interest in making sure their money is well spent. Moreover, this aid must be spent in the context of some sort of overall programme. Most importantly to donors, the programme should have the formal seal of approval of the IMF on the macroeconomic situation and their financial involvement. Getting donors to pledge resources in the context of an IMF programme is the IMF's "catalytic" role working as it was designed to do.
As far as this writer is aware, there are no known exceptions to the rule of an IMF programme preceded by or concurrent with pledges of donor assistance for balance of payments and budgetary support. This rule is unlikely to change anytime soon. Detractors of this approach will argue that turning to the IMF would be a "disaster" because of the stringent conditions and overly-tight macroeconomic policies they would insist on. In my view, we are already in the midst of a disaster, or more appropriately, many disasters.
A major reason for the seemingly drastic nature of adjustment the IMF imposes is that countries are loath to turn to it until the bitter end and the economic situation has reached dangerously precarious proportions. Pakistan is such an example. Our country has waited till the last minute when the economic situation is on the verge of imploding. One such time was evident when Pakistan turned to the IMF for a bailout following Nawaz Sharif's "yellow cab scheme" which bankrupted the country leaving it with barely $100 million of foreign exchange reserves. This level of reserves was sufficient to pay for a couple of days of imports and no debt service.
The later a country turns to the IMF, the more drastic and urgent the adjustment needs to be. Fiscal and external imbalances are greater and the situation more precarious. In these circumstances, the country needs to pull back harder. In any event, it is true that no country would want to be told that it is courting economic disaster. But, as is often said, the IMF has a propensity to take away the punch bowl just as the party is getting started.
Even the IMF, for all its hard-nosed conditionality, has not been able to get Pakistan to implement serious, lasting economic reform. These reforms are ultimately in Pakistan's own interest and for which Pakistan should take ownership. This can be done by designing its own programme and presenting it to the IMF for financing. The latter for its part should not impose its conditions on Pakistan and in fact it should be the other way round.
To be fair, some good has been done under IMF pressure. However, by and large, Pakistan's track record with the lending institutional has been an embarrassment. It is replete with repeated failure in meeting targets, especially by the FBR, and an approach to economic reforms where they are started and then rolled back. The FBR has also falsified data for which Pakistan paid a heavy fine to the IMF of millions of dollars. In this writer's view, which is based on close and personal observation over many years, adjustment and reform under the IMF in Pakistan has been largely a myth.
If this is so, one wonders what all the fuss is about. If Pakistan has not accomplished much under IMF tutelage in the last fifty years in the context of the repeated use of IMF resources, the IMF could not have had much influence on policy-making. Hence, there would appear to be no reason for the angst about an impending "disaster" if we turn to the IMF. The fact is that the IMF, for all its visibility and power, has not been an important part of our economic decision-making process.
When Pakistan has faced a financial crisis, and there have been many, we seem to want to mend our ways. However we start to falter. As soon as the economy emerges from it's low point and starts to recover, and the reserves start to build up, and confidence returns, and as soon as the IMF programme is over, we stop being responsible. Reforms are undone, some policies are reversed, and anything of substance we may have achieved is lost.
This story has been repeated throughout our economic history. When the IMF programme was completed recently, policies were loosened. If we take inflation as an indicator of how responsibly an economy is run, we have moved from an inflation rate of around three per cent per annum at the time of the IMF programme and stable, to 29 per cent per annum now and rising. While not all of this surge in inflation can be attributed to irresponsible and loose policies, a significant part can.
There are many who feel that what Pakistan really needs is a full-blown crisis, a catastrophic meltdown. It does not need another IMF-sponsored bail-out in which no serious or lasting reforms will be undertaken, leaving the country pretty much where it was before the IMF programme, except with a lot more foreign debt. There are also those who believe the IMF presents a serious "moral hazard". It allows a country to mismanage and take risks because there is an un-spoken assurance that it will be bailed out. The IMF, the champion of sound economic policies, generates perverse incentives and encourages bad policies.
Countries that have successfully reformed, Argentina, Brazil, the Asian Tigers, have done so after facing heart-wrenching crisis and faithfully implemented very tough IMF programmes. They have learnt from their mistakes. Some have implemented reforms without assistance from the IMF, Malaysia being an outstanding example. These countries have no intention of going back to the IMF. In contrast, Pakistan has become what is called a "prolonged user", with no sign of getting rid of its addiction to IMF resources.
It is unfortunate that should such a serious crisis befall Pakistan, it is our poor who will suffer the most for no fault of theirs. They have suffered stoically for six decades, putting their complete faith in successive governments. They have been betrayed each time. The famous statement of Quaid-i-Azam that every successive government in Pakistan will be worse than the one before it has turned out to be correct.
In the meantime, our self-serving elite who hold the fate of our country in their hands and who have the power to change the complexion of Pakistan overnight should they choose, will continue, as before, exploiting the country mercilessly with not a blot on their conscience.
As an economist friend of mine observed, the elite with all their assets held abroad in dollars, and all their liabilities held domestically in rupees, are in an ideal position. They are ready to bolt at the first sign of trouble with their dual nationality passports in hand and enjoy their mostly ill-gotten wealth abroad. Life couldn't be better for these elitists. Only they can sleep easy in Pakistan with their power generators humming through the night.
Concluded
(This is adapted from a paper that he wrote for the Lahore-based think-tank Spearhead Research, headed by General Jehangir Karamat)
The writer has a doctorate from Oxford University and has worked at the Planning Commission and the IMF. Email: Meekalahmed2@aol.com
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