It is apparent that the post election government will have to negotiate with the IMF to get some relief as pressures on the exchange rate become unbearable. It may be helpful to rethink the idea of “structural adjustment” to change the pattern of seeking recurrent bail outs from the IMF.
IMF’s Structural Adjustment Programs in the past have suffered from two conceptual flaws in the analytical framework within which these programs were specified. First the term “structure” was misconceived. The IMF’s notion of structure refers to the configuration of proximate constraints in the financial sphere. These include a budget deficit considered unsustainable; and a balance of payments deficit bursting the ceiling within which exchange rate stability could be maintained. Now the term structure in my humble opinion should be understood as the fundamental design features of the real economy which determine the pace and pattern of economic growth. Second, adjustment in terms of this definition of structure would require addressing the weaknesses in the design of the real economy within a medium term framework rather than simply trying to slash public expenditure and raising interest rates within a short term perspective.
As a member of the Prime Minister’s Committee on Economic Policy in the first government of Prime Minister Mohtarama Benazir Bhutto in 1989 I had argued with the then Managing Director of the IMF that his proposed policy of public sector expenditure cuts and increasing interest rates would be counterproductive even for the objective of reducing the budget deficit. This is because such a policy would translate into reduced development expenditure and reduced private sector investment which would combine to slow down GDP growth. Consequently a few years down the line, Pakistan would be placed in a double bind: Slow GDP growth would reduce the growth of revenues and thus generate high budget deficits while at the same time we would suffer from increased poverty and deterioration in public service delivery. He countered that the IMF does “battlefield surgery” and economic growth was not the issue. We swallowed the bitter pill but tragically did not get cured: GDP growth fell sharply in the decade of the 1990s, poverty increased and high budget deficits reappeared. The same problem of slow growth, rising poverty, and high budget deficits emerged in the period of the latest IMF Program during the period 2008-13.
In view of Pakistan’s experience and indeed the world, another program of economic contraction in the face of economic recession now would be indefensible. Instead we need a new growth strategy. The Fund program ought to be part of a home grown medium term policy strategy that addresses the structural roots of recurrent high fiscal and balance of payments deficits. Dr Nadeem ul Haque at the Planning Commission in his latest paper has made a courageous and eminently sensible argument that the new Fund program should combine stabilization with economic growth within a framework of Institutional Reform. Perhaps the time has come for his Framework of Economic Growth.
The economy is indeed in dire straits. With per capita income almost stagnant, a declining investment rate particularly in the manufacturing and transport and communication sectors which are the main sources of employment, it is not surprising that the incidence of poverty has increased to over 39 percent according to an SPDC estimate. If we include unaccounted power sector liabilities the budget deficit is over 8 percent. If we include forward buying by the State Bank of Pakistan of USD 2.3 billion, then by June this year Dr. Haque estimates, the SBP reserves will be as low as USD 6 billion which is only 1.5 months of imports.
Let us move out of this crisis within a strategy of growth and institutional reform. I would suggest that reforms in the institutional structure should not merely release the spirit of entrepreneurship but should bring the middle classes and the poor into the process of investment and high wage employment. What we need is not only higher growth but a growth process in which the deprived sections of society through their innovation and enterprise can become the driving force of economic growth as well as the recipients of its fruits.