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Our IMF political cycle

Opinion

May 21, 2019

Since the announcement of the staff-level agreement with the IMF, the refrain in the ensuing debate, especially by government representatives, is that we should have been anyway doing what has been prescribed by the programme. Why must we spend more than our revenue or be liable to pay in dollars that we fail to earn?

The “we” here is them, the previous government. What is forgotten in all this is that the previous government was also “we” at some point -- and likewise for the government before. This IMF political cycle is a recurrent pattern in our short but turbulent economic history.

The programme this time round is harsher and rather creative. In some key areas, Pakistan has to act before the agreement comes into effect. One was an agreement on leaving the determination of the exchange rate to the market, something that Pakistani governments, like most developing countries, had been resisting so far. On the very next day, the rupee tumbled and a worried prime minister held a meeting to take action, with the new State Bank governor in attendance. (No more dependence on TV tickers!). The governor was also seen attending the ECC meeting.

These events left everyone, including the market, confused about the conditionality regarding the free float and the State Bank’s independence. As I write, the dollar has touched Rs148. The budget for 2019-20 will reflect the fiscal conditionality. Instead of the overall fiscal deficit, the focus of the conditionality is on primary deficit. Like a true lender, the IMF has asked for keeping the interest payments, our biggest expense, aside and see how we manage our defence, non-defence and development expenditures.

In 2017-18, the primary deficit was 2.1 percent of GDP and it is expected to be 1.9 percent of GDP in the current year. The condition is to bring it down to 0.6 percent of GDP. An adjustment of 1.3 percent of GDP will have to be made through expenditure cutting and additional tax revenue.

To keep a human face, the IMF has allowed expenditure on social protection and subsidies on electricity and gas for the lowest consumer slabs. Development cuts and additional indirect taxation have been the usual routes of adjustment. But the burden of adjustment is too large to fit this conventional wisdom. The federal government may have to implement the 18th Amendment in its true spirit to shed the load of non-defence current expenditure. If not, the axe may have to fall elsewhere. Alternatively, the IMF expects the government to “rebalance” the NFC award, a blind alley.

Some would say this is a 'damned if you do, damned if you don’t' programme. Successful implementation will contain the fiscal crisis of the state. A strict austerity regime would also limit growth at around 3 percent in the next three years -- in effect, a recession in our context. It will force the government to postpone its ambitious employment, housing and human development initiatives to the last year of its tenure. At the end of the last IMF programme, the previous government recorded a fiscal deficit of 4.6 percent. Facing an election in two years, it went on a spending spree to win votes, leaving a fiscal deficit of 6.6 percent for the PTI government.

Will the PTI government go down the same route, with the IMF political cycle continuing? In Argentina, a government of austerity that had defeated a populist party, is fearing the latter’s return in the elections. In our case, a populist government has been forced into an austerity regime. Interesting times to watch as far as the political economy goes.

The writer is a senior economist.

Email: [email protected]

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