IMF-Driven Policies : Will the Government Review or Run Risk of a Revolt?

(The following article/column is published in today’s Daily Times dated: Saturday, October 12, 2013

Titled: IMF-driven policies : Will govt review or run risk of a revolt?\10\12\story_12-10-2013_pg5_15)

IMF-driven Policies:

Will the Government Review or Run Risk of a Revolt?


By: Omer Zaheer Meer

Pakistan is going through an economic slump, some would argue a meltdown. With rampant lawlessness, terrorism, rising inflation and severe electricity and gas load management especially for industry, the economy needs a revival. It was against this backdrop that the PMLN government decided to go to the International Monetary Fund for a $ 6.7 billion loan package.

Interestingly IMF’s package is austerity based seeking to cut subsidies in a very short duration, demanding reduced public spending leading to the decision to privatize national institutions like PIA and requiring atleast 5% devaluation in the value of Pak Rupee (already initiated) besides others.

The devaluation has already resulted in unbearable levels of inflation, making an already tough situation even tougher. Even the prime constituency of the incumbent Government, the business community is protesting but at the end of the day they will still be able to simply pass on the effects to the consumer. The masses would thus be hit the hardest. With the industry already in tatters due to the energy crisis, law and order situation and ever-increasing input costs, they are shifting base overseas resulting in a flight of local capital. The gigantic increases in the power tariffs will further worsen an already dire situation for the local industry. On the other hand national institutions, instead of being revamped and properly managed are being planned to be sold off in conditions when they could be going for peanuts.

POL products are treated as a cash-cow for revenue generation, ignoring the super-inflationary effects of increases in their prices. It is indeed iconic that while the prices in international market and neighboring India fell, there was a material increase in Pakistan. The Rupee devaluation policy also contributed to this.

While the IMF program may stabilize the national exchequer in the long-term the economic opportunity costs, resulting unemployment (expected to be an additional one million) and the high risk of an economic meltdown makes it less than a prudent choice. Something which is pretty obvious is that Pakistan’s economy requires an impetus, a stimulus to revive the economic activity and not the program agreed with the IMF.

While we can give some space to the Economic Team citing the tough challenges they are facing, what is unfortunate is that even the possible steps within the ambit of Finance Ministry are not taken. There seems to be a lack of understanding and political will to actually carry out the reforms necessary to resuscitate the failing economy.

Financial Management is one such area. I’ve written before that the way the circular debt of app 500 bn was paid to power generation companies was astounding to say the least. There were no audits, no checks and no proper incentives implemented (even if secretly negotiated) for the masses.

Despite claims of up to 40 % unused capacity by power companies, the promised increase in the electricity generation has not been delivered either. Pakistan went to IMF for a $ 6.7 billion loan while 75% of that was distributed as if it was a free lunch. We must ask the finance ministry why no proper audits were performed? Why could we not negotiate with the power companies the terms for say payments in four or six installments with the next installment payable only on achieving an additional power generation as agreed? Furthermore, there has been no effective national energy conservation drive or campaign to cut the line losses to the minimal possible.

It is now obvious that the necessary reforms required to revamp the tax system and structure are not been followed. Instead of extending the tax base by bringing in Agriculture and other exempt areas in the tax net the existing base is being taxed more and higher indirect taxes are being imposed, both disastrous in the long run. Had we actually taken the tough but necessary decision of broadening our tax base and executed proper financial management especially in the power circular debt payment we would not need to go the IMF. The PKR 850 billion printed by the Government could actually have been used more wisely to pay the foreign debt installments and make segmented payments to clear the circular debt owed to the power companies as suggested above.

There are already noises about a very powerful industrialist from Punjab dictating the economic policies of the current government. On the backdrop of this, a list of public sector power companies up for privatization was announced with all based, guess where? Yes, all based in Punjab. This further ring alarm bells. The Prime Minister needs to direct the finance ministry for an independent forensic audit into the payments of circular debt to the power companies and implementation of measures to ensure transparency. Corruption scandals of the likes of the last PPP Government would not be tolerable anymore. This, along with tough decisions to carry out reforms to extend tax base with a focus on direct instead of indirect taxation and proper financial and institutional management can still lead a turn-around.

The biggest question is will the present Government review its IMF driven economic policies and carry out the necessary reforms while providing relief to the ordinary citizen or will it continue to focus exclusively on temporarily filling up the coffers of the national exchequer without any bearing to the economic condition of a common man and risk a revolt? It should remember empty stomachs breed anarchy.

The writer is a leading Economist who is also a qualified Chartered Accountant, Financial Analyst and Anti-Money Laundering Expert. He can be reached on twitter and ID’s of Omer Zaheer Meer

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