IMF & Policy Options By Dr Kamal Monnoo

The uncertainty and the self-destruct mode of the present policymakers are basically the two main factors taking Pakistan’s economy down. Entering its third month in government the economic leadership is still giving vague signals on whether or not Pakistan will be entering another IMF (International Monetary Fund) program, as the finance minister’s latest is that we could still opt out if the terms are not to our liking – Who is he trying to fool? To any calculating financial mind the decision to approach IMF was quite evident from the Caretaker days with the only remaining question being: when. Naturally, since the Caretakers don’t have the mandate to take such principal decisions, it had to be the job of the new elected government, regardless of who formed it. So it is only fair to expect that the three main political parties would already have a strategy in place on how best to engage the Fund to ensure most favourable terms under the prevailing realities of the Pak economy. While PML-N and PPP seem to have saved face by default, as they lost the national elections, PTI on the other hand stands exposed because by now it is clear that it assumed office without having done its homework. Any corporate captain will tell you that negotiating loans from financial institutions is an art that entails a well thought-out strategy involving a combination of elements such as keeping the lender guessing on the borrower’s alternative options – even if there are none – and intelligently incorporating pre-emptive management measures in the feasibility workings to leave little room for the lender to apply any overly restrictive or unwanted clauses. PTI’s financial leadership failed on both counts as they tackled this exercise from the wrong end of the stick. One has to learn from history to realise that Pakistan’s friends never park their sovereign funds in our reserves beyond a certain level and given the threshold of our present shortfall in foreign currency requirements, entering an 18th IMF program is only but inevitable. So why unnecessarily expose oneself – prior to going to the IMF – by requesting friends like Saudi Arabia and China for help and coming out empty handed? Instead the sensible thing would have been to leverage this option (by keeping a lid on its real value) and thereby negotiate with the IMF on comparatively stronger footings? Also, prudence demanded to quickly enter into a crisp short term (preferably one year) and medium sized ($4-5 billion) IMF program and through its very terms cum oversight slip into a financial straight jacket right from the word go – if a longer period became necessary, the relationship as we know is always extendable provided of course the performance is satisfactory. The trouble now is that the government may have left it a bit too late to still get the terms of its choice from the Fund – however, go it must! And this now would mean more pain for the people: Inflation, High Interest Rates, More Devaluation and Slow Growth leading to less jobs – exactly the opposite to why these people got into the office in the first place!
So what is the solution? The answer is not a one liner but embedded in a gradual process of policy reforms and sound economic governance starting from the elementary prescription of lending confidence to the investors and the markets. So far it has been a complete act of economic Hara-kiri by governmental functionaries in scaring the day lights out of the stakeholders and in the process shooting oneself in the foot. Unsubstantiated cum ridiculous figures (that simply do not add up) are being flaunted every day, thereby discrediting our own economy, both by the leadership and its newly appointed but rather zealous advisors.
The jargon includes largely imaginative (with little empirical evidence) numbers of money laundering in the Pak economy of up to $10 billion per annum, corruption of up to $30 billion annually, element of ‘hundi’ (through non-banking channels) in incoming foreign remittances of around $20 billion, etc. – Who needs enemies? Such irresponsible statements will only end up compromising our own efforts with the lending agencies and the compliance supervisory bodies like the FATF. The reality is that other than the shortage of dollars (primarily owing to the trade deficit) the economy until recently has been doing quite well: Corporate results have been good; Stock market has held its own; Inflation has been low; Interest rates were under check; Rupee more or less held its own; Tax collection grew at the rate of 20% per annum and the GDP growth rate hovered near to the 6% mark. Meaning, in essence the current leadership needs to merely concentrate on where the problem is: Shortage of the USD in the official economy. And the recipe: Policy measures that enhance its inflow, facilitate its retention and retard its outflow. While surely borrowing is one big way to induct foreign exchange in the kitty, this however, does not imply that other smaller but effective measures should not be introduced, in which lie the collective cure to address this issue over the long-term and on a sustainable basis.
For example, the following measures to help ease the shortage of foreign currency can easily be introduced in the first 100 days, if not in the first 30 days:
* Instead of witch hunting investment by Pakistanis abroad, capitalise on it by first registering it and then realistically taxing it in foreign currency. By government’s own account already 30,000 properties in Dubai and UK have been detected. All it needs to do is to allow people to maintain them provided the owner pays a minimum tax of $1,000/annum under a levy of 0.50% per annum of the purchase value – to be remitted into Pakistan from abroad. Even if on average the owners pay between $2,500-3,000/annum, it means a clean sustainable $100 million inflow every year in the national kitty. Countries vie to have productive access to such large foreign investment portfolios and here we are trying to squander away an opportunity by needless negativity and scare tactics!
* Foreign Airlines, especially from the Gulf (Emirates, Etihad, Qatar & Oman) are having a field day with the Pakistani travellers and by conservative estimates do a business of around $2 billion per annum, which is all net dollar outflow for Pakistan. Our friends could be politely asked to have a currency swap arrangements to ensure that our payments remain merely payable in Pak Rupees and not in USD or AED or etc.
* Outright banning of a certain segment of non-essential imports, at least for a period of 2 years, can save foreign currency outflows of around $1-2 billion/annum.
* Some other but effective measures include: Gradual import substitution (through policy encouragement) to countries with currency swap arrangements with Pakistan; convincing multinationals to hold back a certain portion (say 15%) of their repatriations under dividends; royalty and technical fee, (in foreign currency) for a period of 1 year to create an extra annual dollar cash flow; incentivising domestic foreign currency accounts; and last but not least, simply controlling smuggling and under-invoicing.
However, all this takes some serious doing and in the coming months one expects our finance minister to rise up to the challenge by announcing some positive and innovative solutions to set the trade in the right direction. He needs to have confidence in his own economy, because if he himself goes around saying that it is on a ventilator, the report from the lending institutions or our economic partners will only read accordingly. Markets needs calm and investors need hope, not gloom and doom and this can only come with sound but noiseless economic governance. So far, disappointingly all the right corporate governance measures one was expecting from a successful ex-industry captain have been missing. No clear thinking has come forth on the State Owned Enterprises (SOE) either, an area that falls right in his very own corporate domain and a sector where one expected the PTI corporate guru to have entered office, all prepared. In fact, on the contrary the signals so far on resurrecting the SOE are not very good. We have just seen an appointment in PIA of a Chairman with no real corporate background. No disrespect to anyone, but while in the distant past this may have been possible, in the modern day corporate world, to succeed on a competitive global platform, the services of a management specialist are essential – imagine appointing an industry captain straight as a squadron leader. As the government’s honeymoon period draws to a close, it is time to act, mere self-righteousness rhetoric will not do!
The writer is an entrepreneur and economic analyst.

About The CSS Point

The CSS Point is the Pakistan 1st Free Online platform for all CSS aspirants. We provide FREE Books, Notes and Current Affairs Magazines for all CSS Aspirants.

The CSS Point - The Best Place for All CSS Aspirants

April 2024
Template Design © The CSS Point. All rights reserved.