Tuesday, January 31, 2023
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Conflict in IMF programme

The report on the first review of the Extended Fund Facility (EFF) programme was launched by International Monetary Fund (IMF) recently, through which it expressed its satisfaction with the progress of the programme; releasing in turn a tranche to Pakistan of around US$ 452.4 million, and bringing the total disbursements to a total of US$ 1,440 million up-till now.

Here, the IMF highlighted that ‘Full – and timely – implementation of programme commitments is critical to strengthen macroeconomic stability and support robust and balanced growth.’ Unfortunately, the underlying thought-process, and its manifestation in the shape of programme benchmarks or conditionalities, are in conflict with the stated programme objective above.

Macroeconomic stability and balanced growth require a balanced approach to aggregate demand and aggregate supply policies. The programme is heavily tilted in favour of the demand-side policies where aggregate supply-side is being neglected thoroughly. Even in the demand-side policies, the attack is on weakening the overall consumer- and investment spending, primarily through a) over-valued exchange rate, and left unjustifiably on mostly market-determination, given a lack of institutional soundness of the underlying market and the massive level of exchange rate pass-through on inflation and growth prospects, and b) a tight monetary stance through maintaining real policy rate well above core inflation; while not trying any creative economic policy to shift consumption and investment patterns for approaching better quality of GDP and its higher growth, and effectively meeting equity and poverty concerns.

This one-size-fits-all kind of demand-side squeeze is not only a big sacrifice ratio for economic growth prospects, but contradicts reaching the programme objectives of macroeconomic stability and balanced economic growth. What the programme is also doing is not allowing reaching an economy that is based on sustained macroeconomic stability and economic growth, and that leads to a reduction in an otherwise wide income inequality gap, and high poverty levels. Strangely, the claims of a revisit in the thinking of programme design away from its neoliberal base- reflected in repeated and mostly harmful structural adjustment programmes of the IMF- that is being communicated by the higher echelons of the IMF, has not trickled down much to the programme level of even prolonged users of IMF resources like Pakistan.

The real programme would look to change the composition of aggregate demand. Firstly, programme benchmarks should look to shift consumption away from a few traditional sectors like clothing and of the nature of conspicuous consumption in the rich, and in a high proportion of income of the middle-to-lower-income-groups going into making ends meet of the daily nature of life. To do that investment spending needs to adjust in terms of providing greater opportunities for people to invest in projects in the social sectors like education and healthcare.

The space that this adjustment provides will shift both consumption and investment expenditure in creating a more balanced and sustainable economic growth. Moreover, it would help if greater financial products are made available to attract consumption spending into saving. The rate of return is generally high on investment in financial products, and can help give a leapfrogging boost to reducing income inequality and poverty levels; not to mention the positive impact it will have on deepening the financial base of the economy.

The programme conditionalities should focus on reducing asymmetric information that deters consumers and investors from taking risks in a broader number of sectors; which are otherwise under-invested; for instance, many state-owned enterprises (SOEs) like Pakistan Railways. At the same time, the IMF and World Bank should understand the limitedness of variables involved in the ease of doing business index, and internalize the importance of high level of transaction costs – which include costs related to gathering and inspecting information, along with pertaining to enforcement, among others- that reduce the viability of businesses. Reducing these costs involves overall better institutional quality, and benchmarks here should look to improve a) the functioning of institutions or ministries, b) underlying organizations or provincial departments/SOEs/private sector, and c) markets.

Benchmarks should, therefore, look to improve the governance and incentive structures of all these, so that information asymmetries, transaction costs and market failures could be reduced. These benchmarks would in fact allow the economy to be placed on balanced and sustainable footings in terms of a) better managing aggregate demand, b) creating attractiveness and mileage of consumption and investment expenditure for overall boosting the aggregate supply side, and c) help reduce income inequality gap and poverty levels in an effective way. Moreover, research materials in general, including what this writer has produced indicate that sustained macroeconomic stability requires better institutional quality, efficient organisations, and markets that allow reaching true price signals.

‘Mileage’ enhancement above comes from better institutions, underlying organizations, and reduced market failures. Hence, the budget size of the ‘Ehsaas’ (or care) welfare programme or the overall development spending matters less. Rather, what is important is to evolve institutions, organisations and markets that allow the expenditure to produce results that are far better yielding both in terms of efficiency and allocation. These improvements are needed to have a deeper and sustained impact for people who are otherwise handed loans for making houses or starting a business, or allowances under social protection schemes.

There is a big catch here, whereby if this mileage is not made available, it could lead to creation of a whole new group of people, students, home mortgage takers, agriculturalists, small/medium sized businessmen that under various welfare schemes being launched by the people are unable to create returns on their invested loans, and suffer from indebtedness and little generated means to service these loans. There is no programme focus to reach this mileage, allowing in turn no sound pathway for the stated objective, including reducing income inequality or poverty.

Large-scale manufacturing and overall growth prospects are being severely made to suffer from this wild programme approach to squeeze the whole aggregate demand with no introduction of sophistication and novelty. What is worse is that no warning signs are being heeded to. Rather, there is celebration on performance with regard to the squeeze of current account deficit, when what this has incentivized is mostly foreign portfolio investment or hot money, and lack of motivation for investment in importing machinery and other inputs for manufacturing.

At the same time, stable inflation expectations are being evolved in the first review on the pretext that a tight monetary stance will make it happen when in the first place even after many months of this stance, inflation has remained stubborn, and that when it is clear from extensive research on developing countries whereby inflation is not only a monetary but at least equally a fiscal phenomenon, and that reaching true price signals depend on reduced information asymmetry and transaction costs, which in turn require reform of markets and better working of institutions and underlying organizations- both in the public and private sectors. But then there are no benchmarks for all of this. What is worse is that both the Ministry of Finance and the State Bank of Pakistan have a full buy-in on the programme thought-process and conditionalities.

In the meantime, the programme is very giving in terms of benchmarking progress on structural policies. Meaningful SOEs reforms, however, appear to be a far cry given the small spread of audit and focus overall in terms of the number of SOEs targeted for either reform or towards opening them to the private sector. Moreover, there are some other on-the-surface kinds of initiatives through which authorities seeking to present reports, plans and units rather than changing the focus of approach to reforms away from the (unsuccessful) neoliberal ways.



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