DONOR’S AUSTERITY DEMANDS END UP HURTING ECONOMIC GROWTH

                         (Edited version published in “Pakistan Today” August 21, 2011)

With the problematic IMF program expiring in September, the central donor-debate will shift from reviving the stalled arrangement to determining modalities for its replacement. That eventually only seven odd billion were disbursed from a total agreed $11.3 billion reflects the Pakistani government’s inability to meet revenue targets, resolve RGST issue and implement power sector reforms. But with the Fund’s successor programs invariably incorporating increasing austerity demands, it will take a monumental effort by the government to convince stakeholders of its ability to implement mandated reforms considering its track record.

What exactly does IMF’s structural adjustment program get for Pakistan. It bears noting that the said funding is not for budgetary support, but rather for Balance of Payments (BoP) support. However, since our reserves are reasonably healthy, last year’s export ride was unusually profitable even if this one seems choppy, imports are reduced, and remittances are good enough, our BoP position fails to make a technical case for donor need. But it is very important politically for dealings with other International Financial Institutions (IFIs) that fund more of our core running needs.

Traditionally, most of our multi and bilateral fair-weather donors have viewed our closeness with the Fund as a litmus test for gauging our reliability. So, as long as we can accommodate some of IMF’s more reasonable demands, our development funding from other sources will not be compromised. The borrowing is important in light of other emerging needs also. Starting early next year, we must begin repayments for the previous program. And considering the government’s fiscal position, more borrowing to pay for previous borrowing, in addition to continuing current borrowing may well come to define the government as it struggles to find the right policy mix to counter deepening stagflation.

In effect, therefore, we are back to square one, if not actually more compromised. In addition to chronically low growth that provides few employment opportunities, the working middle class can now expect a more hawkish income tax structure and more taxes on consumption. Unfortunately, the ongoing fiscal year’s budget was without any meaningful innovations for tax net expansion. That is more surprising considering the over-ambitious revenue expectations, following a year when not only the original, but also the downward revised target was missed. It was exactly because of this lack of vision when the government took office in ’08 that the need to go back to the Fund arose in the first place. It is little surprise that we are in a similar position fairly quickly.

In truth, until we break the cycle of weak tax collection, low revenue base and continuous degradation of the development budget, we will neither be able to fulfill donor requirements nor achieve our own revenue targets. Firstly, the tax regime must be altered to target the huge undocumented economy and reduce taxes on consumption. The RGST affects the poor more than the rich, an ineffective tax policy that is bound to fail. The sooner those at the helm of affairs balance this equation in their policy framework, the sooner they can set about directing the tax collection machinery to productive use.

The government must also take immediate measures to revive industrial production and stimulate service sector growth. These are essential measures to tackle low growth by increasing employment, consumerism and engineering the second round multiplier. It must also take visible steps to limit unnecessary leakages from the system, especially the case of sick public sector enterprises that continue to hemorrhage billions every year, savagely restricting the government’s fiscal space, which invariably leads to funding non development expenditure from the development head.

Presently, Pakistan is caught in low growth and high inflation at a time when regional emerging economies are leading the international post recession growth scenario. We must rid our need for donors whose austerity demands hurt our economic structure. For that, the government needs to undertake bold reforms which will test its political will.