Need for course correction

November 16, 2019

The writer is a professor at the Lahore School of Economics and former vice chancellor of the Pakistan Institute of Development Economics.

OVER a dozen IMF programmes that Pakistan has entered into in the last 30 years have followed a familiar pattern: an economic crisis; turning to the IMF for relief; much cheering as initial measures lead to some improvement; premature boasts of never returning to the IMF and claims that the ‘begging bowl’ is broken forever; as stabilisation measures bite and public outcry grows, political will to continue stabilisation weakens; reforms are postponed and, in many cases, goodbye IMF; a swift return to imprudent economic policies; hello, IMF it is us again!

After some economic improvements in the first four months of the current IMF programme, we are now at the stage of ‘congratulations’ all around and strong ‘turnaround’ claims buoyed by the positive buzz at the recent Washington IMF/World Bank meeting: ‘Pakistan has turned the corner — well done IMF and Pakistan economic team’. While there is little doubt that the strong policy measures adopted under the IMF programme (and indeed in the nine months before) have borne positive results, the claims at this stage of a ‘turnaround’ are certainly premature, as there is still considerable ground to cover.

If credit is indeed due for this improvement, it is to the people of Pakistan who have resolutely withstood the considerable hardship these measures have entailed — high inflation, falling real incomes, loss of employment, lack of new job opportunities and crushing poverty. The people have borne these ill effects stoically, at least so far, because they have given the benefit of the doubt to the current government’s claim that these measures were unavoidable to clear the mess left by the last government and to achieve sustainable growth.

It appears that the IMF has underestimated the impact of stabilisation on poverty.

As we now enter the next phase of the IMF programme, after its initial success, the real question is whether we can maintain the same rigour and determination in implementing the IMF stabilisation package and seriously start the process of badly needed economic reforms. Or will we beat a hasty retreat as criticism of the programme gathers increasing public support?

To my mind, two critical factors will determine the programme’s fate. The first is if we can give much higher priority to strengthening and widening the direct income support measures to those most adversely affected. The second is building into the IMF programme specific interventions and mechanisms that will revive economic growth and create jobs in the short term rather than waiting for an overall economic upturn, which could take at least two years as currently envisaged. This may turn out to be a bridge too far.

Let me illustrate the urgent need for expanding the safety net with a concrete example. Jahan (not his real name) and his family work as agricultural farm labour near Arifwala in central Punjab. Jahan’s daily wage is Rs350. His wife and grown-up elder daughter work along with him; their wages vary between Rs250 and Rs300. His two younger boys, aged eight and 12, respectively, work all day scrounging fodder for the head of cattle they own. They do not go to school. The family’s total earnings are below the official minimum poverty line at current prices (food intake) and far below the minimum basic needs poverty line. The current inflation has hit their incomes hard and they are clearly suffering from malnutrition. Do they get any direct income support from the BISP or Ehsaas programme? The answer, sadly in this case, is no. It is this situation that needs to be urgently remedied.

It appears that the IMF has underestimated the impact of stabilisation on poverty as they forecast only a slowing down in poverty level reduction and not an increase in poverty levels. The BISP national survey that was started in 2017 has not been completed, but its initial results suggest that, while around 20 per cent had graduated out of the programme, another 20pc would need to be added to it. It is likely that inflation has affected those who moved out of the programme, with many then falling back into poverty. There may be a strong case, therefore, to expand the coverage of the BISP unconditional cash transfer programme by perhaps 20pc well as a 20pc increase in the quarterly stipend on an urgent basis, and the slight increase in the primary budget deficit relaxed to accommodate this increase. At the same time, the minister/adviser on social protection must be made an integral part of the Economic Team.

There is also a real concern that the economy may fall into a low-level growth trap and that it has contracted much more than the official statistics suggest, which only reflect the documented economy. The other concern here is that the informal and undocumented economy has slowed down much more in this recession than it has previously for fear of falling into the tax net as well as for avoiding taxes in the past.

In avoiding this situation and reigniting growth, the government may need to play a more active role, since private investors continue to view the economy as remaining soft for at least two more years. This would require the government giving greater priority to its employment generating projects, concluding those projects that are nearing completion and putting on hold or slow-tracking new projects. The same priority criteria should be applied to CPEC’s early-harvest projects. The public-sector development plans both at the federal and provincial levels need to be revised accordingly together with quick disbursements of funds. An employment-generating scheme with a focus on building houses for the poor could yield quick results.

It is imperative that the government not retreat from its current commitments made under the IMF programme. But to do this, it must focus much more on providing protection and safety nets to those adversely affected. Time is indeed running out, as is the people’s patience.


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