A Fine Balance

‘Stabilisation-first’ versus growth-stabilisation balance has been under debate ever since the approval of the new IMF programme for Pakistan. Many, this writer included, are of the opinion that the IMF programme’s notion of stabilisation-first has been discredited in recent years, particularly after the global economic meltdown of 2008.
The recent experiences of several European countries including Greece, Spain, Ireland, and Portugal have simply confirmed our views. The policy of ‘stabilisation first’ has increased people’s suffering. After three years of pursuing this policy, the unemployment rate still remains painfully high in Spain (22 percent), Greece (16.2 percent), Ireland (14.2 percent), and Portugal (12.2 percent). People of every race, culture and language share one universal aspiration – the opportunity to lift themselves out of the pit of poverty to a better future.
The recent IMF programme for Pakistan is of a similar vintage of stabilisation in the narrow sense of reducing budget deficit and controlling debt. Pakistan has been forced to pursue such a policy at the back of a stagnant real per capita income growth or in an environment of economic downturn. It needs to be understood that the scope of fiscal correction during a sharp economic downturn is limited.
If the economy is growing at a slower pace and private demand is shrinking due to rising unemployment, a contraction in government demand (sharp fiscal correction) would only amplify the economic downturn, especially at the back of a slumped external demand. Those European economies that attempted sharp fiscal correction have relapsed into recession.
It is true that Pakistan’s public debt and budget deficit are high and both need to be brought down over the medium- to long-term. The question is whether, keeping in mind the current atmosphere of depressed economy, it is the right time to do this. John Maynard Keynes, the father of modern macroeconomics, remarked in 1937 that “the boom, not the slump, is the right time for austerity at the treasury”.
The bottom line is that instead of predetermined fiscal targets, which are unlikely to be realised, fiscal adjustment should be calibrated to economic revival and rebalancing of demand from the public sector to the private. There should also be a sharp shift in the composition of deficit from consumption (current expenditure) to addressing supply-side bottlenecks through public investment in infrastructure, in addition to structural and governance reforms.
Unlike public consumptions which can crowd out private demand, public infrastructure investment has higher fiscal multipliers and can crowd in private investment. Similarly, public sector spending on education and health will enhance productivity. One may argue that an inherent danger to this policy is that markets and rating agencies could react adversely. However, given Pakistan’s debt burden (60-62 percent of GDP) they are likely to react more adversely to the persistence of low growth, rising unemployment, poverty and the resulting social unrest.
It is, therefore, not only undesirable to attempt sharp fiscal correction during a slump but may also be difficult or even impossible for a democratically elected government to pursue such a policy. The IMF programme has been criticised for its insistence on sharp fiscal correction at a time when the economy is depressed, leading to prolonged periods of low economic growth. The G-20 leaders have recognised the weaknesses of the programme and have argued that fiscal consolidation is necessary in the medium-term but job-rich growth promotion is necessary in the short-run.

The government should review the current programme and raise the issue during their forthcoming review mission. The pace of adjustment needs to be moderated. A balance is needed between stabilisation and growth. Reduction in fiscal deficit must come from resource mobilisation and not from cutting development spending. Pakistan must seek IMF resources equivalent to the payment due during the current fiscal year. In other words, there should not be net outflow of resources to the IMF under the programme.

How do we strike a balance between stabilisation and growth? Given the demographic structure of Pakistan, promoting growth in the short- to medium-run without compromising on stabilisation is an absolute necessity. Pakistan needs to undertake wide-ranging growth-critical reforms. Poor access to electricity has emerged as one of the critical constraints to growth. Is raising power tariff – by unprecedented proportions – a solution? Raising power tariff alone is not and never will be a solution. We have increased electricity tariff beyond the paying capacity of the consumers.
Did we do anything to stop power theft? What did we do to reduce technical losses? Did we take any measures to increase recovery of electricity bills? What has been done to force the federal and provincial governments and other government organisations to not only clear their outstanding electricity bills but also pay them on time? Did we stop Wapda from providing free electricity to its employees? Did we undertake technical audit of our power plants? Did we change the heads of the Gencos and Discos? Did we strengthen the finance department of Wapda/Pepco? And most importantly, did we sort out the infighting and multiple centres of power in the Ministry of Water and Power?
The answer to all these questions is in the negative and yet we expect to address Pakistan’s energy problems simply by raising the power tariff. Economic recovery will rest on addressing these questions which should form the performance criteria or structural benchmarks of the renegotiated IMF programme.
Growth critical reforms must include private-sector development through: i) lowering barriers to development of SMEs; ii) strengthening banking and financial services; iii) strengthening the country’s physical and human infrastructure by changing the composition and quality of expenditure; iv) removing irritants and impediments to private-sector growth; and v) reducing the cost of doing business.
Pakistan needs to revive economic growth and create jobs to avoid its own Arab spring. Given the current demographic structure, if we do not invest in people, it will lead to a demographic disaster. Pakistan has already lost five years and cannot afford to lose another five by ignoring growth and job creation in pursuing the stabilisation-first policy.
Fiscal correction must be the part of the renegotiated IMF programme. However, the pace of fiscal correction needs to be moderated. Furthermore, the burden of fiscal correction must be on resource mobilisation rather than cutting development spending. In other words, fiscal correction must be undertaken by keeping in view the quality of spending.
Fiscal measures must include broadening tax bases by bringing untaxed or under-taxed sectors into the direct tax net, making the tax structure more progressive, improving the efficiency of tax administration, and tightening regulations on tax havens. The privatisation of bleeding PSEs must be a part of structural reforms. In sum, the burden of stabilisation must be borne by the rich and the powerful and not by the poor and low-income groups.
If the current IMF programme is not renegotiated, it is bound to bring pain and suffering for the people and most likely to be derailed. Is this what we want?