Reassurances and the reality


M Ziauddin

ADDRESSING business and industry leaders at an interactive session organised the other day by the
Federation of Pakistan Chambers of Commerce and Industry (FPCCI) where the heads of all commercial banks were also present, the SBP governor Reza Baqir assured them that the economy is moving in the right direction. Mr Baqir said that in order to pull the country’s economy out of the woods, the SBP focused on three major areas exchange rate, foreign currency reserves and interest rates. The most encouraging development, according to Mr Baqir, was the narrowing of the current account deficit from past record of $2bn per month to $579 million by July this year, showing a contraction of 73pc year on year. Referring to complaints about high inflation, he said that all over the world central banks used the interest rate as a tool to fight inflation and high cost of living and, therefore, the SBP pushed the policy rate up to 13.25pc.
In order to measure the real interest rate, he said, one had to minus from it the inflation rate and explained that if ‘we have 13.25pc policy rate and estimated inflation rate at 13pc, this would mean that the real and true interest rate is 0.2pc only‘. Rejecting the idea that investment has ground to a halt due to the high interest rate, the SBP governor said that over the past nine to 10 years the policy rate had gone up and down, but private investment did not increase. Therefore, other factors also inhibit and discourage investment like ease and cost of doing business. The SBP as a central bank has to directly support private businesses by providing financial viability to industry and exports. Talking about fiscal deficit, he said expenditures exceeded revenue collection and the only way out was to increase revenue collection.
The reassurances coming from the SBP governor notwithstanding, one finds it almost impossible to feel reassured as the country is right in the middle of an IMF dictated programme within which, as per Pakistan’s past experience, lies the fundamental fault afflicting the national economy. Not only Pakistan has never been able to come out of its economic crises following an IMF programme, most other countries which have gone to the Fund for advice and urgent loans in their hours of crises have had the same experience. In an article (The IMF’s latest victims) published on August 20, 2019 in International Politics and Society, the author, Jayati Ghosh declares that the Fund’s bizarre belief in ‘expansionary austerity’ would be laughable if it were not so damaging and therefore insists that the IMF’s longstanding approach to lending should be suitably reformed.
Quoting the case of Argentina, the author says the Fund has a long history of policy mistakes. In mid-2018, the IMF agreed to provide the country with a heavily frontloaded three-year loan worth nearly USD 57bn – the largest in the institution’s history – following a series of reckless decisions by President Mauricio Macri. One such decision, made soon after he took office in 2015, was to strike a deal with the holdout creditors who were still fighting in US courts to be repaid in full, following Argentina’s 2002 debt default and subsequent restructuring. Another was Macri’s subsequent borrowing spree, which caused public debt – mostly denominated in dollars – to swell by more than one-third, to USD 321bn in 2017.
By last year, Argentina’s fiscal and current-account deficits exceeded 5 per cent of GDP. In the ensuing economic and financial crisis, public debt ballooned to nearly 90 per cent of GDP, capital flight caused the peso’s value to collapse, and inflation soared. So, under pressure from US President Donald Trump (who had business ties with Macri), the IMF stepped in. The loan unprecedented in size, had all the familiar characteristics of past IMF financing programs. In exchange for the cash, Argentina was to implement massive budget cuts, in order to balance its primary budget in 2019 and significantly reduce its external deficit. Argentina complied – and the economy steadily deteriorated.
Today, inflation is running at over 55 per cent, the poverty rate has surpassed 30 per cent, and output and employment are shrinking. Argentina is nowhere near the IMF’s targets for investment and GDP growth, which have already been revised twice. More downward revisions are undoubtedly coming. Referring to East Asia’s financial crisis of 1998, the author said the Fund had to sign no less than five Memorandums of Understanding with Thailand, precisely because fulfilling all of the austerity requirements the Fund had imposed on it meant missing its macroeconomic targets. Quoting the example of Greece, she said in 2013, the IMF produced a report acknowledging that it had ‘underestimated’ the effects austerity would have on Greece’s economy.
Yet, far from learning from its mishandling of the 1990s Asian financial crisis, the IMF made the same mistakes in Europe after the 2008 global financial crisis sent the eurozone into a tailspin. In particular, instead of allowing Greece to default on its massive debts to private creditors, the IMF – together with the European Central Bank and the European Commission – lent it the money. The accompanying austerity conditions made repayment of those debts – now held by official creditors – impossible. Greece continues to struggle to this day. In March, the IMF approved a USD 4.2bn, three-year loan for Ecuador, as part of a plan to reduce public debt and reform the economy. In exchange, the Fund is predictably demanding rapid fiscal consolidation, through cuts to wages and public-sector jobs, hikes in energy prices, new charges for government services, and higher indirect taxes. In a report for the Centre for Economic and Policy Research, Mark Weisbrot and Andrés Arauz note these steps will likely lead to an immediate drop in GDP and cause the current recession to persist for the four years of the programme.
Yet the IMF has somehow convinced itself that growth will decline only mildly in 2019, before recovering in 2020, as a huge boost in private-sector confidence – naturally brought about by fiscal restraint and privatisation – leads to a surge in inward foreign investment. According to the Fund’s logic, even if employment and consumption are falling, and the economy is in recession, net capital outflows of 1.9 per cent of GDP will turn into net private capital inflows of 4.9 per cent of GDP in 2020. According to the author as usual, the folly of this logic will become apparent in due course. (A floundering economy, it should be clear, is not attractive to private capital.) In the meantime, the people of Ecuador, she maintains, will suffer greatly, owing to rising unemployment, declining living standards, widening inequality, and greater poverty. The author finally asks: How can the IMF justify an approach with such a poor track record? One explanation, she says, could be a lack of accountability that permeates the institution’s bureaucracy, right up to the very top. If that’s the case, boosting accountability should be the next IMF managing director’s first order of business – that, and aligning the Fund’s lending approach with economic realities.
— The writer is veteran journalist and a former editor based in Islamabad.