The mouse that roared – Dr. Pervez Tahir

Following is  a cross-blog post from Express Tribune

The deal struck with the IMF by our finance minister, Ishaq Dar, indicates that the so-called Plan B was never there. Our newly elected government had already decided to tread the beaten path of beg now, reform never. In fact, the talk about the inevitability of the recourse to the IMF was a farce. Just look at the critical elements of the crisis at hand: a measly current account deficit of less than one per cent of GDP, an improving trade balance, booming remittances, single-digit inflation. Compare it with the crisis when the IMF was approached in 2008: a current account deficit of 8.5 per cent, an inflation rate of 25 per cent, global financial crisis, oil and food price shocks. Only the fiscal deficit is now higher — nine per cent compared with 7.5 per cent. Had the finance minister put his accountant’s hat aside while doing his budget numbers, he could easily have fixed an achievable target for fiscal deficit. Making allocations without preparing projects or programmes is bad budgeting. Avoiding the uncalled-for increase in salaries and the Benazir Income Support Programme would have kept the deficit around 5.5 per cent rather than 6.3 per cent.

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PML-N Government Appreciates PPP Policies

Nawaz Sharif taking lessons from Asif Zardari

It is said that the imitation is the sincerest form of flattery. If this is the case, the recently displaced PPP government’s most admiring flatterer is none other than Nawaz Sharif. After taking control of the government since only a few short months ago, the PML-N chief has taken page after page from the PPP’s agenda, claiming it as his own.

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How not to negotiate with the IMF

Following is a post published in Express Tribune. Writer can be reached at pervez.tahir@tribune.com.pk

Negotiating a programme with the IMF has always been very difficult for Pakistan. More so, when we are seen to be desperately discussing an urgently needed bailout package. That is why, perhaps, the ongoing negotiations in Islamabad had seemed so difficult. To understand these difficulties, let us step back a little. During the election campaign, the venerable Sartaj Aziz had said: “Right now, you can’t reach an agreement with the IMF because the kind of conditions they would impose on you would not allow you to grow. But if our economic revival package starts working in two months, three months’ time, and it is clear that exports are picking up, our revenues are going up, then you need much less adjustment than indicated by the present situation.”

Dar ignored this sane piece of advice. First, he presented a budget with a deficit of 6.3 per cent. There is no way the IMF could stomach a fiscal deficit target beyond four to 4.5 per cent. It could have been fixed around five per cent anyway if: 1) the government had not increased the Public Sector Development Programme by 50 per cent to accommodate its politically motivated programmes; 2) it had not surrendered to the bureaucracy’s demand to increase salaries and pensions by 10 per cent; and 3) eliminated tax exemptions on its own. Instead of finalising its own energy plan first, the IMF was allowed to dictate the end of power subsidies within a tight time frame. It does not take kindly even to the lifeline tariff for the smaller consumers, the preference being for conditional cash transfers. Unfortunately, the State Bank of Pakistan also made a political statement by announcing a cut in the policy rate at a time when core inflation is still running above headline inflation. Worst of all, the finance minister announced on the floor of parliament that Pakistan needed the new IMF loan just to repay the earlier loan from the same institution. By implication, the intent was not reform but access to ready cash.

Like the hero in Punjabi films, he unleashed a series of economic barhaks from the word go. “Programme or no programme, we shall not impose further taxes.” It was pointless to make a request, if this was a non-negotiable position. The IMF knows enough about the capacity of the Federal Board of Revenue to reject the position that it can collect the desired revenue by toning up its administration. Millions of dollars poured in it by donors have made little impact on its governance. The SROs, lax audits and the slow pursuit of cases against tax delinquents are part of a culture that defies all reform.

Dar said he would negotiate, not beg. There was a needless invocation of national interest. In the same breath, he warned that the country could be reduced to a banana republic if the IMF did not help. The thought that he could negotiate without being flexible, bordered on the ridiculous. “I need six months to turn around the economy, but my problem is that the country has to return a substantial amount to the IMF soon,” he went on to claim. While there is no magic wand to turn the economy around in such a short span, a sounder budget and an austere balance of payments, together with some elements of the so-called plan “B”, would have provided the breathing space to stabilise the economy. It would have also prepared better ground for negotiating a deal with the IMF. However, the PML-N’s structural weakness — a bias against taxation and towards imports — has come in the way. It had promised an economic blast. What we have, thanks to Dar’s irrational exuberance, is an IMF drone. Is it any wonder that Secretariat Block Q was declared out of bounds to the media?

Published in The Express Tribune, July 5th, 2013.

Why The IMF – M.Ziauddin

The writer for this post is Executive Editor of The Express Tribune

More than 99.9 per cent of our population would perhaps find it almost impossible to grasp, in clear terms, what is meant by the phrase “tax-to-GDP ratio” or why we need to rush to the IMF every now and then, missing completely, therefore, the connection between this strange sounding phrase and the begging bowl that has now become our perpetual oxygen tent. But our rich, who make up a minuscule part of even less than one per cent of our population, understand very well what the phrase means, why we need an IMF bailout so very often and what is the relationship between the two. The reason why our rich comprehend the issue better than the rest of the population is inherent within the very process through which they have continuously succeeded in cornering the national wealth.

Since most of our rich do not fall in the category of true entrepreneurs, they have, therefore, consistently failed to understand that by not paying their national dues, and at the same time, by indulging in pilferage of utilities like power, gas and water, they are only jeopardising the chances of their own growth and risking self-destruction in due course of time, if by that time, their shenanigans have not destroyed the very country that has offered them such vast opportunities to write so many rags-to-riches stories. Interestingly, most of these rags-to-riches stories are not the usual tales of trials and tribulations, or accounts of high risks and high profits or mental epics of when and where to invest. Almost all such stories in Pakistan are more or less anecdotes of having the right connections, nepotism and favouritism and of out and out corruption, promoting rent-seeking.

We started with permits and licences. The well-connected made millions by simply selling the official paper. Next came, vertical and horizontal monopolies flowing out of the private banking sector concentrated in the hands of a few families. This was preceded immediately by the bounties generated by the Pakistan Industrial Development Corporation, which used to set up industries in lucrative sectors, make them profitable and then sell them at throwaway prices to the well-connected. Around this time, state-run banks were providing 75 per cent of the equity for investment to people with the right connections. Even before the launch of the unit, the sponsors would retrieve their part of the equity by floating shares and then buying them back after manipulating the market to depress their prices to next to nothing. And even before the first batch of goods went out of their factories, they would have pocketed huge profits by over-invoicing imported machinery. And many would make millions routinely by siphoning off investments in the loan-burdened units and declaring them bankrupt.

Even the nationalisation phase of the 1970s did not curb their rent-seeking habits. While nationalisation soon turned into bureaucratisation, the incoming military regime of General Ziaul Haq returned many of the nationalised units back to their owners almost for nothing. In some cases, the buyers were allowed to borrow from nationalised banks without any collateral to buy nationalised units. And when the denationalisation spree was launched in the 1990s, highly profitable public-sector units were sold for a pittance and since then, the amount of tax these units used to pay has gone down considerably.

Every time an attempt is made to make them pay their dues, the big business would get the urban-based media to focus on exemptions allowed on income from agriculture, while at the same time, it would use this very concession to increase its own quantum of tax avoidance. In fact, the two — the big business and the agriculturists — have contributed equally to keep our tax-to-GDP ratio so low. Between the two, they have cornered our entire economy and using this clout, they have bought off both the establishment and the political parties. So, whether you have a military regime or an elected civilian government, the two moneybags would continue to call all the economic shots and that is the reason why our tax-to-GDP ratio continues to remain so pathetic and we continue to need the IMF’s oxygen tent to escape default.

Published in The Express Tribune, July 3rd, 2013.

Provincial budgets fall in line – Shahid Javed Burki

Following is a cross-blog post from Express Tribune. The writer is a former caretaker finance minister and served as vice-president at the World Bank

Does the new government which took over the reins of power in Islamabad in early June know what to do to revive the economy? Does it have an economic model it is likely to follow? What should the new administrations in the four provinces do now that they have a great deal of authority in economic matters? Will they follow the lead provided by the federal government? We can find some answers to these questions by analysing the content of the five budgets, all presented in the middle of June.

Finance Minister Ishaq Dar told the National Assembly and the nation that the share of investment in national income had to increase to rebuild the nearly shattered economy. The country was saving only 12 per cent of its domestic income and investing it in an economy that was increasingly inefficient. Whether deliberately or not, the Finance Minister Ishaq Dar took a leaf out of the old book of development economics: that for the rate of growth to increase, the amount invested in the economy must continuously grow. That is what various economists had concluded when they began to build their understanding of the process of growth.

This approach leaves a number of questions unanswered but not the ones that were raised in most of the commentary following the June 12 presentation of the national budget. Among them, several are to be found lying on the border where economics meets politics. For instance, why has the rate of investment fallen to its lowest level in six decades? There are many answers but two of them are of particular importance. One, the country does not save enough and, therefore, invests little. Two, having become dependent on external savings that came mostly in the form of development assistance, the decline in this flow pulled down the rate of investment. These two answers beg some more questions. Why do the Pakistanis save so little while the Indians and the Chinese — both communities just across the border — save so much? This is where political economy enters the domains of anthropology and sociology. Almost a century ago, Malcolm Darling, a British bureaucrat turned academic, came to the conclusion that the Muslim culture in Punjab favoured consumption over investment while the Hindu preferences were exactly the opposite. Darling based this finding on the work he had done investigating the reasons for the increasing debt of the Punjabi Muslim peasantry.

That the provincial budgets, announced after the national budget, reflected the same approach to economic revival is a good indication of where the national economic discourse has arrived. The provinces also focused on investment but with one important difference. Their budgets said quite a bit more on how the increased amount of investments would be allocated among different activities. That was perhaps to be expected given the redefinition of government responsibilities occasioned by the passage of the Eighteenth Amendment to the Constitution three years ago. The provinces now have much greater authority in the area of social development. Very little has been left with the federal government in the social sectors. Most of the provincial finance ministers identified education as the priority sector. None of them, however, said anything about the partnership between the public and private sectors for improving the level of social development. I will have more to say about this subject later in this series of articles.

The other feature common in all provincial budgets is the reliance on ‘external’ savings. For them, ‘external’ means the federal government. There are differences in implied dependence since the National Finance Commission Award of 2009 promised the provinces a much larger share in the national resource pie. Larger shares were given to less developed provinces of Khyber-Pakhtunkhawa and Balochistan. But defining the share in the resource pie is only one part of the problem. The other is increasing the size of the pie and that brings us back to the interface between economics and politics. Why do the people of Pakistan save so little compared with the people of the countries with much better economic records? Economists have begun to suggest that causality runs in both directions: investment increases the rate of economic growth, high growth encourages people to save more. The main task before the policymakers, therefore, is to pull the economy out of the recession into which it plunged during the rule of the PPP-led coalition. According to the five finance ministers, this can only be done by increasing the share of investment in national and provincial incomes.

But before that happens, potential investors have to be convinced that the economy has a future; that today’s policymakers have a clear idea on how to grow the economy. As economists emphasise over and over again, confidence is an important part of the effort to restore the health of the economy. Confidence was lost during the rule of the PPP-led coalition. It needs to be revived.

What is needed is a clearly articulated strategy that goes beyond simply increasing the amount of public sector investment. It must also include at least two other aspects of development — a clearly defined role of the state and a clear definition of how the public and private sectors could work together to advance the economy. Now that budgets have been presented, the new policymakers must indicate how they will manage the economy.

Published in The Express Tribune, July 1st, 2013.