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IMF & Structural Economic Reform

April 24, 2016

                      IMF & Definition of Structural Economic Reform

Asad Rizvi @asadcmka

In Pakistan, one of the major causes of economic downturn is the history of involvement of the elitist that has all the time dominated at the highest circle. The power elite model is a complete failure, as it did not contribute enough to match population growth pace, it has increased poverty rate, pushing illiteracy rate higher, worsened health care condition and causing social unrest.
Today, tough the country is blessed with large lot of younger population, but the cause of economic misery is lack of industrialization and outdated agricultural technology.
In true sense, the nation is not aliened to engage itself with the process of globalization. It has certainly failed to counter two other major challenges, energy scarcity and climate change.
Unfortunately, it is due to Hierarchical Control System that despite our country being blessed with wide range and abundance of natural and other resources, Pakistan’s economy is totally dependent on Foreign Capital.
It is simply because the Command Hierarchy opts for a preferred policy of their choices resulting pocketing of largest portion of wealth that simultaneously has helped in promoting Nepotism and Corruption.
Hence, they are the Real Spoilers of Pakistan’s Social and Economic Indicators/Models, as the History of Hierarchy Control would suggest that the chosen few from the same lot are most of the time engaged at different levels.
Take an example of group of people often chosen to represent “Monetary Matters”, or matters pertaining to “Fiscal Issues” or have a look at Group of Experts and Planners invited to prepare and provide feedback on “National Budget” issues.
Interestingly, expect for one or two new faces new names are not involved in Budget preparation. Old faces have been part of the process since decades. After the Budget announcement, they are the ones mostly found snubbing government policies, probably because their direct or indirect interest is not protected.
This is 3rd year in running for the present government to prepare its National Budget (2016-17). If the present Government seriously means business, they should adopt sensible strategy to introduce new faces with new ideas/plan and make an effort in their coming budget to minimize and overcome economic burden, as input of all past committees have been well short of targets. With a serious note, this continued weak input should be highlighted in print and electronic media.

Structural Economic Reform

“Structural Economic Reform” is a very common term, which is frequently used by almost everyone. Economist/Politicians/Planners/Think tank are of view that strategic shift through structural economic reform can bring positive and desired economic and social changes for the well being of the nation.
By definition the term is wide and very confusing. It is also very common in our country and is frequently used in context to IMF assistance, which is the easiest way for every government to get money without being accountable to the nation. Pakistan has so far approached IMF on 8 occasions.
Structural Economic Reforms can necessitate changes to government working strategy, but they are extremely difficult to analyze or describe its type. This is why IMF phrase “Structural Changes Vital to Successful Development” is a common term often used in Pakistan, but it is a perplexed clause when applied.
-To illustrate my view point, until past and present government’s tenor, funding of Circular Debt would always hit and inflate Fiscal Debt number, but suddenly in recent times IMF made a big policy change and thinks otherwise. If my argument is not acceptable then why in previous years, Circular Debt payments was added to the Fiscal Deficit number inflating the data and now it does not ?
-Government is not suppose to borrow directly from Central Bank, but is allowed to use backdoor, as Central Bank can fund banks through Open Market Operation (OMO) encouraging banks to buy lucrative Government Paper to meet its funding shortfall. Why does it instead encourage window dressing, which is against norms ?
-Thirdly, IMF wants industrial expansion, as it is of view that economic growth is critical, it also wants to improve human capital skills to enhance productivity, but at the same time it demands austerity. Then how is it possible when liquidity is intentionally drained out and corporate lending is discouraged? Advance/Deposit Ratio dropping to around 50 pct justifies my argument of private sector slowdown.
-Further, in Pakistan’s case only 10 pct of the IMF funding is allowed for debt related payments and the remaining balance amount is placed with Bank for International Settlement (BIS) or other agencies. The impression given is that holding of IMF money fattens country’s Forex Reserves.  Over here, who is the beneficiary ? Pakistan that cannot spend IMF loan according to its need or IMF that has succeeded in conditional lending. Spain and Italy snubbed IMF when it offered conditional lending demanding austerity measure.
-There should not be any disagreement to IMF demand of economic stimulation policy. But there is a clear policy conflict. Its major demand is to contain deficit, which is not possible without putting a slash in bank lending. Then how can economy expand by further choking banks by draining out injected liquidity (OMO) to sell Bonds/T-bills ?
-Is IMF complacent approach not questionable that despite our exports falling since last six years due to sharp fall in commodity prices in international market, IMF does not demand from Pakistan to do cost and benefit analysis? Why IMF does not ask government to refrain from support price policy, which is clearly state intervention and not as per international market practice?
-Is IMF not aware that due to consumer unfriendly food support price policy, food prices in Pakistan are already overvalued by nearly 30 pct making life of common man miserable? Prices should be aligned in line with international market price to support its ailing exports so that it can capture its lost market share. It will serve two purposes. Reduction in artificially inflated price will ease domestic food inflationary pressure and give much needed boost to exports.
-Why IMF has adopted dual stance ? It is compromising on weak Revenue Collection, which is at alarming low level in terms of Tax to GDP Ratio. But it is least bothered when Mini Budget is introduced to fill gap that adds extra burden on the larger part of the population ?
-Why IMF is not responsible for drop in Tax to GDP Ratio when private sector spending is curtailed to contain deficit resulting weak revenue collection?
-Why IMF does not consider breach of 60 % Fiscal Responsibility and Debt Limitation Act (FRDL) a serious issue ?
-Why IMF does not change its priority list putting taxing of all income on top of its list and by putting Privatization behind ? This is amusing and confusing too.
I have listed some of the facts and would remind IMF about its deregulation policy, as most of the issues discussed above fall in its ambit.
My intuition is that such ongoing borrowed policies will never bring positive and desired result, unless drastic changes are applied at all levels.
Therefore, it is imperative to bring imminent changes in the current monetary system and its economic model.
Start by getting rid of Feudalism that has economic roots that is spread all over the system to be followed by revamping of country’s education system that should top the priority list. This cannot be done without substantial increase in spending on Education by allocating good part of money, which should be 6-8 pct of GDP. Though many would argue that it’s a Provincial subject, but lead has to be taken for a big leap. There is surely unending list of things to do.

(Disclaimer applies in my post, which means that the perspective is my personal view. I have made every effort to ensure accuracy of information provided. However, accuracy cannot be guaranteed. This article is strictly for information and not intended for Trade or Business Transaction)

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