By Laila Sohail

Saturday, 29th November – 2008

The economic crisis has taken us exactly where it was expected…straight into the account books of the big bosses at the IMF We may be told that it’s a do or die situation, but there are options available. We should first get the IMF off our back, and then work on our own development programs. What Pakistan needs right now, is an out of the box solution…and some courage.

The IMF is going to bail us out with 7.6 billion dollars. The interest rate is going to be between 3.51% and 4.51%, but an official announcement is yet to be made. Apparently that’s it. We take $4bn this year, $3.6bn the next, and repay it by 2016. Or at least that’s the part we are told. According to speculations, the deal comes with an implicit price. A 30% cut in the defense budget is demanded. Other cuts may ask for reducing the number of pensionable posts in the government and semi government departments, devaluing the rupee, increasing sales tax by Rs 50billion, and imposing a 7% tax on agriculture.25% of government assets may be kept as mortgage, and the future annual budgets may now be prepared by the IMF and not the Ministry of Finance, so now it is not only at the borders where our sovereignty is compromised.

There are also concerns about the very reasons for going to the IMF. The notion being that the whole economic crisis was exaggerated so as to leave no other options open. The IMF hawks want us to go under, America wants us to go under…and now the government wants us to go under. It may be the last nail in the package to ensure that even the economy is no more independent.

It does not really matter what the intentions of the IMF are. The fact is that the Fund is not a charity institution. Regardless of its noble claims of strengthening countries, it is at the end an institution working in its own interests, and one should not be naive enough to either deny or criticize that. The loans may be meant to stir up the economy, but history has shown us the failures of this policy. One can not blame the IMF for our own ineffectiveness. Borrowing to develop, and then borrowing again to finance the previous borrowing, is a policy that can now safely be called a failure, as we have no development, but only borrowing bills to show for it.

There is only one reason for our failed policies, be it related to development, trade or investment and that is over reliance on external sources of financing. In a globalized world, transactions with other countries are a compulsion. External Finance has been a major constituent in development. No doubts there. However we have been over enthusiastic about it. It can not be the sole mode of survival. We should not be worried about putting food on the table every time the dollar revalues, trading trends change, or interest rates go higher half way across the globe. We need to survive on our own, and then use the best economics has to offer us to interact with the rest of the world. External finance should be an opportunity for growth, not a necessity for survival.

If somebody up there is listening, this is the direction we need to be heading for:

Default: One can neither be too scared, nor too optimistic about defaulting. It has its consequences. We owe our foreign debt to a trade deficit, Foreign Commercial banks, International bonds and the IFI’s.

  • Default on the foreign commercial banks and International bonds: What’s the worst that can happen? Being realistic, its goodbye foreign investment {at least for now}. We lose our credit worthiness and the foreign banks don’t want to have anything to do with us. We lose all confidence in the International Bond market. If the local currency depreciates due to the flight of capital, it may cause cost pushed inflation as the prices of imports rise, however the inflationary control measures taken through the tight monetary policy by the central bank will to a great extent offset this. The one advantage: it saves us from the IMF.

The price seems big, but compared to the other costs, it’s the minimum. The world recession already means decreasing investment globally. The instability and insecurity means bailing out investment no matter what rate of interest you offer, because no investor wants to invest where there is risk to property. So the investment you lose out on is not as much as you would expect. The investment in the past few years was mostly on FMCGs {Fast Moving Consumer Goods} anyway, so it can not be used for sustenance. When the crunch comes, investment moves out. How do we compensate for the loss in growth? We simply build.

  • Encourage saving. Discourage expenditure. Support private investment. Despite the credit trustworthiness issue, local investors may still be persuaded with subsidies, tax incentives and support schemes. BULD FROM INSIDE. Foreign investment is important in a global world, but if letting go of it means relief from the IMF, it’s the lesser bitter pill to take

Trade: There is a trade deficit of $3.522 billion {FY08} .Unfortunately that would have to be paid. We need to curtail our imports, but for the current period, we can not afford to mess with these guys Oil, machinery, iron and steel remain our biggest imports. We are dependent on our imports, like it or not and therefore can not endanger the supply, or raise their prices. If we are ready to lose out on investment, we would need to have the trade door still open for us to interact with the rest of the world. A current account default would be a trade suicide, one that we can not under any circumstances afford. How we do it with no foreign exchange reserves is a bigger challenge. Push for bilateral funding, use up money from the domestic debt, rack our brains and take out whatever for ex we can from wherever we can to finance the deficit. In May 1998 the government had gone to the extent of freezing the foreign currency accounts. Even if such dire action can not be called for, at least SOME action needs to be taken to make this a priority.

How do we decrease the trade deficit? That’s a simple one. Increase exports and decrease imports. Our current major exports include cotton, so take measure to increase the quality and yield, but we can’t do that because we import the fertilizers from Morocco. .We can not export more sports goods or leather items either, because the machinery comes from China, and we can’t make our own capital goods because the iron and steel has to be bought from Japan. So the only way to increase exports is to also increase imports, as all the raw materials for our exports are imported. Decreasing the trade deficit…not that simple after all!

  • We will have to increase both the value and threshold of our exports. Our largest trading partner is the European Union, and United States is the single country to which we export the most. It goes without saying that we need to increase our trade diversity {trade with more countries}.
  • Our exports have been limited to a few items. Over the years we have faced immense competition from countries including China, India, Korea, and Taiwan. Trade has grown for our rivals, but with hardly any effort to improve the quality or yield of our exports, we have been left behind in the competition. INVEST in Research and Development. Focus on finished products instead of unfinished crude goods. Support exporters through reduced taxes, schemes etc.
  • Minimize imports: We can’t do without oil, steel or iron, but we can continue living without the latest cars, mobile phones and watches. Take a free hand and tax the luxury import items {it will help ease the fiscal deficit too}. Create awareness and ask the people to give up on imported Pineapple Juice and resort to local Nimo Soda for a refreshing change. This will be a good time to revisit the Be Pakistani Buy Pakistani Scheme.

Fiscal Deficit: The ever increasing fiscal debt causes further borrowing from the IFI’s

  • Instead of borrowing from the Central Bank; the Government should opt for direct public financing if it has to borrow. It does not have an adverse effect on interest rates and therefore investment. The monetary base is not affected by the deficit funding and therefore it does not cause inflation. Most importantly, it makes the Central Bank independent and does not dictate or affect the Monetary Policy. Borrowing from the Central Bank causes inflation. LET GO OF THE CENTRAL BANK.
  • REDUCE the government expenditure, and no, I am not referring to THE government expenditure…the subsidies and the pensions etc. I am referring to the expenditure by the government. Ministers in big cars, huge entourages, political dinners and functions at the Presidency: Islamabad does not give itself away. No one would be able to guess that there is an economic recession in place. The fiscal deficit is a tragic 122 billion {FY08}, the least that can be expected is a cut down on the Jiye Bhutto monuments.

Empower the common man: Income disparity is one of our biggest problems. It is not enough to generate wealth; the effect has to trickle all the way down.

  • Develop the AGRICULTURE sector: The agriculture sector remains the largest in the economy. While industrialization, investment etc accumulate wealth for a certain class, agriculture benefits the common man. It is also the rare case where we do not have to rely on imports for its development and we can gain a competitive advantage in its trade {(his will also help with the current account deficit).Invest in R&D to improve yield. AGRICULTURE IS THE WAY TO GO.
  • Stop waiting for the big factories to open up. Invest in COTTAGE INDUSTRIES. Create employment for the common man. Provide Vocational/technical training. We have plenty pf labor, but it has to be trained to be more productive. It will also affect export favorably. Development will not come about by distributing meager amounts of cash as pocket money to the poor; it will come about by giving a man a job that allows him to improve his standard of living.

Schemes/ campaigns: Attempts should be made by the government to bring the people on board and create a sense of unity to face the economic challenges.

  • Campaigns should be launched to achieve policy incentives. For example to encourage using public instead of private transport to save on fuel, buying local goods instead of imported one, saving more, conserving energy etc. The sense of alienation should be removed

It won’t be a walk in the park, but imposing these policies is the only way for long term sustenance. Short term growth may be effected but compared to the conditions that accompany the IMF loan; it’s a price worth paying. It is true that we need to cut down on our defense budget and reduce the fiscal deficit, but it has to be done on our own terms, and not through dictation. The 7% tax on agriculture is an example of exactly the kind of fiscal policy we don’t need. The increase in tax, including the GST, is all to be borne by the lower and middle classes, while the rich and elite enjoy a regressive taxation system. The announcement has been made for all subsidies on petroleum and electricity to be removed. There is also a call for the devaluation of the rupee, meaning we can expect bigger import bills. The 2% interest rate raise {the condition is 5%} will affect investment adversely.

We want to borrow from the IMF for what? Only to maintain our credit rankings. What good does that do when we are already paying the same price? The government wants to take the loan and bear the price in the short term, and then introduce development programs for growth purpose. Keep the same strategy; only pay the price in terms of default in the capital market. Stop using the IMF as a ventilator every time external finance fails us. Turn this into an opportunity to develop basic infra structure, redistribute the wealth and put local resources to use.

IT’S TIME TO GO SOLO, STOP BEGGING AND START BUILDING.

Laila Sohail is a young Pakistani commentator and can be reached at: blabbersboo@gmail.com

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Previous Columns by Ms. Sohail:

No to the President, No to the media

Wake up, we are already at War

Where there is a will – There is a way! Zardari’s Success Story

Pervez Musharraf: Pakistan’s Only Real Democrat in 40 Years