The insanity of Our Economic Policy

“Insanity is doing the same thing over and over again and expecting different results.” Einstein

Pakistan is an IMF addict: we have had 12-13 IMF programs in the last 30 years and have spent more than 22 years in a program (more if you count program monitoring). So, what will change with another program? Will both Pakistan and IMF repeat the past and prove insanity as in Einstein’s maxim. 

IMF gave us a clean bill of health about 2 years ago, yet we are in another BOP crisis. You can see the exchange rate collapsing. Will the doctor repeat the old medicine?  
While policy, IMF and our policy remain engaged in a dismal dance, the economy beyond the control of the MOF chugs along creating a middle class. People are largely better off despite the shenanigans of the trio (MOF, IMF and pundits). People have worked hard to build a life for themselves whether through migration or some trading and even informal work at home.  But then the trio (IMF, MOF and our economists) call the hard work of people, the informal economy, and they want to shut down what is working in the economy.
What economists should say (and never say) is that the Ministry of Finance (MOF) SBP and economic policymaking is always in a crisis even if the country is prospering.  MOFs bereft of policy skills is always run by a megalomaniac Finance Minister (who boasts of running 10 divisions from Planning to Statistics, why?) and a controlling Finance secretary from the DMG. It always remains close to a BOP and a fiscal crisis.
Let us call it like it is. MOF and SBP as well as economic policy needs an overhaul. Currently the government is not structured to do policy in the 21stcentury. Any DMG cannot come and make policy in Planning, Finance, Commerce, FBR, Industries for 6 months before retirement. It would be laughable were it not real.
And the minister of finance is just one minister and should not try to be deputy prime minister and bully SBP, Planning Statistics, economic affairs and many other ministries. She should only be minister for finance. PERIOD.

The pundits/IMF talk of the economy as if the megalomaniac, skill-less MOF can wave a magic wand to make the economy turn on a dime. Despite many pronouncements and repeated donor policy advice and financing, growth remains below potential, fiscal and BOP deficits remain out of control, savings and investment remain low. So, what have all these programs and donor interventions achieved?  

Yet the cavalry in the form of the IMF will be here is September. They will provide temporary relief as always. Sadly, they are incapable of changing the fundamental weakness in the economy—the poor policymaking in the country.  

IMF will repeat the same medicine, increase revenues through mini-budgets and random taxes. Reduce expenditures without analysis.  In short IMF keeps giving us the “austerity” treatment, that Europe has reviled. But austerity has not fixed our problem for 4 decades. Instead it makes it worse as haphazard taxation and expenditure cuts erode the capacity of the state and society’s trust in it. 
 IMF fixes for structural problems were easily gamed by MOF. The government has never reduced in size. PSEs bleed profusely (Farrukh Saleem gives good figures). Government expenditures as well as borrowings remain out of control and the IMF has no analysis of why. SROs despite much effort remain intact to the detriment of taxes and business competition. Corruption and governance problems continue to grow. 

Programs and groupie economists always focus on tax GDP ratio as the centerpiece of the IMF program. Tax reform makes a bigger mess. We have a punitive tax system belying all principles. There are 60+ withholding income taxes on various services that the poor pay to never get a refund. 70% of our revenue is now collected on withholding agents like mobile phones, banks and schools. And FBR is getting bonuses thanks to DFID funded research. This tax policy is a drag on the economy, hurting our exports and businesses but IMF will give us more.    

In the 90s I did a paper on Sustainable deficits (with Peter Montiel) to show that Pakistan can sustain a deficit of about 5% pf GDP. The IMF mission objected and maintained a deficit target of 3% in the 90s. Now with hindsight, we can see that despite IMF efforts, Pakistan never even reached 4% of GDP. Now the IMF has moved the target for the fiscal deficit over 4% but without a clear strategy on how to achieve it. 

So be prepared for minibudgets, arbitrary taxes and more borrowing.  3 years later MOF will declare victory and IMF and World Bank will praise MOF. But by next election, look for another crisis and a return to the IMF.

The cycle will continue until we change the MOF, SBP and how we make economic policy. And IMF has no way of doing that!

Or as Einstein said keep repeating insanity of repeating past mistakes. 


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  2. Thanks for writing this, I will surely refer this to other people, do write more about Investments in Pakistan & Mutual funds in Pakistan.


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