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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  5. You are missing “The Corona Bonanza” for Pakistan

    Bonanza 1

    There will a temporary shock to the government fiscal revenues as Imports will crash,CIF rates of imports will also crash,domestic production has stopped (as tax on MRP less deductions is paid at the time of production and not sale),domestic MRP rates will also crash.That is Y the state has not passed the benefits of lower crude and palm rates to the people

    The Bonus is in non-salary expenditures of the state,which are on ARC (Annual Rate Contracts) or other RC.With crash in commodities and surplus capacities – Pakistan can easily make and re-negotiate its procurements.Large nations like Hindoosthan,will face disaster,as they will face supply risks,per se.W.r.t the purchases by the Pakistani state,the state can declare Force Majeure,especially on International contracts.

    There is no immorality in this,as the suuply and value chain of the suupliers to the state – will,in any case,declare Force Majeure – which will ensure that the suupliers will default on the government contracts.The supliers will make supplies at ARCs,only to the extent of the existing stocks,as at March 15th,2020.They cannot be allowed to supply,from new purchases at the old ARC rates.

    Global suppliers will be glad to dump their stocks – with depots in Pakistan – for sale to the Pakistani State.

    This could easily reduce the costs by 30-50%,on a one time and recurring basis.Once this Cost is saved,in phases,the benefit of oil price crash on fuels and edible oils and also power tarriffs and fertilisers,can be passed on to the public.That will be pure jannat.

    Bonanza 2

    The Only Solution to the supply chain risk in USA/EU (w.r.t their supply chains in PTRC) lies in massive robotics and AI – which will make humans obsolete in manufactuirng and also,in part,in IT.The question is,what to do with the humans.That is Y the virus is sought – Simple !

    For Pakistan – the crash in Raw Materials and cost of capital, availability of capital and crash in logistics costs will make manufacturing and exports viable.That makes existing unviable manufacturing units viable and jobs and decline in NPAs.No fresh capacities should be launched,solely based on the current cost structure.Crash in costs plus the low labour costs in Pakistan and stable PKR – is the Alt-AI and Robotics

    The Pakistani people should thank its prior leaders,that they made manufacturing unviable in Pakistan,and made it a trading nation. Had the state set up manufacturing units – they would be unviable,banks would be busted and there would have been mass skilled unemployment. Just look at Hindoosthan.dindooohindoo

    This is the time for setting up manufacturing units – SME and others.

    The military,food,telecom,technology and health secuirty of the USA and EU is in the hands of the PRC.These nations will be FORCED to move at least 10-20% of their supply chain,to other nations.They have no choice.

    Bonanza 3

    The SBP and the treasury of the private sector,should suck in the Corona rate cuts and packages in EU/Nippon/North East Asia and the USA – and restructure the entire FX loan portfolio,w.r.t tenor,spreads,risk premiums,swaps and hedges. One simple way,is by trade finance,which is based on underlying trade and other activties with those nations.

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  6. Corona Bonanza 4

    After doing 3 and 4 above,the state should invite bids to build and repair infrastructure on BOOT basis.The Cost of infra should reduce by at least 30%,supplemented with long term soft loans and grants.

    With viable manufacturing and exports,lower cost of debt – an already cheaper infra cost – will make infra financing and operations,all the more viable

    Bonanza 5

    To lock in the gains to the people and industry,the SBP and the State should lock in to NYMEX crude and futures,at current rates (on CBOT or with large funds etc.) – for as long as possible,with reasonable contangos or maximum backwardation.A large nation cannot do this – as it will move the premiums,in the derivatives market.

    The State should thereafter, lock in the oil and gas rates – and then affix power and fertilisr tarriffs, for the same tenor – with a priority for industrial zones – after meeting the consumer needs.Edible oil contracts can also be struck with large funds,in the USA/EU.

    This is also the time for the state to declare Force Majeuer on the ulra high cost RPP/IPPs.With reduced power demand,the entire power demand of Pakistan, can be met from fuel and coal plants,at less than half of the previous marginal cost. For several people, this power supply can be free of cost,as the Marginal cost of power on current fuel costs,should be around 1-2 Rupees (which is not worth collecting from marginal users).dindooohindoo

    It is time to celebrate !

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