Institutional weakness, problems of governance impeding growth

Emotions · #1 Monday, January 26, 2009

By Ijaz Kakakhel

ISLAMABAD: Economists highlighted the institutional weakness and problems of governance as the main factors that have impeded the efforts of putting the economy on the path of sustainable development.

Although there was some disagreement regarding the recourse to IMF, but all of them agreed that the country was left with no choice but to take the begging bowl out again.

Economist at a seminar on “IMF: Pain or Panacea” on Friday claimed good governance, good institutions, good policies and good luck were required to put the economy on right track but at present all these things were missing in the country.

The new IMF programme was termed “the most easy programme in the history of the country”, as it carries only four conditions: controlling budget deficit, increase in foreign exchange reserves, controlling inflation and limiting government borrowing from banks.

The Center for Research and Security Studies (CRSS) arranged the seminar and main speakers were Chief Economist at the Royal Bank of Scotland Sakib Sherani, former adviser to the World Bank Abid Hasan and others.

The participants were of the view that Pakistan has to grapple with the problems of bad governance and inefficient use of borrowed money in the past. They claimed that several countries of world took loan from the IMF and put their economies on right path of development due to the absence of the above-mentioned problems.

They were of the view that next two years would be more crucial for the entire world including Pakistan, in which economic activities would be slacken.

Changing of government, separation of PML-N from government and law and order situation further deteriorated financial position of the country.

At present circumstance, the experts expressed the need for tight monetary policy, not only to control inflation but also to bring down the balance of payment deficit. Experts believed that the IMF programme would not harm the economy if implemented honestly. However, they said that the IMF pains have to be distributed according to the “ability to bear the burden.”

Chief Economist at the Royal Bank of Scotland, Sakib Sherani in his analysis said Pakistan’s current economic problems stem from years of flawed policies, which in recent years were consumer led growth centric. It has also resulted in an unsustainable fiscal deficit, Sherani said adding that the tax net needed to be expanded to all possible sectors such as agriculture, professionals like doctors and lawyers and the services sector. He expressed the hope that the latest IMF standby agreement (SBA) for Pakistan would help in stabilising the economy and help revive the confidence among investors.

“Compared to the 46 conditions accompanying the 2000 SBA, the latest $7.6 billion dollar IMF package carried only ten performance criteria.” If good economic management is ensured, there is no question why Pakistan shouldn’t fulfill the conditionalities,” argued Sherani.

Former advisor to the World Bank, Abid Hasan said the IMF package was neither pain nor panacea. “What we need is to cut fiscal deficit through curtailing inflation, raise interest rates and increase taxes to GDP ratio if we want to stabilise the economy.”

He argued that the challenge facing the country was a lack of credibility as well as leadership’s disconnect with the ground realities. Successive governments, he said, also lacked a focus and sincere commitment to setting things right, he said.

Panelists also warned of “hard times ahead”, referring to assessments by an economic think tank which projects the unemployment to rise by 3 million, another 5 million falling below the poverty line, with a 3 to 4 percent growth rate. These projections, if proven true, could seriously imperil the stabilisation programme currently underway.

Dr Farrukh Saleem, the executive director CRSS in his introductory remarks, said that Pakistan’s problems were actually three fold: one, the ‘trust deficit’—the outside world could not trust that the government would do the right thing. Two, the budgetary deficit—the Government of Pakistan raises Rs 1.5 trillion as revenues and spends Rs 2 trillion. Three, the trade deficit—we import goods worth $35 billion and export goods worth $20 billion. As a consequence of the above three, Pakistan is now like a patient who was going through a severe heart attack and the only doctor around was the IMF.

For the past 64 years, the IMF had always prescribed a standard prescription: Increase taxation, decrease government expenditure and devalue your currency. Over the past 64 years, every country—including Argentina, Bolivia, Brazil, Chile, El Salvador, Ethiopia, Haiti, Indonesia, Kenya, Liberia, Malawi, Pakistan, Paraguay, Philippines, Somalia, Sudan, Syria, Thailand and Congo—that went to the IMF got the same prescription. The problem was that a large majority of the IMF patients somehow failed to cure their ailments.

Dr Saleem said, “I have absolutely no problem with IMF’s goals. I also want the Government of Pakistan to end deficit spending and I want Pakistan to narrow the trade gap. My difference with the IMF came in the route taken to reach that destination. My personal ideal would be a ‘supply-side’ approach that relies on providing tax incentives to individuals in order to increase the overall productive capacity of an economy while the IMF’s prescriptions are all about cutting demand.”

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