Daily Times

The west is greatly indebted to
the works of John Maynard Keynes, the brilliant economist. He died in 1946, just before he could see the true practical value of his academic work. Post-war Europe used his policy prescriptions with a great zeal to recover from the economic fallout of the two world wars and the great economic depression. And more recently, the US and Europe used his doctrines to prevent an all-out economic meltdown after the financial crisis of 2008.

What Keynes proposed was remarkably simple. He argued that economies have cycles of booms and slowdowns and without government intervention the slowdowns can become very deep and prolonged. Investors lose confidence and stop investing, employers stop hiring and people stop consuming; their collective expectations of economic depression become a self-fulfilling prophecy. Governments at this time have to step in to spur economic activity by what Keynes called ‘counter-cyclical measures’ to lead public investment and undertake government spending in order to restore confidence and stimulate activity in the economy. The IMF supports this paradigm when it comes to the western economies but takes a diametrically opposite position for countries that borrow from it in the developing world. It almost forces them to adopt policies that further aggravate the slowdown like cutting public spending, removing subsidies and increasing interest rates. And for this it has not escaped criticism. Renowned economists like Jospeh Stiglitz (Nobel Prize winner and former chief economist of the World Bank) amongst other luminaries have written and spoken extensively against this approach. Unfortunately, Pakistan has once again subscribed to these IMF terms when it requested $ 6.3 billion from the IMF under its Extended Fund Facility (EFF).

So why did we do it? The answer to me is quite obvious. The new federal government in Islamabad lacks the political will to undertake structural reforms that have to be coupled with the Keynesian mode of recovery. It is always easy to borrow money and delay or avoid the politically difficult path of generating and mobilising resources indigenously. Amongst the many ills that the new PML-N government inherited from its predecessor, there were certain positives as well. The country’s current account deficit was within manageable range and the inflation rate was in single digits (5.1 percent in May 2013). However, the problem lay with the fiscal deficit that had soared to more than eight percent of GDP and a massive foreign repayment of loans that was due soon. Many argued that going to the IMF at this time was neither necessary nor wise given the harsh preconditions associated with its financial loans. Instead, a wiser approach from the perspective of the long-run could have been to ask for a re-scheduling of the foreign repayment and in the meanwhile plugging the massive leakages in the state-owned enterprises (Rs 500 billion per annum or 2.5 percent of GDP) by either selling them off or restructuring them in order to contain the fiscal deficit.

Simultaneously, additional fiscal space could have been generated by a serious effort to widen the tax net of the country. Pakistan has one of the lowest tax-to-GDP ratios in the world (less than 10 percent). This represents not only a difficulty but also an opportunity to raise government revenues dramatically by bringing in sectors like agriculture and property and stock markets that pay virtually no taxes. Taxing the rich and powerful has never been easy in Pakistan, given their huge influence in politics. Not surprisingly, the taxes that the government did in fact end up levying in the federal budget for 2013-14 are mostly indirect in nature like the increase in sales tax and various other taxes on consumption of essential goods, services and utilities. These forms of taxation are regressive in nature (burden the poor more than the rich) and do not widen the tax net.

Unwilling to remedy the structural weaknesses of our economy, the new government, therefore, opted for the alternative IMF route that also entailed cutting the PSDP by a massive Rs 321 billion (according to IMF figures), raising interest rates and the abrupt removal of subsidies on energy tariffs. The government has recently also embarked on a domestic borrowing spree in order to pay off the circular debt. These sums are borrowed from the State Bank that prints this money for the government and that leads to inflationary pressures. Another route adopted has been to borrow huge sums from the domestic banking sector (Rs 675 billion in July-August alone) and that leads to a term in economics called ‘crowding out’, i.e. the banks stop lending to the private sector as they find a safer refuge in the form of government securities. These measures too will invariably slow down the economy even further.

This brings us back to Keynes. For the past five years, Pakistan’s average economic growth rate of 2.9 percent per annum has been much lower than our regional average. Private and public investments and savings have collapsed. A huge quantum of capital flight has taken place from both the documented and undocumented economic sectors. We are indeed suffering from an economic recession and instead of putting in place ‘counter-cyclical’ measures that would transition the economy towards a higher growth rate, our new government has embarked on the path of a further economic slowdown. So it comes as no surprise that the IMF itself estimates Pakistan’s GDP growth rate at a paltry 2.5 percent for this fiscal year, one of the lowest in its history. The tax net will not be widened, inflation will be more than double, public and private investment figures will further deteriorate. So whilst taking the easy IMF route has meant that Pakistan’s new government will sustain its finances for a short term period, the medium to long term outlook holds the dreadful prospect of an economic slowdown turning into an outright depression combined with the traditional neglect and worsening of Pakistan’s structural economic woes.

The writer is a graduate in Development Economics from SOAS and a Barrister-at-law. He is also PTI’s runner-up candidate from NA-121 Lahore and can be reached on twitter at @hammad_azhar