As every successive government that comes to power in this country turns to the IMF, there is a danger that we as a nation will be left completely ignorant of the possible alternative methods to handle the economy and financial crises facing us today. Many economists propose the imposition of capital controls as a remedy for countering the economy crises and Asad Umer too should consider it as a possible alternative. This can be established from the examples and experience of Korea, Thailand and Malaysia.
One must accept that poor banking regulations and supervision has deepened the crises. Moreover, tying our currency value with the Dollar at a time when the later is rising, as compared to the rupee, obviously makes investors nervous. It is typical of economies that are facing some sort of monetary crisis to experience a sudden drying up of net capital inflows, which leads to massive unemployment and inflation. To ensure that this does not happen in Pakistan, two measures should be taken for controlling cross-border capital movements: controls on capital outflows, perhaps similar to those that Malaysia imposed in the late 90s, and controls on capital inflows that Chile implemented in 1991 running up to 1998. This control of capital inflow and outflow is a tested procedure for dealing with current and impending financial and currency crises.
The implementation of these measures includes steps such as “outright prohibition of funds’ transfers, restrictions on capital account transactions including taxes on funds remitted abroad, dual exchange rates and outright prohibition of cross-border movement of funds”.
These steps may immediately help slow down the flight of the international reserves and capital, and may give the current government enough time to correct the economic situation in this country or implement corrective policies. Capital controls also enable the retaining and simultaneous control over the interest rate and exchange rate. They are the best course of action when the authorities are reluctant to allow the exchange rate to float freely, which is the case in most third world countries and emerging markets.
The implementation of Capital Controls includes steps such as “outright prohibition of funds’ transfers, restrictions on capital account transactions including taxes on funds remitted abroad, dual exchange rates and outright prohibition of cross-border movement of funds”
In Pakistan’s case, where any such move may also instil distrust in the investors, capital controls should be imposed for probably just six months to a year. The researchers and practitioners too should consider capital controls as a serious alternative to the IMF and should discuss and propagate this previously tested measure through their public engagements. Capital controls is an effective means of preventing a rise in exchange rates and may also alleviate calls for the reduction in domestic spending. In Malaysia, Dr Mahathir is not only considered a savoir of the economy when he implemented capital controls, but he also bore the brunt of the blame for implementing this measure very late. I suggest that Asad Umer should consider this alternative to approaching the IMF as soon as possible.
By implementing these policies, Pakistan can show that it is not dependent on the IMF to fix its problems, especially at a time when we are facing a devaluation of the currency and a reduction in foreign funding. As for Imran Khan’s calls for Dollars from the expatriate Pakistanis, this will certainly not be an alternative to either the IMF or capital controls. In fact it will result in excessive capital inflow, which may in turn stimulate spending, which may in turn lead to import surpluses.
We are living in a time when even stable countries such as Turkey, Greece and (probably in the future — after Brexit) UK, are facing financial crises. Trump is fast introducing nationalistic policies and withdrawing its support for foreign countries such as Pakistan. Therefore, it is a distinct possibility that institutions like the IMF and World Bank might also, one day, find themselves out of resources. This is the right time for economies such as Pakistan to find indigenous solutions to their financial problems, and reject the IMF’s help, which comes with stringent monetary and fiscal policies.
The author is an Assistant Professor
Published in Daily Times, September 11th 2018.