Daily Times

Economic growth is of paramount importance for the economic vitality of any country around the globe. Strong economic growth increases the tax revenue for government; the wealth of the country and its population and savings to be invested in the domestic markets and business. In this regard, growth in exports is like a prerequisite for economic growth or else countries suffer from severe current account deficits (CAD), which in turn slows down economic growth.

Since the birth of the IMF from the Bretton Wood System in 1944, the fund has functioned as a global lender of last resort for the countries facing financial instability. Helping countries fix the problem of severe CAD is a part of the objectives of IMF because the CAD, if persistent for a long time, may cause severe financial instability. Therefore, countries facing severe CAD problems approach IMF to get instant credit package to support the current account, which, in turn, soars their debt burden. While the debt offered by IMF has the monetary cost in the form of compound interest, the non-monetary costs of Structural Adjustment Programs (SAP) are intertwined with it. These are the policies attached as a precondition with the credit package. Using SAP, the IMF gives policy recommendations to the debtor country to address those financial problems due to which she is requesting the credit package.

Thereby, when the PTI government, after facing a severe CAD of $18 billion in FY-2018, knocked the door of IMF for a credit package to support its CAD crisis, the Fund authorities had affixed the devaluation of Pakistani rupee against the dollar as a prerequisite under SAP for a credit package. Consequently, to secure the credit package the circumstances had forced the PTI government to accept the precondition and devaluate the currency by 25 per cent from Rs 122/$1 on August 31, 2018, to Rs 163/$1 on June 28, 2019.

Being a third-world country, the sole option of currency devaluation couldn’t give a long-lasting positive impact on Pakistan’s exports, the CAD and the economic growth

The IMF had later proclaimed that the precondition of the devaluation of rupee for the credit package aimed to help Pakistan boost up her exports. However, the statistics of the State Bank of Pakistan (SBP) depict the opposite story, as, during the same period of rupee devaluation, the exports of Pakistan had dwindled by 0.23 per cent from $24.842 billion in FY-2018 to 24.785 billion in FY-2019. Although the data of SPD reveal that the exports had plunged, yet according to SBP, the CAD shrank by 30.5 per cent or $5.5 billion from $18 billion in FY2018 to $12.5 billion in FY2019, and this contraction was enabled because of the high tariffs on imports. The aforementioned statistics also manifest the fact that the 25 per cent rupee devaluation neither caused an upturn in exports as it was claimed by the IMF nor had any role in a downturn of CAD for the FY2019.

Therefore, I believe that the above statistics detect the lapse in IMF’s policy to make appropriate recommendations to Pakistan because being a third-world country, the sole option of currency devaluation couldn’t give a long-lasting positive impact on the exports, the CAD and the economic growth. Thus and so, the point, which has been missing from the agenda of IMF for a long time and is of vital importance for Pakistan in comparison to the rupee devaluation is the strong “Domestic Industrial Infrastructural Reforms.”

The strong industrial reforms compatible with the 21st century would be the only way forward for Pakistan for reviving its domestic industry and making its products competitive export based on cheap prices and good quality; a tactic that has been used by Japan and China for decades. Ultimately, cheap and good quality products would have high demand in the international market, which would, in turn, increase the exports, economic growth and consequently turn the current account into surplus.

Hence, I would like to direct the readers’ attention to the point that the IMF hasn’t made the appropriate policy recommendations to Pakistan. Being a Reformist Financial Institution, it should have long ago forced Pakistan to adopt Industrial Reforms instead of the fruitless option of currency devaluation.

Although the rupee devaluation recommended by IMF failed to increase the exports, economic growth and decrease the CAD, however, it had successfully up-surged the prices of goods and services which in turn elevated the inflation rate by 44.7 per cent from 4.7 in FY-2018 to 6.8 in FY-2019. So, the aforementioned discourse leads us to the conclusion that the currency devaluation recommended by the IMF had backfired and grievously affected the general public of Pakistan. Better late than never, Pakistan being trapped in the bullheaded economic situation must go for “Domestic Industrial Infrastructural Reforms;” which is the only effective and long-lasting modus operandi for Pakistan to increase exports, economic growth and improve CAD.

The writer is a columnist and works as Assistant Accounts Officer at Directorate of Finance, BUITEMS