An Alternative to the IMF

In spite of being an agricultural country, producing more than one-fifth of its output from agriculture, and a little less than half of its population working in agriculture, Pakistan is food insecure. And in spite of vast rivers and their tributaries, the country is potable and irrigation water scarce. And despite of vast hydro, coal, oil and gas reserves we are energy scarce. Even though Pakistan has large mineral reserves it presents a perfect textbook example of a resource curse afflicted country. Agreements have been signed with foreign countries which reflect Emmanuel's "unequal exchange" in its most blatant form. In some agreements the share going to the country and its people is minimal, but there are examples when resources have been given at zero royalty rate. Our highways and roads are being used for transportation of armaments, goods and services to superpowers free of cost. And that too to a superpower which according to Stiglitz and Bilmes spent USD 3 trillion on the Iraq and Afghan wars between 2001 and 2008. Poor governance, corruption and extreme generosity are taking their toll in the form of the country having to borrow with adverse impacts on the economy, geopolitics and the society at large. Following a brief introduction I will discuss the IMF solution currently being employed to close the deficit on the external account. I shall present my own solution to filling the external account deficit.

 

IMF Policy Prescription
According to the State Bank of Pakistan, deficit on the current account has increased 50% to a staggering USD 14.03 billion during the first ten months of the fiscal year 2018. This is a precarious situation as the foreign reserves declined to USD 11 billion last week. The standard IMF policy prescription for countries faced with balance of payment crisis is to devalue the currency, which through reduction in export prices is expected to expand the demand for exports. By making imports more expensive the demand for imports is expected to be reduced. This narrative does not take low elasticity of demand and supply of our exports and imports into cognizance. With low demand and supply elasticities, the expansion in exports and the reduction in imports might not happen, as a result the trade deficit instead of declining, might actually widen.


IMF’s external sector strategy has been used unsuccessfully in Pakistan since the 1990s. While devaluation has not reduced the trade deficit, increase in interest rates to combat inflation results in reducing investment, output and employment. Although the fallout on the economy and the people is horrendous, the lenders and those drawing their salaries and pensions in foreign currencies stand to gain from devaluation. The focus of IMF strategy is on across the board reduction in imports and increase in exports instead of a targeted approach. Moreover, the IMF strategy passes on the cost of adjustment to the common people instead of those that have benefited from foreign borrowings. Additionally, the entire focus is on increasing foreign exchange earnings through increasing exports, other sources of foreign exchange inflows have been ignored.


Alternative Strategy 
I have tried to formulate an external sector strategy for Pakistan that does not entail the costs and drawbacks of the IMF strategy. I am drawing heavily on my earlier papers, especially Wizarat (2000 and 2001). The proposed strategy is not just an alternative, but a superior alternative on account of the following: First, with hindsight we know that devaluations for the last many years have not increased exports nor reduced the demand for imports. When import demand has been reduced, it has been at a very high cost to the economy in the form of deindustrialization. We are also aware of the ramifications of devaluation on inflation, investment, output and employment. In view of the above, I am proposing ‘selective’ demand restraint rather than ‘across the board’ demand restraint. Second, I have tried to pass on the cost of adjustment to the segments of the Pakistani population that have been beneficiaries of current policies. Third, the proposed strategy tries to break the trade-off between economic adjustment and economic growth by trying to bring about an ‘expansionary adjustment’ rather than a ‘recessionary adjustment’. Fourth, I am not trying to increase foreign exchange reserves by only increasing exports, but have focused on expanding exports, reducing imports, increasing remittances, foreign investment and financial assets to increase the flow of foreign exchange reserves. Following measures are being proposed in this study:


Short Term Measures
• Selective demand management (Banning the import of luxury and consumer goods).
• Importing essential goods on barter. 
• Securing better deals for the supply of goods and services from Pakistan.
• Foreign exchange regime and capital controls.
Medium to Long Term Measures
• Exploring substitutes for essential imports.
• Exploring alternative commodities and markets for exports.
• Repatriation of looted Pakistani assets transferred abroad.
•  Gold reserve management strategy.
• Implementation of Cartegna Protocol and Phytosanitary measures.


Short Term Measures
• Selective demand management (Banning the import of luxury and consumer goods)
Selective demand restraint rather than across the board demand restraint reduces the import demand for consumer and luxury goods, creating space for the import of essential capital goods, industrial raw material and machinery required for economic development. The strategy also passes on the cost of adjustment to elite and the business class, instead of the middle and poor class. The cost borne by the wealthy classes will be marginal in comparison to the tremendous socio-economic-political cost entailed in the IMF strategy. And as Griffith-Jones and Sunkel observe: “The restriction of non-essential consumer imports and production would be the contribution of the privileged sectors of debtor countries…" 


Importing essential consumer goods on barter
Import of essential goods like petroleum through barter trade can also release the pressure on foreign exchange reserves. Moreover, it can bring about an ‘expansionary adjustment’, rather than a recessionary adjustment entailed in the IMF strategy through expanding output of goods that are bartered. Banning consumer durables and importing petroleum and petroleum products on barter can save enormous cost on the import bill. In addition, import of edible oil to Pakistan on barter can save foreign exchange further. Thus the total savings from banning imports and importing on barter will be very substantial.


• Foreign currency inflows that are at the discretion of other countries like the CSF cannot be relied upon as a foreign currency inflow for balance of payment support. Such foreign currency inflows need to be replaced by inflows that are based on market determined rates. For example, countries using Pakistan's highways, roads, air routes, etc. should be charged market based rates, with prior knowledge and information about the total amount it will contribute. All such agreements signed between Pakistan and countries for the use of our infrastructure and services, development of infrastructure, natural resources, etc., need to be ratified by different pillars of the government and the state to preempt rent-seeking and personal interests subordinating national interest.


Foreign exchange regime and capital controls
Pakistan initiated on deregulation and financial liberalisation during the 1990s, with the capital account substantially liberalised and the Rupee allowed full convertibility in four main currencies, including the dollar. At present, Pakistan has one of the most liberal financial regimes in the region and there are no restrictions on rupee convertibility into foreign currency nor any limit on the transfer of balance from FCAs aboard. 


Despite capital account liberalisation and rupee convertibility, massive capital inflows have not been witnessed, but there have been massive outflows of capital out of Pakistan. This has resulted in massive flight of capital, particularly of dollar from Pakistan. According to press statement by a former SBP governor about USD 25 million were smuggled out of the country on a daily basis during 2013 from the Karachi, Lahore, Islamabad and Quetta airports. There is evidence that Pakistanis are shifting their capital abroad through legal and illegal means. During 2013 and 2014, flats and villas to the tune of USD 4 billion were purchased by Pakistanis in Dubai. Interestingly, almost the same amount has been borrowed from the IMF during this period to fill the deficit in the current account. 
Flight of capital is also being done legally. A citizen is allowed to carry 10,000 dollars without any official restrictions. Moreover, payment in dollars is allowed for education, tourism, holidays, hajj, umrah, as well as official and business tours. According to available estimates, to avoid taxation there was flight of capital amounting to USD 10 billion from Pakistan. Some commercial bankers on conditions of anonymity stated that around USD 300 million to USD 350 million is going out of the country each year through credit cards as they have become another source of foreign exchange outflows. When Pakistani citizens use credit cards abroad, the amount is claimed from Pakistan in dollars. Client's banks settle these dollar payments against credit cards by buying dollars from the market. These capital outflows are draining the economy of our foreign exchange earnings. Therefore, instead of copying the liberal regimes blindly on the IMF dictates, Pakistan must act according to its own macroeconomic needs and formulate capital controls that respond to the challenges we are facing.


Medium to Long Term Measures
• Exploring substitutes for essential imports.
The demand for petroleum products can be reduced by switching to alternative sources like wind, solar, nuclear and hydel power. Similarly, demand for edible oil can be reduced through education and inculcating awareness regarding the harmful effects of excessive consumption of fats in our diets, applying import substitution on edible oils and importing edible oil on barter.
Exploring alternative export commodities and markets.


We have to explore export markets for fish, textile yarn, apparel and accessories, sports goods, leather and leather manufacturers and surgical instruments. Alternative markets for these could be found in Central Asia, the Russian Federation, the Middle East, China and Japan. Pakistan being an agricultural country has a lot of potential to export food items, fruits and vegetables to the European Union, the Russian Federation and other SCO countries. However, consumers in these countries are health and nutrition conscious and the governments are equally alive to the situation and enacting laws to ensure quality assurance of food products imported in these countries. Contrarily, Pakistan, under external pressure, has been promoting GM seeds and has not passed Labelling Law to discriminate between organic, hybrid and Bt crops. In this scenario, even if Pakistan is able to produce a large exportable surplus, our exports will be shunned by the health conscious consumers in these countries.1 
Repatriation of looted Pakistani assets transferred abroad


I first presented the idea of relating debt servicing to looted Pakistani assets transferred abroad in 2000. The pros of the scheme are that it meets the quid pro quo criteria i.e., it puts the burden of debt servicing on people who have benefited from this debt. Moreover, it is the only way to solicit the co-operation of countries where this money is invested i.e., tying our interests with those of the creditor countries. Expanding on my earlier suggestion made in 2000, I am now proposing that we use the proceeds of not only looted corruption money transferred abroad, but all corruption money seized from within the country and abroad. The proceeds from these can be used not only for debt servicing, but for closing the current account deficit and building foreign exchange reserves. A task force comprising of NAB and FIA officials, economists, etc., can be constituted to work out the modalities.


•   Gold reserve management strategy
During the era of the gold standard, central banks maintained a major portion of their reserves in gold and a minor portion in currencies. Following the abandonment of the gold standard, central banks hold the majority portion of their reserves in currencies, and allocate only a certain portion to be maintained in gold. Central banks now resort to trading in gold in a crisis management situation only. However, India is successfully using gold reserve management to maintain its liquid foreign exchange reserves by buying gold quietly from private suppliers and selling it at an appropriate time to enhance its foreign exchange reserves.2 The gold reserve management strategy can be used to strengthen the liquid foreign exchange reserves when required through a buy back agreement in foreign currencies.


Implementation of Cartegna Protocol and Phytosanitary standards.
If Pakistan wants to avert free fall in the export of food, cotton and cotton manufactures, it will have to ensure quality assurance of its products. It will have to adopt Cartagena Protocols on risk assessment and biodiversity and pass the Labelling Law so that we can categorise our exports into organic, hybrid and Bt. categories. We have to decide whether we want to keep obliging seed companies by increasing the demand for their GM seeds, which they can't sell in Western countries (due to health conscious customers) at the cost of losing our export markets and ending up with a serious crisis in our current account and balance of payments. 


Summary and Conclusions
While Pakistan doles out its natural resources at below market rates or zero royalty and allows the use of its highways and airways without remuneration to rich countries, it goes out with the proverbial "begging bowl" to meet its needs. Our over-generosity towards rich and powerful countries has converted us into a beggar with all the accompanying humiliation that it entails. Although our foreign exchange situation is precarious we continue to import luxury goods for the rich in the country, which is worsening the deficit in the current account. Continued borrowings from the IMF is contracting our investments, output and employment with all the ugly manifestations like worsening the distribution of income and wealth, and increasing poverty levels with horrendous social and political implications. Capital account liberalisation is resulting in massive exodus of capital out of the country. This massive outflow of capital coupled with the lost opportunities to bring in capital due to practices such as charging below market rates or free of cost both in the supply of strategic goods and services, and natural resources have been attempted to be compensated through small increases in export earnings through IMF dictated devaluations. 


No attempt has been made over the last almost 30 years to formulate an alternative strategy. In view of the above, I have proposed an alternative to the IMF, which envisages that we ban the import of luxury consumer goods, use barter to import essential imports and impose capital controls to handle our current account deficit through crisis management and charge market rates for the supply of our highways and other strategic services. We need to revisit our natural resource policy to sign agreements with countries which do not envisage the export of these in raw form and ensure the ratification of these agreements through different pillars of the government and the State to rule out rent-seeking behaviour. In the medium to long run we should use the corruption money seized from abroad and within the country, implement the Cartegna Protocols and biosafety standards to improve the quality and increase the quantity of our exports. Alternative strategies like gold reserve management will help to diversify our reserve portfolio and render greater stability to the system.


The writer is HOD Economics and Dean CESD, IOBM, Karachi, Pakistan.
E-mail: drwizarat@icloud.com


Griffith-Jones, Stephany, and Sunkel, Osvlado (1989), Debt and Development Crisis in Latin America: The End of an Illusion, Oxford : Oxford University Press.
Stiglitz, Joseph and Linda Bilmes, (2008), The Three Trillion Dollar War, Norton and Company, USA.
Wizarat, Shahida, (2000), Paying Debt Through Loot, Pakistan Business Review, Vol. 2, No 3, October.
Wizarat, Shahida, (2001a), Alternative External Debt Management Strategy, Pakistan Business Review, Vol. 3, No 1, April.
Wizarat, Shahida, (2001b), Bypassing the IMF, Dawn, April 12
Wizarat, Shahida, (2008), Why IMF is not an option’, Daily Dawn, August 26.
1 Pakistan's fish exports to the European Union worth $ 50 million a year were suspended during 2007-13 as European food officials found the quality deficient and unhygienic. Similarly, GM traces were recently found in a sample of mango pulp sent to Russia, which was actually in the powder used as a preservative.
2 Gold reserve management strategy can also be used to increase investment, employment, increase GDP growth and promote exports.
 

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