IMF advises Pakistan to break from its economic practices of past 75 years

“Democracy and competitive capitalism make a difficult, but precious, marriage of complimentary opposites,” writes Martin Wolf, associate editor and chief economic commentator of the Financial Times London, in his book on ‘The Crisis of Democratic Capitalism’.
In turn, he argues that competitive democracy induces politicians to offer policies that would improve the performance of the economy and the welfare of the people. The first concern of democratic states is (and should be) the welfare of its citizens. The alternative, he says, is an unaccountable rule or the iron cage of custom — both are recipes of stagnation and repression.
Owing to the critical global importance of the issue, the 2024 Nobel Economic Prize went to three researchers to explore why global inequality exists today, especially in countries dogged by corruption and dictatorship. Simon Johnson, James Robinson, and Turkish-American Daron Acemoglu were commended for their work on how “institutions are formed and affect prosperity”.
Mr Acemoglu thinks the social, cultural and political influence of the super-rich has reached a dangerous level. He explains why the West’s top-down approach to enabling the state institutions (for nation-building in Afghanistan) was bound to fail in tears. He and Mr Johnson worry that technology will be deployed to replace rather than empower humans.
“When citizens feel seen and heard, their trust in the system is reinforced,” says analyst Farrukh Khan Pitafi. As per Mr Wolf, politics must be susceptible to the influence of all citizens, not just the wealthiest. It should seek to create and sustain a vigorous middle class while ensuring a safety net for everybody.
According to a Pakistani political scientist, a nation’s people are entitled to rule through their genuine representatives who are elected in free and fair elections and committed to implementing programmes and policies for public welfare approved by the voters.
The International Monetary Fund (IMF) staff report on the $7 billion bailout has advised Pakistan to break from its economic practices of the past 75 years to escape its recurrent boom-bust cycles. The report has asked Pakistan to swiftly end preferential treatment, tax exemptions and other protections for the agriculture and textile sectors, which it says have stifled the country’s growth potential for decades. As of May 2024, 70 per cent of the outstanding concessional central bank loans were tied to the textile sector.
“Pakistan’s economy has stabilised, and the macroeconomic situation has improved, but current recovery is neither sustainable nor sufficient,” said Mukhtar ul Hasan, the World Bank economist and author of the Pakistan Development Update (PDU) at its recent launch. Mr Hasan said IMF’s standby arrangement unlocked external flows but “negatively impacted growth and investment in the country”. The World Bank officials see high vulnerability risks lingering despite some nascent recovery.
With the poverty rate rising 0.3 per cent within one year to 40.5pc in FY24, the PDU has warned that the 2.8pc and 3.6pc economic growth rate it projected for the current and next years was insufficient to dent poverty levels and improve living standards of the majority of Pakistan.
The PDU notes that the output growth would remain below potential over the medium term as tight macroeconomic policy, elevated inflation, and policy uncertainty continue to weigh on economic activity. Cuts in public investment or social spending tend to have a much larger negative impact on growth than more poorly targeted subsidies such as for fuel, says Era Dabla-Norris, the IMF’s deputy fiscal affairs director.
Pakistan’s banking sector, the IMF notes ‘holds the world’s largest proportion of government securities relative to its total assets. The Fund has cautioned that the entrenched nexus between the government, the central bank and the banking sector is detrimental to the country’s economy and financial sector.
Finance Minister Muhammad Aurangzeb says that big companies are responsible for about half of total tax evasions, which amount to Rs3-4 trillion. “Pakistan cannot achieve sustainable growth with a tax-to-GDP ratio of 9-10pc,” says the minister, stressing this ratio should be about 13pc. To quote Mr Wolf, “Those who manage corporations should understand that they have obligations to the societies that make their existence possible.”
Spelling out the rights and responsibilities of citizens in the chapter ‘Restoring Citizenship’, Mr Wolfe says every citizen, especially the successful ones, is expected to pay taxes sufficient to sustain public welfare.
Published in Dawn, The Business and Finance Weekly, October 21th, 2024