Budget: Can Counter-Cyclic Approach be an Alternative to the IMF?

Pakistan is preparing a budget amid a triple crisis: low growth, inflation, and financial strain (stagfinflation). Despite all the tall claims, growth is not recovering to the required level. The production sector is facing one challenge after another. Industry is struggling to remain competitive amid a complex business environment, high input costs, burdensome regulations and procedures, and a lack of innovation among businesspeople. Inflation, which was controlled by imposing hardship on farming communities, is back. The state relied solely on lower food commodity prices, thereby imposing high costs on the farming community, a situation that was not sustainable at all. State Bank, after securing immense powers following Pakistan’s 2019 agreement with the IMF, was unable to devise innovative tools to address inflation.

The financial crisis is worsening. The government is unable to devise a bankable plan to manage the crisis. It has not created avenues to generate financial resources to repay the debt or fund its programs. It is heavily relying on continued borrowing to repay its debt and fund its programs. This is the result of blindly following the IMF’s imposed conditions to manage the financial crisis.

It is pertinent to note that the IMF, building on its newfound role after the 2019 agreement, is excessively interfering and compelling the government to follow its conditions. Apart from other conditions, the IMF is stubbornly pushing Pakistan to focus on taxes and privatization. The government is following suit and does not miss any opportunity to impose taxes on the people. It is fast turning Pakistan into Taxistan, and the salaried class is the biggest victim.

On the other hand, the IMF is pushing Pakistan toward privatization, and the privatization of PIA is the latest outcome of this pressure. However, this is not a good strategy because a state cannot survive solely on taxes; it also needs non-tax sources of revenue. Moreover, the strategy has largely failed to produce the desired results advocated by the IMF. For example, in 2014, the late Dr. Pervaiz Tahir conducted a study on privatization titled Economic and Social Consequences of Privatization in Pakistan. The study highlighted that the country has experienced a decline rather than a positive impact across economic, social, and political indicators. The most prominent economic evidence was the huge debt stock and fiscal deficit, which, interestingly, were the main targets of privatization. Despite these strategies, the economy is not recovering; instead, things are becoming more complicated.

Pakistan is not the only country suffering from IMF interference, privatization policies, and blind taxation. There is a list of countries that have failed to recover after entering the IMF’s debt and policy traps. The most prominent example is Argentina in Latin America, along with other countries in the region. It has gone down with every IMF intervention, such as privatization or tax increases. Right now, it has received the largest loan of around US$57 billion, but the economy is still suffering. It is struggling to create jobs and reliable sources of economic growth.

In this context, Pakistan needs to think outside the box and look beyond the IMF. Analysis of historical economic growth shows that Pakistan’s only path to growth lies in the production sector, and that this is its only alternative to the IMF. Strengthening this sector will help Pakistan emerge from this triple crisis, create decent livelihoods and financial resources, and pursue sustainable development. Hence, Pakistan needs to make every effort to strengthen the production sector to help the country solve its problems of low growth, high inflation, and financial crises. Agriculture and industry should be the prime sectors for boosting production capacity.

To enhance production, Pakistan should focus on agricultural and industrial development. There is no second opinion that agriculture is the linchpin of Pakistan’s economy. It contributes 23.5% to national GDP and accounts for 37% of the country’s labor force. It guarantees food security after Allah and contributes to industrial development by providing quality raw materials. Despite this importance and contribution, the sector has been largely neglected by the state over the decades. It is hostage to poor governance, faces challenges with low-quality inputs and their timely availability, is manipulated by the private sector to exploit farmers, and is exposed to climate change shocks. These factors have resulted in low productivity, high post-harvest losses, and deteriorating land quality. Moreover, an outdated supply chain and a lack of quality storage facilities further hamper the sector’s performance.

Therefore, Pakistan must focus on solving these challenges to turn around the sector’s performance. In the short run, this would be an excellent way to counter the problems. Pakistan has many opportunities to do so, including CPEC-II, the Action Plan, and the Gulf countries’ interest in Pakistan’s agriculture and food markets. Gulf countries import more than 80% of their food commodities and products and are seeking reliable partners. They have shown keen interest in building strong linkages in Pakistan’s agriculture and food sectors. The Gulf countries can provide the financial resources needed to fast-track the sector’s development. Moreover, the Gulf countries would be regular customers and would act as an anchor for the sector.

Industry is another area that can help Pakistan turn around its economy in the medium term. Unfortunately, the industry faces a double-edged problem. On the one hand, government policies, the tax system, higher input prices, and weak supply chains are weakening the sector. On the other hand, the industry looks to the government for subsidies and tax exemptions. It has less focus on enhancing productivity and building brands. These factors have resulted in a decline in industrial output and its share of national GDP. The latest rebasing of the economy in 2021 indicates that the share of larger manufacturing has shrunk from 20.9% to 19.5%. It is alarming that when Pakistan needs industry to boost, it is on the decline. The government is trying to reverse the process, but with little gain.

If Pakistan can put its house in order, it has many opportunities to pursue industrialization and growth, including CPEC-II, the Action Plan, and investment opportunities from the Gulf region and Western countries. CPEC-II has the potential to quickly turn around the fate of industry.

However, to improve and strengthen its production sectors, Pakistan will have to move away from the IMF’s prescribed formula for economic governance and management. The IMF’s prescribed cyclical approach will not help Pakistan overcome its current problems and pursue growth and sustainable development. Why? Because the cyclical approach holds that during a bad economic environment or crisis, the government should raise interest rates to counter inflation, control the flow of cheaper money to struggling business sectors, implement contractionary policies, and manage deficits through taxes. The government should slash development expenditure and infrastructure investment.

Famous economist John Maynard Keynes did not subscribe to this approach. He proposed a counter-cyclical approach. He urged making credit available at lower rates to assist the private sector and boost production. He also urged adopting expansionary policies to restore growth. He was convinced that the state must fund development projects and enhance infrastructure investment during a slowdown or economic crisis. These actions will help create jobs and demand, which will spur growth.

Unfortunately, Pakistan is still pursuing the IMF’s prescribed formula to overcome its challenges. Therefore, challenges are still haunting Pakistan, and there is no way out in sight right now. Things are becoming complicated with every implementation of the IMF formula or approach. The cyclical approach is further impacting the production sectors and their growth. Therefore, Pakistan needs to try the counter-cyclical approach to overcome the triple challenges of growth, inflation, and debt. Otherwise, the situation will continue to deteriorate, and the Argentine example is the best way to understand the phenomenon.