Cover Story

Banking on the IMF

The 7th NFC Award and the subsequent 18th Constitutional Amendment in 2010 resulted in a significant fiscal and administrative decentralization which left the resulting fiscal federal structure unbalanced and posed macroeconomic and political challenges.


Pakistan stands on the brink of default with inflation at a record 40%, growing unemployment, the exchange rate in an unending slide as exports decline by nearly 20% and industry and businesses are shutting down. Macroeconomic imbalances have destabilised the economy, aggravating the existing sufferings of its people due to unaddressed long term developmental issues. While the country’s economic woes are rooted in its own inept policies, the government remains engaged with the IMF continuing to pursue the same policies that failed to rein in the economic meltdown, and possibly contributed to it. A fresh approach to address the economic crisis is hampered amid a democratic transition of government stalled by political polarization, institutional disorder and constitutional standoff.

Pakistan is not destined to suffer such economic conditions. “In the first 20 years after independence in 1947, Pakistan had the highest growth rate in South Asia. In 1965 it exported more manufactures than Indonesia, Malaysia, Philippines, Thailand, and Turkey combined. It would have made anyone’s list of the Asian countries most likely to enjoy miracle level growth rates over the ensuing decades. This did not happen” says the World Bank Development Policy Review of 2002.

Pakistan’s exports failed to provide the sustained contribution to the country’s GDP growth and to finance the import needs of a growing economy exposing the country to greater risk of balance of payments vulnerability fuelled by chronic fiscal deficits. In the following decades Pakistan could not achieve the world market share gains made by its comparator economies largely because of import substitution policies the country adopted throughout the period and the inadequate responses to changes in market trends and global trading rules. While adoption of import substitution policies was not unusual in the 60s but as other countries shunned “inward looking policies” early, Pakistan continues import substitution policies even today, with a strong anti-export bias.

Economic development in Pakistan suffered as a result of several policy mistakes and wrong priorities but growth was most often disrupted by short-term macroeconomic mismanagement. Throughout the development experience of the country, chronic fiscal deficits fed into mounting debt and rising interest payments, contributing to excessive domestic demand spilling over into external imbalances and loss of reserves.

With a weak performance of exports, Pakistan experienced persistent balance of payments crises as a result. The foreign exchange crisis Pakistan faces today is also linked to fiscal imbalances as this support domestic demand and import growth, but importantly for Pakistan, external pressures are also linked to the poor performance of exports and the surge in imports due to the loss of competitiveness of the economy.

Competitiveness is no longer about exports’ competitiveness in isolation; increasingly, it is recognized that measures to strengthen competitiveness should be economy-wide to support exports and the domestic businesses because of strong interdependencies between the domestic economy and exports and to encourage exports diversification. Policies have overlooked that businesses create jobs and wealth, not governments. Financing of persistent and rising budget deficits by borrowing from the banks have crowded out the private sector in Pakistan, while government efforts to address fiscal imbalances with rising taxes on businesses, over-valuation of the currency and placing the burden of energy sector inefficiencies on businesses resulted in loss of competitiveness of both exports and domestic sectors.

Since the 1990s there have been fundamental changes in global trading rules and market trends with important implications for the competitiveness of countries which have not received adequate policy attention in Pakistan. Apart from “border” issues like the exchange rate, taxes on inputs and trade facilitation, the ability to deliver on time and conformance with international standards have become sources of comparative advantage which require a range of “behind the border” policy and infrastructure support.

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