Inconsistencies and disconnects …Nadeem ul Haque | Shahid Kardar

While it played a crucial role in liberalising the economies of the communist bloc, it now appears to support heavy-handed regulation and price controls in a developing country like Pakistan. Such inconsistencies raise questions about the adaptability and relevance of IMF programmes in different contexts.

In our case, the domestic market continues to influence the pace, pattern and level of growth. Policies are focused on protecting an industrial structure that produces low productivity/ low value-added goods. The growth of one industry has created a market for another — flourishing with varying degrees of inefficiencies. The result is that all such markets have grown together.

The outcome is a formal private sector whose habits and investments have not changed over time. Exporting a similar range of goods (with modest upgrading to higher value-added goods) depends on subsidies and concessions.

We believe Pakistan needs a comprehensive policy overhaul, moving away from excessive regulation and a tax-first approach towards a strategy that promotes market development, innovation, and economic productivity.

For this transformation to take place, greater engagement with local research and institutions is necessary. The findings of the Pakistan Institute of Development Economics (PIDE) suggest that Pakistan’s economy is being held back by structural flaws, not simply low tax revenues or energy pricing issues. Decentralising governance, reforming tax policy, and removing barriers to trade and investment are key to a more vibrant, competitive economy. International partners, including the IMF, must recognise these local realities and align their strategies accordingly.

Energy losses have brought the economy to its knees with the IMF’s only proposal being to increase prices to cover losses and hide inefficiencies. Not once has the IMF accepted that the need of the hour, as shown by local research, is to activate the market system, which has been on the anvil for almost 20 years.

The energy sector remains highly centralised; it is a one-buyer one-seller (government) model, with an outdated uniform pricing system that relies on cross-subsidies and prevents the development of competitive markets.

Perhaps the most central issue is the extreme centralisation of power within government and bureaucracy. A few civil servants wield disproportionate control, undermining the growth of key sectors like education, energy, and infrastructure. Energy losses can only be eliminated if the system is configured as independent units operating in a market. The IMF, however, has set up impossible goals such as privatising huge energy monopolies without an adequate regulatory framework and capability and allowing market forces to operate.

In 2024, the government is still trying to control prices through the bureaucracy. The IMF is silent on this key issue. With the fall of the Soviet bloc, we thought this issue had been dealt with and that the world had learnt price controls don’t work. Should the IMF not settle this issue of price controls in a programme?

As argued earlier, the governance system itself incentivises rent-seeking and political loyalty over merit and efficiency. Public resources are misallocated, and government officials benefit from a system that rewards perks like subsidised housing and overseas assignments instead of transparent cash salaries. PIDE suggests that a simple reform — monetising these perks into one transparent salary structure — could potentially unlock billions of dollars in investment by freeing up valuable real estate currently occupied as housing by government officials. In Islamabad alone, this reform could attract an estimated $55bn in investment, with similar potential in the other major cities.

The IMF and international partners have insisted on energy price hikes for over two decades, largely ignoring the fact that the problem is more about underlying issues of poor governance and mismanagement than inadequate pricing. Despite repeated calls for reforms that allow the market to work and take the centralised bureaucracy out of the power sector, no significant changes in management practices were implemented. Similarly, in the tax system, the focus has been on extracting more revenue, without addressing the convolutions of an inherently unstable tax structure and a rapacious regulatory environment or exploiting the opportunities for leveraging digital tools to facilitate compliance.

This disconnect between the IMF’s policies and realities on the ground has been exacerbated by a lack of engagement with local research. The IMF’s recommendations often seem more aligned with abstract economic models than, as argued in an earlier piece, with the economy’s on-the-ground complexities. For example, the IMF has continued to overlook local arguments that underline the absence of decent public services — even something as basic as security of life and property — and the unfair, unwieldy tax structure implemented by a predatory administrative machinery as key reasons for widespread tax evasion.

Fund programmes appear to be designed with no attention to investment. Through most programmes, the investment rate has been very low — an average of less than 15 per cent of GDP, while other growing economies average over 25pc of GDP. Why is our investment so low? The most important factors have been listed above and mentioned earlier.

If only the IMF had considered the trade-off between austerity measures and the sacrifice it demands from growth, confronted by a situation of high rate of unemployment with all its social implications, they would have arrived at the need to deregulate the economy, decentralise governance, get the government out of the habit of fixing prices and develop markets without bureaucratic interference. Additionally, it would try to seek open economy policies with a stable market-based undervalued, not overvalued, exchange rate.

A little humility is needed in the IMF and increased engagement with local research. Currently, it is captured by forces that want centralisation and a rent-seeking, controlled, non-market economy. Rather than chasing taxes with fickle and extractive policies like the Sheriff of Nottingham (and hope, in vain, that improved governance follows), perhaps the IMF could join those forces that are demanding serious reform for investment and growth. That is our only way out.

Courtesy

DAWN