IMF Programme To Literally Kill Economy, One Million Households Will Fall Below Poverty Line Which Can Lead to Social Unrest: Shahid Kardar
Renowned economist Shahid Kardar has warned that the IMF programme will literally kill the economy, as additional one million households are expected to fall below poverty line, which could lead to social unrest.
He said stagflation would give rise to unemployment from 5.8 per cent to 8 per cent by 2020-21, with 4.5 per cent increase in incidence of poverty.
The average annual growth for next two years is likely to be 3 per cent, which won’t create adequate job opportunities, said Kardar who added that inflation would range between 11 to 13 per cent with the SBP [State Bank of Pakistan] policy rate likely to go up to 14 per cent this year.
Kardar noted that the IMF programme was essentially relying on one instrument –the exchange rate to reduce trade balance, which wasn’t enough.
He feared that withdrawal of zero-rating will impact exports without timely, efficient and sustainable system of refunds.
Interest rate is going to squeeze demand but question remains whether the main borrower – the government – will change its behaviour, he noted.
About the perennial issues of economy, Kardar said macroeconomic management had remained unchanged for 50 years and the fundamental weaknesses unattended, resulting in near-crisis situation after every few years.
According to Kardar, there is no adequate follow up through structural reforms. The cumulative costs of failure to reform have been slowed down economic growth and increase in vulnerability.
He said global competitiveness ranking of Pakistan had worsened – 83 in 2007 but 122 now. In comparison, it is 39 for India, 71 for Sri Lanka, 98 for Nepal 98 and 106 for Bangladesh.
About the energy sector, Kardar said IPPs had been given concessions and guarantees of very high returns in dollar terms (17 to 22 per cent) on cost-plus basis for 23 years, which would make electricity extremely expensive and further weaken competitiveness of economy – at a time when renewable energy cost is falling dramatically.
Kardar stressed that the only choice was to renegotiate the IPP contracts, especially those projects commissioned in 2002-4. “They have already recovered their investments several times over,” he added.
Kardar – who also served as the SBP governor and is currently working as vice-chancellor of Beaconhouse National University, Lahore – said reserves built on external flows had kept the value of rupee higher than it would have been otherwise.
He explained that 1 per cent depreciation raises domestic prices by 0.4 per cent. On the other hand, 1 per cent growth in GDP leads to 1.1 per cent increase in tax revenues under an unchanged tax system. But 1 per cent increase in interest rate results in decline in private investment by 0.8 per cent.
Kardar said gross financing requirement for the next two years stood at $50 billion.
Talking about the strict conditions of the IMF programme, he said the Fund was taking an extreme position and demanding prior actions after the waivers in the past.
Kardar said the revenues had been overstated and expenditures understated – for example defence – in the budget.
The outgoing fiscal year will at best end with a revenue generation of Rs4 trillion for the FBR, but the target [Rs5.5 trillion] set for the next year was unrealistic – a growth of almost 40 per cent from an economy which the government itself admits will grow below 2.5 per cent, he added.
He said that there was too much emphasis on revenue generation, as the narrative overlooked the expenditure side of equation – including the losses of PSEs [Public Sector Enterprises] and subsidies given to the farming sector.
The accumulated losses of PSEs stand at Rs1.3 trillion (excluding circular debt which is now Rs 1.6trillion). These are growing by Rs2 billion per month, according to Kardar.
He also questioned whether the IMF demand a mini-budget, given the uncertainty and disruption as economic activity grinds to a slow pace means reduced revenues in the first quarter.
Kardar said 2018-19 will end with primary deficit at 2.9 per cent of GDP and it was impossible to bring it down to 0.6 per cent n just one year without sharp cuts in expenditure. “Our estimate for 2019-20 is 3.3 per cent,” he predicted.