IMF prescriptions are not the
answer to Pakistan’s economic problems
The country’s faltering economy and the global credit crunch have once again compelled Islamabad to seek a bailout from the IMF. But even if the IMF agrees to help, such help is likely to come this time with an even longer list of stringent conditions
By Kaleem Omar

Pakistan is no stranger to seeking financial assistance from the International Monetary Fund or to the mandatory conditions that accompany such assistance. After a gap of several years during which Pakistan’s then-Prime Minister Shaukat Aziz was much given to saying that the country had “broken the begging bowl,” Islamabad has now initiated negotiations with the IMF for an economic assistance package that could total anything up to $10 billion.

Shaukat Tareen, Economic Advisor to the Prime Minister, said last week that a formal request to the IMF in this regard  was likely to be submitted within the next 15 days. On November 15, the IMF announced that it has reached an initial agreement with Pakistan on the elements of a $7.6 billion rescue package. The 23-month standby arrangement is subject to the approval of the IMF Executive Board,which is expected to meet this week to discuss the programme.

Meanwhile, however, Prime Minister Yousuf Raza Gilani’s government and the State Bank of Pakistan have already announced several measures that appear to be aimed at anticipating some of the conditions that the IMF is likely to impose as a part of its assistance package to Pakistan.

On Wednesday, November 12, the State Bank increased the benchmark interest rate by two percentage points to 15 per cent. Addressing a news conference in Karachi on Wednesday, State Bank Governor Dr Shamshad Akhtar said: “Given the persistent demand pressures, the State Bank is raising the policy rate from 13 per cent to 15 per cent. This will not only help in aligning aggregate demand with supply but also provide room to accommodate the government’s financing requirements from commercial banks.”

What this means in plain terms is that the increased benchmark interest rate is going to curtail private sector borrowing from commercial banks, thus allowing the government to borrow more money from them. Such borrowing would be in addition to the several hundred billion rupees that the government has already borrowed from the State Bank this year to meet the growing fiscal deficit.

Unlike private sector borrowing, a big chunk of government borrowing goes into meeting non-productive expenditure. Such expenditure contributes nothing to GDP growth or to the alleviation of poverty. Based on a per capita income of $ 2 per day, an estimated 70 per cent of Pakistanis now live below the poverty line, though the government still uses the highly unrealistic yardstick of a per capita income of less than $ 1 per day to define the poverty line.

Pakistan’s population is now estimated at about 170 million. The exact figure will not be known until the next national census is held It was supposed to take place this month, but with half the month already gone, there is still no news of when it will be held.

Seventy per cent of this estimated population of 170 million means that something like 119 million Pakistanis are now living below the poverty line – a staggering number by any standard.

Any IMF conditions that include doing away with all subsidies and increasing utility tariffs can only lead to raising the cost of living and making it more difficult for the vast number of poor Pakistanis to make ends meet. This is hardly the way to go about reducing poverty in this country. On the contrary, it will push even more Pakistanis into the ranks of those living below the poverty line.

Raising the State Bank’s benchmark rate will also contribute to a rise in poverty because it will make it too expensive for small- and medium-size industrial enterprises (SMEs), which provide the bulk of industrial employment, to borrow money from commercial  banks to expand their production facilities, which, in turn, will increase unemployment.

Higher interest rates will also raise manufacturing costs and make Pakistani products less competitive in export markets, as will the recent increase in electricity tariffs (already the highest in the world). Lower export earnings will increase the trade deficit (which is currently running at close to $ 2 billion a month) and further erode the country’s fast-depleting foreign exchange reserves – which have fallen to $ 7 billion from $ 16.5 billion in September 2007.

Short-term measures are not the answer to Pakistan’s economic problems. Many of these short-term measures are little more than tokenism that do not even begin to address the economic problems of a country of Pakistan’s size (the sixth most populous nation in the world).

Similarly, no poverty reduction strategy can succeed unless creating an environment favourable to small- and medium-sized enterprises is put at the top of the agenda. What is needed, then, is a comprehensive policy package aimed at creating an entrepreneurial Pakistan.

Prerequisites for creating an environment favourable to businesses include improving the knowledge on the SME population. Producing reliable and updated statistics is crucial in this respect.

The government should also set up an SME policy group to formulate and coordinate policies relating to SMEs. The group should be chaired by the federal finance minister, with the federal and provincial industries ministers, provincial finance ministers and other officials as members. It should also have members drawn from the business community, including representatives of the SMEs.

Encouraging entrepreneurship is a key to creating jobs, improving competitiveness, boosting exports, fostering economic growth and reducing poverty. In any such endeavour, education and training play a vital role. Training programmes, which define entrepreneurship as a basic skill, must stress the importance of developing an entrepreneurial spirit among Pakistani citizens.

Projects on the development and implementation of entrepreneurship training curricula should be chalked out, including entrepreneurship amongst women and management capacity building. An education toolkit on private equity financing and venture capital should also be developed.

Difficulties experienced in starting up an enterprise can clearly act as a direct brake on entrepreneurship. Policy makers therefore need to place considerable emphasis on improving start-up procedures. A best procedure benchmarking exercise should be carried out, establishing a clear mapping of federal and provincial procedures and identifying illustrative cases of best practice, with the aim of reducing delays.

SMEs are the most sensitive of all to changes in the business environment. They are the first to suffer if weighed down with excessive bureaucracy. And they are the first to flourish from initiatives to cut down red tape and reward success.

SMEs must be considered as a main driver for innovation, employment, poverty reduction and social integration. The best possible environment for SMEs and entrepreneurship needs therefore to be created.

Micro, small and medium-sized enterprises are socially and economically important, since they represent more than 90 per cent of all enterprises in Pakistan, provide millions of jobs and are an essential source for entrepreneurial spirit and innovation.

  SMEs face particular difficulties. To compensate those difficulties, federal and provincial legislation needs to be enacted to grant various advantages to SMEs.

Such legislation must acknowledge the dynamic capacities of SMEs in answering to new market needs and in providing jobs. It must stress the importance of SMEs in fostering social and regional development, while behaving as examples of initiative and commitment. It must recognise entrepreneurship as a valuable and productive life skill, at all levels of responsibility.

Also, legislation must applaud successful enterprise, which deserves to be fairly rewarded. It must consider that some failure is concomitant with responsible initiative and risk-taking and must be mainly envisaged as a learning opportunity. And it must recognise the value of knowledge, commitment and flexibility in the growth-oriented economy.

The situation of SMEs in Pakistan can be improved by action to stimulate entrepreneurship, to evaluate existing measures, and to make them small-business-friendly, and to ensure that policy makers take due consideration of SME needs.

To this end, policies should be put in place to: (a) promote and strengthen the spirit of innovation and entrepreneurship to enable enterprises to face the challenge ahead; (b) achieve a regulatory, fiscal and administrative framework conducive to entrepreneurial activity and improve the status of entrepreneurs; (c) ensure access to markets on the basis of least burdensome requirements that are consistent with overriding public policy initiatives; (d) facilitate access to the best research and technology; (e) improve access to finance throughout the entire life cycle of an enterprise; and (f) improve performance continuously, so that Pakistan offers a user-friendly environment for SMEs. Government agencies and policy makers must also listen to the voice of small businesses and promote business support.

Emphasis must also be placed on education and training for entrepreneurship. General knowledge about business and entrepreneurship needs to be taught at all school and college levels. Specific business-related modules should be made an essential part of education schemes at secondary level and at colleges and universities. Young people’s entrepreneurial endeavours should be promoted and encouraged. And appropriate training schemes should be developed for managers in small enterprises.