IMF prescriptions not relevant now? | Business Recorder

February 09, 2012

BR RESEARCH

Wake up! Two words that sum up the Article IV review for Pakistan by the IMF.

Just before repayment starts, the fund in an unprecedented tone has told the countrys economic managers to take pervasive actions, before it is too late.

The point is simple; monetary and fiscal policies are not in sync with economic realities and in election year, the reality can get harsher, very quickly.

The pointy references allude to the extent of pressure that the Fund may exercise on the countrys economic policies, should the depleting levels of foreign reserves take Pakistan back to the lenders window.

The Funds tone betrays urgency.

Over the past four months, not only has the central bank slashed the discount rate by 150 basis points, despite slippage in foreign reserves and structural imbalances, but also it has been active in the foreign exchange market shouldering the local currency against depreciation.

SBPs consistent facilitation of the banking sector to continue lending to the government has also caught the attention of the IMF.

Still there are many who plausibly contend that the prescription of the Fund should be set aside in favour of lower interest rates to boost growth.

After all, many in developed and emerging economies have or had adopted such policies in the recent past.

But, there is a catch: the sensitivity of lowering interest rates on spurring investment sits at a record low.

And its not like relatively higher interest rates are the only detriment against investments.

Some potential investors are turned off by the energy shortfall.

Others are wary of the poor law-and-order situation and insipid investment policies.

Although, there exist some serious structural imbalances in Pakistans economy, the Phillips Curve seems to make good theoretical sense: progress against inflation comes at the expense of greater unemployment, and that reduced unemployment comes at the expense of greater inflation.

That the rate of inflation and the rate of unemployment cannot be reduced simultaneously is a widely accepted concept.

Lets reduce unemployment.

Moreover, energy issues need to be tackled on a war footing.

According to an ADB analysis, per dollar consumption of energy in Pakistan is 15 percent and 25 percent less than that in India and the Philippines.

To be competitive in the global village, we urgently need to plug in our inefficiencies.

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IMF prescriptions not relevant now? | Business Recorder