IMF Starts Youth Dialog in Pakistan

What are the implications of the global economic crisis for future policymaking in Pakistan and the rest of the world? On February 22, twenty of the top students at the Lahore School of Economics sat down to debate this question at a roundtable discussion with the IMF.

Led by Paul Ross, the IMF’s Resident Representative in Pakistan, and moderated by Dr. Azam Chaudhry, Dean of Economics, the discussion began with a look at the impact of the crisis on the country. Pakistan was relatively insulated from the global financial crisis, several observed, given its limited links with the global financial markets. And the country’s banks had not purchased “toxic assets” or engaged in short-term, cross-border borrowing, as had financial institutions in other parts of the world.

However, participants noted, Pakistan now faces falling demand for its exports, the bulk of which go to the hard-hit advanced economies. Interest rates and risk aversion among lenders have also risen, and these factors negatively impact the country’s growth. While the global crisis didn’t spark Pakistan’s economic difficulties, one student noted, it has served to deepen them.

A key consensus that emerged from the discussion is that Pakistan sorely needs effective poverty reduction and social protection measures. Just how policymakers should go about this, however, was a topic of debate.

Expansionary fiscal policies are the answer, a number of students asserted, saying that reducing subsidies on food and oil would only increase poverty. One disagreed, saying that Pakistan could not afford fiscal laxity, but that measures should be taken to spread, in an equitable manner, the burden of fiscal adjustment.

“Consider the impact of a two-year period of fiscal austerity on the low-income shopkeeper whose costs are already high, on top of high inflation, electricity surcharges, and the rising cost of imports. Will he have the capital to survive the two years? These micro-level considerations will aggregate and translate into macro considerations in the long term,” the student said.

In response, Mr. Ross said that the question of why Pakistan should implement contractionary policies when many other countries are enacting stimulus packages is a difficult one.

“The short answer is, we live in a world of financial constraints. Pakistan, in 2007-08, was spending a lot on subsidies because of high oil and food prices. To finance that, it was printing money, which resulted in inflation jumping to 25 percent and foreign reserves falling to $3.5 billion, a decline of $10 billion—and this is not sustainable. If this had continued, inflation would have kept rising, and—based on the experience of other countries—Pakistan would have experienced a “sudden stop,” where the exchange rate plummets, money stops coming in, people sell off the local currency and buy foreign exchange, and the economy contracts severely,” he said.

Instead, Ross added, Pakistan’s growth rate remains positive in contrast to the contraction seen in most other countries last year. “Although the rate of growth now is low by historic standards, Pakistan’s growth rate was higher than many other countries in 2009,” he said. “Had it continued with the policies it had in place, there would have been a sharp contraction rather than the slowdown in growth that we’ve seen.”

Students also voiced the view that both qualitative and quantitative changes in the present tax system were needed. Many felt that a progressive tax system ought to be put in place to make the tax burden more equitable across income categories. Several felt that a value-added tax, which is being considered by the Pakistani authorities, was regressive in nature and should not be levied.

Mr. Ross noted that Pakistan struggles with the problem of revenue mobilization. The number of Pakistani taxpayers amounts to less than 2 million people in a country with a population of more than 170 million, he said, observing that many emerging market countries’ tax revenues amount to around 20 percent of GDP compared with 10 percent in 2008/09 in Pakistan.

The value-added tax, he continued, is one of the better taxes—it generally creates fewer distortions than other taxes and encourages saving. The bottom line is that Pakistan must boost its tax collection rate; otherwise, there will be no money for poverty reduction, investment in health, education, infrastructure, and other priority expenditures that are key to long-term development.

Several students cited the country’s energy crisis as a key cause for concern, noting the unreliability of the electricity and gas supply to vital industries. “The current energy crisis has a detrimental effect on local industry and on the perception of foreign investors,” one participant said.

Part of the problem, Mr. Ross responded, is that electricity companies are not good at collecting bills from their customers. This is a governance issue, he stressed, and the government will have to become more effective with its monitoring mechanisms—not just in the energy sector but also in other realms, such as tax collection, management of public enterprises, and public procurement.

Students also raised the following points:

• Market access for trade. Pakistan should be given greater market access for its exports, and the IMF could play a role in inducing the advanced countries to open up their markets to Pakistani goods and services.
• Gender equality. Women need to be brought into the mainstream both to boost economic growth and to safeguard them against vulnerability.
• Security. The country’s security problems have dented both foreign and domestic investor confidence and diverted allocations for development expenditures into security expenditures.
• Self-reliance. Pakistan needs to transition from perpetually relying on foreign assistance to self reliance through greater domestic resource mobilization and increased domestic investment.

Following the roundtable, students expressed enthusiasm about the event.

“I particularly liked it when Mr. Ross said that economists are like doctors and all of them have their own opinion,” said Abdul Rehman Chaudhry, one of the participating students. “Obviously, we have our own opinions—we have our clashes and we have consensus on certain issues as well. But at the end of the day, all of us are trying to fix a problem. And that is the thing that binds us together—fixing problems that concern the developing world.”