Tuesday, January 19, 2021

Dr Ashfaque Hasan Khan member Economic Advisory Council’s talks economics with GVS

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Dr Ashfaque Hasan Khan is a member of the Economic Advisory Council of the Government of Pakistan. He is an elected member of the Board of Trustees of the International Islamic University, Islamabad. He held various important offices such as economic adviser of the Ministry of Finance (1998-2003), director general of the Debt Office of the Ministry of Finance (2003-2007), special secretary finance (2007-2009). Moreover, Khan also served as the spokesperson of the Government of Pakistan on economic issues from 1998 to 2009. Dr. Khan holds a Ph.D. degree in Economics from Johns Hopkins University.

GVS: You have previously said that the IMF pro-gram will bring the same ‘hara-kari’ for Pakistan that it does everywhere; raising interest rates, utility rates, taxes, cut in expenditure and devaluation, which would shrink space for both the government and the business sector. Minister of Economic Affairs, Hammad Azhar, does not agree with this. The government response is if you look at the medium framework of reform that the Ministry of Finance has created, it shows that they also want to move in the same direction, and basically the IMF is not asking them to do anything which they did not want to do themselves.

Dr Ashfaque H Khan: When we were in the government, we said the same, it is not new. Our standard argument would be “This is not the IMF program, this is our program, or our reform agenda financially supported by IMF”. It’s a standard built-in answer that every Minister of Finance. or the SBP officials would say. Whoever is in government will say the same, when I was in government, I said the same. However, we will always face constraints from the IMF program.

GVS: What are the constraints the IMF Program has produced for Pakistan?

Dr Ashfaque H Khan: Very simple. As I said, the IMF program has four main elements: Tight fiscal policy, tight mon-etary policy, market-based exchange rates (a garb for meaning devaluation) and increasing utility prices. These are the four elements and these are a set of policies on which a consensus was developed among the World Bank, IMF and the US Treasury in the early 1980s.

Dr Ashfaque

John Williamson, an economist from Britain, working for World Bank in 1989 coined the term ‘Washington Consensus’, consensus on these four policies. For every country seeking IMF resources, these are the standard policies, that they will implement whether its Egypt, Pakistan, Ukraine, or any other country. Now, its implications, I will tell you one by one and you will see what has happened in Pakistan. IMF’s Washington Consensus, what is this for? Its to bring economic stability. How will we achieve that? By controlling inflation. How will we control inflation? By raising interest rates. How can we bring economic stability? By reducing budget deficit. How can we reduce deficit? By mobilizing more resources and cutting down expenditure; also called austerity. The second flag of IMF is trade and exchange rate policies. This has to be done by lifting of trade restrictions on imports and exports, to liberalize trade, and the devaluation of the currency. The third element is for market forces to operate freely. This includes removing subsidies and state control. How can you remove subsidies? By increasing the prices of utilities. To end state control, start privatisation. This is the crux of the IMF program and the crux of the Washington Consensus.

GVS: What is wrong with that from your perspective? Because the Government’s position is that the IMF is helping us because we have to fix our current account deficit so if we let our currency float, our current account deficit comes down. We have to raise our taxes to give us fiscal space and we have to raise utility prices.

Dr Ashfaque H Khan: I understand, this is the standard text book answer that we have to say. For eleven years I have said the same words that Hammad Azhar is saying from the past two years. The purpose is to stabilize your economy. How? Through demand management; the IMF program is also called demand management program. IMF’s former managing director, Christine Lagarde on September 1, 2016, in an IMF blog said and I am quoting in verbatim “The longer demand weaknesses last, the more it threatens to harm long term economic growth, as firms reduce production capacity and unemployed workers leave the labour force”. What she is saying is the longer you pursue the demand management policy, business will cut down production as they do not want to pile up inventories, when they cut down production, economic growth slows down, unemployment increases, and over time workers will lose the skills they gained.

GVS: If you listen to Hammad Azhar, when asked about the interest rates coming down to 7% from 13%. He says we have reduced the interest rates, because we controlled inflation which is now 8% to 9%, and it was mostly food related and our inflation is coming down and our interest rates are low and won’t go back.

Dr Ashfaque H Khan: This is a big misnomer, that increasing the interest rate will control inflation. In Pakistan inflation is a supply side phenomenon as well as government itself creating inflation by raising government administered prices such as electricity and gas prices. Interest rates can control inflation only when it is caused by demand side pressure which increases prices. Our inflation is from supply side. Here, interest rate is not a proper instrument to control inflation. Empirical evidence shows this. In Pakistan we can control inflation by improving the supply of commodities and the government exercises restraint in raising utilities prices.

GVS: Could the reason be because the borrower is government itself and private corporation and companies are not in even borrowing?

Dr Ashfaque H Khan: No. Food inflation has 34% of weight in overall inflation. Can you increase the interest rate to decrease the price of food items? You cannot because it’s a supply side phenomenon.

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On the other hand, the government increase the electricity and gas prices, this has 15% weight. Combined, they make 49%. Therefore almost 50% of your inflation is coming from factors that are not related to interest rate. Apart from that, 22% weight is of house rent, which are measured quarterly through survey. How is it related to interest rates?

GVS: International economists who support the IMF program will argue that IMF is only forcing the countries to fix their current account deficit and is forcing the countries to cut down their expenses so that they can repay back the loans that they have taken from other countries. Is this not true?

Dr Ashfaque H Khan: This is a mindset debate. I have written in many of my articles that IMF’s mindset follows Chicago school of thought, where everything is a monetary phenomenon.

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Inflation is a monetary phenomenon, balance of payment is a monetary phenomenon, and this is caused by excessive demand. Fix the demand and everything will be fixed. Their standard prescription is therefore when inflation increases, increase interest rates. To improve current account, raise interest rate and devalue currency.

GVS: Can you quickly tell us what in your mind is the way forward?

Dr Ashfaque H Khan: The money coming in from GCC countries and China was one of the options that the government initially used. The government and other stakeholders gave Pakistan 14 billion dollars. But we had a leaking bucket. On one side the money was coming in, on the other side the money was going to importing luxury goods. That was the greatest mistake we committed. When money started coming in from Saudi Arabia, UAE, Qatar, China, we could have built our reserves but we simply wasted. On one side the reserve was being built, on the other side luxury imports such as chocolates, cell phones, 3000cc cars, etc were coming into the country.

GVS: It took the government several months to control the imports, the criticism was that they had totally stopped the essential imports that would hurt the economy.

Dr Ashfaque H Khan: I am not talking about essential imports; I am talking about non-essential imports. I offered to the PM, we would identify 10 items that will help reduce imports. There were many ways we could have reduced them. In Economics, we have many other ways to restrict imports including prohibitive duty so that the goods don’t come in, you can ban, and it is permissible under WTO. We could use quantitative restriction to curtail imports, we could have enhanced cash margin for non-essential import. We had many other options to restrict imports.

GVS: Are you hopeful that current account surplus and the other improvements such as exports will continue in the next one year or two years?

Dr Ashfaque H Khan: This is a dangerous question. Non-essential imports have started increasing with the same speed. One example, is cell phones, if we don’t import cell phones for a year, will Pakistan be destroyed?

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Even if they have high duties, there is 135% growth in the first quarter of this fiscal year. We have imported $527 million of cell phone in July-September this year as against $224 million in the same period last year with the growth of 135%. What are we doing? If we don’t stop nonessential imports, this gain will be wiped out in the current fiscal year.

GVS: What do you suggest are the steps if the government wants to take if it doesn’t want to go back to IMF?

Dr Ashfaque H Khan: My view is that now that Pakistan has gone to the IMF, therefore we have to complete the program to maintain credibility. But the economic team of the government must tell the IMF that, no more policy majors, no more devaluation, no more hikes in electricity and gas prices, and discount rate be reduced to 5%. They have cost us $40 billion according to my calculations. They need to clearly tell the IMF that no more action on those four elements and that we will concentrate only and only on reforms. IMF program is a reform program.

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We have to focus on power sector reforms. Just focusing on increasing electricity or gas prices means status quo is maintained. They need to focus on reforms in agriculture, in industry, in tax system and tax administration. These are important areas. Pakistan needs to focus on improving its ranking in the World Bank indices including ease of doing business. We have to bring in reforms by focusing on those line items. We need to conduct tax administration reforms, tax system reforms, agriculture sector reforms, industrial reforms, governance reforms, civil service reforms, and power sector reforms. We have to work on all these reforms in the remaining period of the IMF program.

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