Pakistan’s top government finance officials joined Harvard Kennedy School professors in weighing policy choices to improve economic growth in the wake of the country’s recent debt crisis. At a conference on the Harvard campus in October, Pakistan’s financial authorities struck tones of optimism based on tough steps they have taken, including monetary tightening, even before the $6 billion IMF bailout in June; Harvard faculty said the policies need to remain consistent, in line with the World Bank assessment that Pakistan’s “medium-term growth outlook hinges upon the country’s ability to implement necessary structural reforms to boost competitiveness and achieve sustained growth.”
Pakistan’s Minister for Finance, Abdul Hafeez Shaikh, and the Governor of the State Bank of Pakistan, Reza Baqir, were joined by by Carmen M. Reinhart, Minos A. Zombanakis Professor of the International Financial System and a former deputy director of the IMF. Sumitomo_FASID Professor of International Finance and Development Asim Ijaz Khwaja, director of Harvard’s Center for International Development (CID), moderated. The event was the inaugural Pakistan Development Forum, co-hosted by Evidence for Policy Design (EPoD), a research program within CID, and the Centre for Economic Research in Pakistan (CERP), a Pakistan-based think tank.
Here are some excerpts, lightly edited for length and clarity.
On Pakistan emerging from the debt crisis:
Asim Khwaja: “The challenges Pakistan is now facing are not challenges of the current government, or even the previous government. These are challenges which have been several decades in the making.”
Abdul Hafeez Shaikh: “To stabilize the economy and then move to a platform for longer term growth takes time, even if you are working overtime, which this government is; even if you have certain advantages, which this government does. As a result of tough decisions, we are seeing some good initial results. The current account deficit was brought down by 30%-plus last year, and that trend is continuing in the first quarter. Exports are finally beginning to pick up, so that’s a good sign, and it’s because of targeted support to the export sector.”
Reza Baqir: “The number one predictor of going to the IMF is either falling or low-level reserves. So the question really becomes, what is this program doing so that reserves don’t fall next time around when there is balance-of-payment pressure. That’s really the key question. And there are two institutional changes in this program that have never been done in the history of Pakistan. The first was the transition from a fixed exchange-rate system to a flexible exchange rate system. … The other big institutional change is the fact that for the first time, the government is not borrowing from the state bank.”
Carmen Reinhart: “Part of the problem of the see-saw was the fixity of the exchange rate, but part of it was also the “this-time-is-different syndrome.” After a couple of good years, you begin to treat the favorable growth environment as permanent and you overspend. Something happens, your budget deficit is larger than planned, and financing from the bank becomes the norm. That of course means downward pressure on the reserves. … Don’t get overly optimistic; don’t think that the good news is permanent, and limiting borrowing is, in addition to a floating exchange rate, a safeguard to maintaining reserves.”
On collaborating with China:
Carmen Reinhart: “A usual source of weakness—or a usual source that erupts during crises—is the issue of hidden debts. And during China’s boom, Pakistan borrowed a lot from China. A lot of that borrowing was very opaque, and I mean not just opaque to the IMF but to the government. Because they also lend a lot to [state-owned enterprises]. Hidden debts lurk everywhere because also what we’ve seen again and again in crises is that a private-sector liability or semi-private-sector liability become public liabilities.”
Abdul Hafeez Shaikh: “There is a lot of myth-making around the Chinese economic relationship with Pakistan and sometimes a sinister twist is put on it, when in fact if you look at the portfolio of things that are being done, first there’s a port. And that port is going to really contribute toward trade between Pakistan and Central Asia and China and Africa. From our point of view, it’s a port and we would like everybody to use it, and if there’s a road, we would like everybody to use it. And in fact only if the capacity utilization is high, with everybody using it, will the benefits flow.”