The report said that the economy has deep-rooted structural problems, which have come sharply under focus during the last few months, as the economic difficulties emerged. "These structural problems need to be tackled if we are to avoid the 'stop-go' cycle of growth linked to the level of foreign assistance", the report said. The panel has accepted the responsibility of preparing a 'home-grown package' to achieve stabilisation of the economy and remove the structural imbalances.
The report said that emergence of very large and unsustainable macroeconomic imbalances, coupled with a high and rising rate of inflation, necessitated resort to a strong stabilisation program in the short run, "if the country is to avoid a default" eventually on its international obligations and to prevent inflation from acquiring a runaway character, leading to a social breakdown in an already difficult security situation.
Therefore, the stabilisation program has to be designed in such a manner that the trade-off with respect to growth is essentially of a short-term character, and it is possible for the economy to get back to a relatively high growth path in a medium run, it added.
The case for stabilisation can be made powerfully by developing a 'counterfactual' scenario of the economy in which strong policy actions are not taken and "we essentially continue for the next few months" with 'business as usual'.
"There is every prospect of increasing panic in the markets and fast continued erosion of business confidence, some of which we have seen already. The rupee is plummeting while the rate of foreign exchange reserves' depletion intensifies. It is conceivable that if no concerted action is taken to stem the slide of the rupee it could depreciate much further as the foreign exchange markets attempt to equalise the demand and supply for foreign currency. This will lead to a severe import compression of over 20 percent and not only create a dislocation in production processes but also lead to shortages and lack of affordability by bulk of the population of essential food and other items."
The overall inflation in prices in this scenario could be almost treble of last year's rate of 12 percent. Private investment could fall by over 25 percent, worsening greatly the prospects for gainful employment of a large number of new entrants to the labour force. Over two million additional workers could be unemployed and as many as ten million people could fall below the poverty line. The consequences are too horrendous to comprehend, leave alone accept. "We have no other option but to adopt a strong domestic stabilisation program if we are to avert a national crisis, especially at a time when there are serious security threats to the country."
Pakistan has faced financial crisis before. "Perhaps, the best most recent example is the situation after the sanctions imposed upon us following the nuclear blasts of 1998. In the presence of extremely low foreign exchange reserves, Pakistan had to negotiate an IMF stabilisation program, with a series of tough conditionalities.
The key elements of the stabilisation strategy, agreed with the IMF in January 2009 may include a severely contractionary monetary policy characterised by very high real interest rates and strong curbs on private sector credit; exchange rate policy involving a transition from a dual exchange rate (with the lower rate on essential imports) to a unified, but significantly depreciated rate; continued process of trade liberalisation with declining import tariffs; major public expenditure containment, especially of development expenditure and no significant measures of social protection during the adjustment process due to lack of 'fiscal space'.
The stabilisation program did succeed in converting the current account deficit into a surplus by 2000-01 and in bringing down the fiscal deficit to sustainable levels. The inflation rate, which was in double digits in 1994-97, fell to low single digit by 1999-2000. But this strategy imposed a high cost in terms of the decline in the rate of growth of the economy, which fell to a low below the average of 3.5 percent in the first four years after the launching of the program.
The central message from this stabilisation episode is that while the strategy, followed under the aegis of an IMF program, was instrumental in removing the macroeconomic imbalances, it was achieved at too high a cost, in terms of the growth foregone and rise in poverty. Clearly, there is need to develop an alternative, perhaps more 'home grown,' strategy, which does not fundamentally impair the medium-run prospects for growth and avoid placing more of the burden of adjustment on the relatively weaker and more vulnerable sections of society, the report said.
The principles underlying a 'home grown' stabilisation strategy with a human face are to preserve the growth momentum by protecting levels of public and private investment to the extent possible and aiming for pro-poor growth. The policy actions and reforms should be designed in a manner so as to insulate the poor to the extent possible from negative impacts, and a strong social protection strategy needs to be put in place to reach out to particularly vulnerable groups at this time.