An IMF tranche gets delayed and nerves start dangling in Islamabad Wouldnt it be nice if, for once, we could look into IMFs eyes and use its help for what it is really meant for - budgetary support and not the budget itself However, for this to happen we first have to get our own house in order and get the Pak economy moving again. If we reflect over the last decade, we see an economy with an expanding population, which naturally had to be matched by an increase in budgetary outlays to manage it. To explain this in simple corporate terms it basically meant: Enhanced financial requirements employed to sustain a larger business. What has happened recently is that while the business has shrunk the working capital requirements are proving to be inelastic due to two main factors, (a) population that cannot be wished away and in our case it is in fact increasing annually at a very rapid rate and (b) persistent inflation and devaluation over the years simply making it impossible to sustain national operations with scaled down cash inflows. To put it mildly, strangulating the economy, at least for now, is not an option Anybody who looks carefully at the world economy will recognize that a degree of monetary and fiscal stimulus unprecedented in peacetime is all that is prodding it along, not only in high-income countries, but also in big emerging ones. The conventional wisdom being that it should by now be possible to also manage a smooth exit. Nothing though seems less likely and it appears that for the time being the governments will need to continue supporting economic activity in their economies - The question is that why should Pakistan be any different? So let us consider the endgame instead, and for this we need to start from the reverse side of the stimulus coin: On the global front the private sector in general is now spending far less than it has historically done in the last 30 years. Point to note, however, is that given the recent global financial mess, such shifts towards frugality will have occurred, despite the unprecedented monetary loosening. While the latter helped prevent still a greater collapse in private spending, the huge fiscal deficits, largely the result of automatic stabilizers, have been no less important. If governments around the globe had tried to single mindedly close fiscal deficits, as they attempted to do so in the 1930s, we would be in another Great Depression. Likewise, on the domestic front, we need to start from ascertaining the principal reasons for being in the current economic mess. Four imbalances come to mind: Asset price bubble; explosion of the profit column on the balance sheets of the financial sector; mal-investment (a term coined by the Austrian business schools), meaning diverting the money flow away from the productive sectors and into the non-productive sectors; and finally a trade imbalance compounded by rise in the cost of manufacturing at home. Where we went wrong was that in trying to correct the situation, instead of focusing on these areas we plainly relied on tightening the monetary policy side, thereby exacerbating the quagmire we were in. Agreed that we did make some elementary mistakes in our monetary policies, which needed to be corrected, but at the same time I really do feel that though monetary policy mistakes did have a role to play, they can neither be regarded as the main culprit nor should they be banked upon to play a lead role in the rescue plan. To find a successful way forward, what is required is to divide the policies in two very basic categories - What can be termed success or, on the other hand, failure? Success would mean re-ignition of the credit engine, so that the private sector spending cum investment surges anew, fiscal deficits shrink and the economy appears to be going back to normal. Failure would mean that crowding out the private sector continues. Its spending and growth fails to pick up with any real vigour and fiscal deficits continue to remain large in the foreseeable future. While the success recipe may see difficult periods to start with, whereas the failure one can provide short-term relief, the big point is that we need to somehow escape the trap that is at present likely to lead us to a sovereign debt crisis. This as we know can in turn result in defaults, probably via inflation. In essence, private sector strangulation and economic inactivity invariably leads to sovereign bankruptcy and inflation. Lastly, the only way one envisages to manage a ticket out of the present economic crisis is by a combination of a surge in private and public investment and capitalizing on a re-emerging demand in the developed world by controlling the cost of production at home (meaning domestic demand boosted by an export-led growth). Yet exploiting such opportunities would involve radical rethinking. Unfortunately, nobody so far is seized of such a radical post-crisis agenda. It is important not to repeat our past errors and to invest in the future as there may not be too much time on hand e-mail: kamalmannoo@hotmail.com.