Dr Kamal Monnoo To tighten or not to tighten - that is the question. It is one to which policymakers have started changing their answers. Are they right to do so? If arguments for tightening are correct, failure to do so would bring fiscal and financial shocks in some of the worlds most important countries. If false, tightening would threaten recovery and might trigger further financial shocks. Rightly or wrongly, there is a strong public perception at home that economic policies in Pakistan are primarily IMF driven for which we have very little autonomy. The common man remains sceptical about the real designs behind the IMF recipes and even the story of those developing countries where the IMF has played a strong role, is not quite inspiring. However, the question is whether we should be blindly buying these conspiracy theories or looking inwards to see whether a certain policy is in the larger national interest? The IMF has an international role and would naturally have a global perspective; the responsibility, therefore, ultimately lies with us to convince and educate financing institutions IMF, World Bank and others to tailor policies to suit our environment and ground realities and not those that fit-for-all measures. It is also for our negotiating team to point out the contradictions within the IMF mindset and restrain it from using different yardsticks for different countries In this context, let us try to evaluate and compare some of the proposed IMF recipes for Pakistan as against what they have been advocating in other parts of the world, and also how differently those countries had responded as compared to us. We know: 1 The world economy is recovering more strongly than expected - in April 2009, at the time of the London G20 summit, the consensus forecast for global economic growth in 2010 was 1.90 percent, by September 2009 (it had reached 2.60 percent and by June 2010 it was 3.50 percent); 2 The fiscal crises in Greece and other peripheral members of the Eurozone has been reinforced by the election results in the UK that threw up a coalition government. The flight from risk has been dramatic: in May 2010 the yield on Greek 10-year bonds peaked at more than 12 percent. At the same time, the extent of the tightening is also real and not in anyway exaggerated. In its May 2010 'Economic Outlook, the OECD forecast a decline in cyclically adjusted fiscal deficits for the groupings as a whole from 6.40 percent in 2010 to 5.80 percent in 2011. As in Pakistan, in Greece the IMF, as expected, forcefully demanded fiscal tightening from the Greek and the UK governments. We already find this new proactive, self-imposed political will towards fiscal tightening before even being told to do so. In fact, some analysts in the UK still think that the planned fiscal tightening is not going as far enough as it should do. In short, the IMF proposed solutions to the Eurozone are, in essence, no different from those it demands from us. This means that while we can argue about the pace of tightening, fiscal targets and the ways and means of achieving them, there can be no doubt that fiscal tightening is in our best interest; the sooner we do it the better for us However, the monetary tightening side may present a different argument altogether. At the anti-tightening extreme are those who argue that money supply under no circumstances should be curtailed to the public sector, as in their opinion fiscal deficits have no impact on activity since they lead to offsetting private peoples behaviour. Thus, if governments run deficits, private people save, since they understand their taxes will ultimately rise. Another, very different, extreme position comes from those who believe a deep slump would purge past excesses, and so lead to healthier economies and societies. While people who think in these radical ways influence the broader politics, they have limited direct influence on policymakers. So, then what is the underlying debate about? The advocates of a balanced and restrained tightening of the monetary policy in Pakistan argue that huge fiscal deficits - never seen before - threaten long-term fiscal credibility and depress private confidence and spending. And the crowding out of the private sector in an already depressed environment can be disastrous for growth and employment generation. On the global front and especially in the US, we have seen such experts advocate go in for fiscal stimulus on top of the built-in stabilisers during the panic of 2008 and early 2009, and now for paving the way for QE2 in 2010 Messrs IMF and Colleagues have conveniently tagged along While these advocates of a pro-growth and pro-employment generation monetary policy agree that there must at some point be a decisive slowing of the growth of long-term spending, they emphasise the fragility of the current global recovery and, in particular, the emerging scenario of huge private sector financial surpluses (Pakistani financial sector is also posting similar unhealthy high profits). In their opinion, this private fragility has caused fiscal deficits and not the other way round. Further, they argue that we have invariably seen and continue to see in such times a strong flight to safety for the people who simply tend to panic and see no alternative but to buy bonds of highly rated governments, particularly the US. Since the Eurozone crisis, this role of US backed governmental securities has become more entrenched. Moreover, the long-term interest rates of leading countries are falling, not rising: in the US, 10-year Treasury bond rates are 3 percent. Finally, they add that with interest close to zero, monetary policy is ineffective, except to the extent that it supports fiscal loosening. Surprisingly, in this case Pakistan seems to be handed down a diametrically opposite direction. We are being asked to further tighten our monetary policy in an environment where, 1 The monetary policy, instead of becoming ineffective due to zero interest rates, has become ineffective due to the nature of the prevalent inflation that shows little or no elasticity to monetary policy measures and reacts mainly to supply side management; 2 Growth rate remains embarrassingly low when compared to other players in the region like China, India and Bangladesh; 3 Population growth runs high, ratio of the percentage youth to total population remains amongst the highest in the world and industrial productivity continues to decline; 4 Last but not the least, both domestic and international investments seem to have dried up causing a rapidly increasing unemployment rate coupled with mushrooming poverty pockets (recent floods have exacerbated the situation). There is no doubt that our central bank needs to quickly put a spanner in the works of our printing press (Rs3 billion being printed per day, which is mounting a serious pressure on the value of Pak Rupee). We see a very different approach by the IMF when it comes to the Eurozone, which ironically is also operating with a foreign currency. The principal IMF argument in their case is that so long as excess capacity remains so large and normal bank lending so weak, such reliance on the central bank 'printing press creates no inflationary danger. On the contrary, the danger is rather that premature monetary or fiscal tightening would trigger a sharp economic slowdown, as in Japan in the 1990s, so pitching important economies into deflation. The interaction of high indebtedness with deflation could, they argue, create a downward spiral. A Japanese-style 'lost decade threatens the developed world. That is particularly likely if everybody tightens together. If anything, further loosening is needed: in the first quarter of 2010, the GDP of every member was of the G7 was still below its pre-crisis peak. Agreed, that our parameters are quite different and we in Pakistan neither have the economic muscle, nor the credibility to think in terms of careless loosening to generate growth, but surely the kind of counterproductive monetary tightening policies to control inflation being implemented on the one hand, and the reckless high inflationary taxation measures being introduced on the other cannot be in our best economic and social interests either? My own inclination though is to strongly support growth, investment, manufacturing productivity and employment generation, at least in the near term. One cannot be sure who is right, but one can be sure that, if policymakers get it wrong, the results may well be dire. The final advice is that whatever the prescription, our economic physicians must remain prepared to respond swiftly to advance reactions to their favoured, but may be not so prudent present course of treatment The writer is An entrepreneur and an economic analyst. Email:kamalmannoo@hotmail.com.