Reading Mr Aftab Ahmad Khan's article (AInflexibility of IMF Terms Causing Economic Crisis@, Dawn, Economic & Business News, October 12-18, 1996), I was taken by surprise because I did not think he was a person who subscribed to down-market conspiracy theories. But no matter, because by the time this is published, events would have moved swiftly making any comment from me on the subject largely infructuous. This is just as well because I am constrained in what can be said publicly on the subject of the IMF's perceived intransigence over agreeing to resume support to Pakistan in the context of the 1995-96 stand-by arrangement.

Although the title of Mr Khan's article is about Pakistan, the main body of his article is devoted to an attack on IMF policies. He argues that these policies have had ruinous social and political implications for developing countries, and have failed to deliver on growth objectives. Since this is a rather generalized observation, there would have been little merit in attempting an argument to settle it one way or another. Nor would I have troubled Mr Khan, or the reader, with a reply until I came across his empirical sample of seven countries (Egypt, Jordan, Jamaica, Brazil, the Philippines, Morocco and Zimbabwe) which, in his view, paid a heavy price, underwent great trauma under IMF-imposed changes, and have nothing to show for it except distress and Adestabilizing social and political tensions.

I must admit that I am surprised--and a little disappointed--that Mr Khan, whose extensive knowledge and voracious appetite for serious reading is well-known to all of us, should make such a cavalier and dismissive statement about these countries. In this article I shall try to correct the record and, in the interest of brevity, comment on the economic situation of only a select number of the countries mentioned by Mr Khan. Even here, I will confine myself to a broad-brush overview of selected indicators of macroeconomic performance such as growth and inflation, the fiscal and external accounts, and add a few brief comments on the measures taken to increase social equity in these countries.

Let me start with Egypt. As readers may know, since 1991 Egypt has been engaged in implementing a wide-ranging programme of stabilization and structural reforms with the support of two successive arrangements with the Fund. Its accomplishments to date are unquestionably impressive . Economic growth has accelerated, from a mere 0.3% in 1990-91 to an estimated 4.5% in 1995-96; inflation has come down from 21% to 7% over the same period and is estimated to fall further next year; the fiscal deficit, which is invariably the root cause of macroeconomic instability, has been cut from an unsustainable 15% of GDP in the late 80s to only 1.3% of GDP in 1995-96 (with the primary fiscal position moving to a surplus of 5.5% of GDP), in response to deep cuts in current outlays, including defense expenditures. Furthermore, priority social sector spending, especially health and education, have been protected and development expenditures have been maintained at 5.4% of GDP. The external position is strong and Egypt's gross international reserves, at around $18 billion, provide cover for as much as 14 months of imports.

It is true that unemployment remains high and has been slow to respond to the resurgence of growth. But, contrary to Mr Khan's assertion, Egypt, like many other countries, has an extensive system of social protection that helps protect the poor, notwithstanding the rigours of a Fund-supported programme. This includes consumer subsidies, cash transfers, social insurance, income supplement and micro-credit programmes, and voluntary organizations' welfare and development programmes. A Social Fund for Development has been established to provide assistance to displaced workers and to support enterprise development programs and public works.

However, this does not mean that Egypt has no problems. Indeed, Egypt faces a formidable unfinished agenda of economic reforms. State involvement in the productive sector is still large; the economy remains highly protected; the financial sector needs to be revitalized and the fiscal position remains vulnerable because of its dependence on revenues that are inherently volatile. Unemployment remains a pressing problem and social conditions need to be improved. But, to say that Egypt is a country in distress is simply not true.

Mr Khan's reference to Jordan is even more perplexing because Jordan has, and continues to be, a truly outstanding performer. Real GDP has grown at an annual average rate in excess of 6% in recent years (6.4% in 1995); inflation was less than 3% in 1995 despite the pass-through effects of an increase in the GST rate and sharp upward adjustments in administered prices; wage increases were recently granted to government servants (despite Mr Khan's claim that the IMF is always fond of cutting wages all round, especially of civil servants), without any fiscal impact, and in the context of a declining fiscal deficit, as the cost of the wage increase was fully offset by strict adherence to hiring limits and compensatory across-the-board cuts in the purchase of goods and services. Jordan's fiscal performance has been remarkable: the deficit has been halved in recent years (to about 3% now), allowing the public sector to make net repayments to the banking system (in our parlance bank borrowing for budgetary support is actually negative!).

Of course, referring to Jordan as a country in IMF-inspired distress, Mr Khan must have had in mind the recent riots following the implementation of the reform of the food subsidy system. Personally, I thought that was a remarkably bold and courageous step, for which the Jordan government deserves to be congratulated. In one stroke, the government removed a costly and wasteful generalized subsidy on wheat with large dead-weight fiscal costs, and replaced it with a cash transfer mechanism to households meeting income eligibility criteria based on a coupon system that was already in place for rice, powdered milk and sugar; a similar cash transfer system was introduced for barley and other animal feed. Indeed, Jordan provides an excellent illustration of a bold and politically risky subsidy removal, while reinforcing the safety net for the truly poor and needy which leaves them better off than they were before.

There has been a striking turnaround in the Philippines economy recently. As soon as the crippling power crisis ended in 1994, a strong and well-balanced recovery emerged and the economy revived; growth accelerated to 5.5% (and 6.3% in the first quarter of 1996), with inflation dropping to 7%, compared to 17% in earlier years. By all accounts, a decade of reforms has now created a strong foundation for rapid and sustainable growth. Growing confidence in the economy has prompted a surge in exports, remittances and capital inflows which have propelled the overall external balance from a large deficit to a $1 billion surplus. These developments occurred against the background of a series of exogenous shocks: the Mexico crisis which triggered a portfolio shift away from emerging markets; a severe drought that caused rice prices to double, and another wave of financial anxiety with renewed concerns over Mexico. But these shocks did not derail the adjustment program, and far from plunging into recession, the economy actually gained momentum. As the recovery demonstrated its resilience, confidence improved further, providing an additional spur to economic activity. This is the doctrine of Acumulative [circular] causation@ which Mr Khan accuses the IMF of being in danger of disregarding.

The reduction in macroeconomic imbalances in the Philippines has been noteworthy. Obviously, without it, the path of growth and inflation would not have been as favorable. The consolidated public sector deficit has been halved to 2.2% and, for the first time, is generating favorable debt dynamics. In other words, the budget is benefitting from a virtuous circle where a strong fiscal position is limiting the need to borrow, allowing nominal debt and debt service to remain essentially unchanged, and, with a growing economy, to fall as a share of GDP. The room created by this favorable debt dynamics is being used to finance a doubling in pay for government servants! Furthermore, despite the continuing need to keep the deficit on a downward path to lower demand pressures further and to release more resources to a resurgent private sector, the government is spending more social services through its Social Reform Agenda. Expenditures focused on agrarian reform, rural infrastructure, and other poverty alleviation projects are projected to rise 22% in 1996, complementing an 18% increase in overall development expenditures. In the external sphere, exports which once played a minor role are now spearheading the economic advance. The external debt to GDP ratio has declined by 7% points in three years, and the debt service ratio is only 14% of the value of exports of goods and services. Indeed, there is now widespread agreement that Philippines' economic prospects are brighter today than they have been for more than a decade.

On Morocco, I shall be very brief. Perhaps Mr Khan does not know that Morocco, after years of persevering with adjustment and reform, has graduated from the exceptional use of Fund resources and is now on the path of self-sustaining growth which is being financed from autonomous capital inflows. Mr Khan indicates that IMF programmes always and everywhere insist on large currency devaluations as a precondition on the use of its resources irrespective of the country's conditions and circumstances. This is not true. Again, looking at his own sample, Jordan's exchange rate has been remarkably stable for many years, as the authorities have pursued a policy of maintaining the stability of the Jordanian dinar vis-a-vis the US dollar. In Egypt, the pound's stability has served as a nominal anchor and a central element in the successful campaign to reduce inflation. In the Philippines, policy is geared towards maintaining a stable exchange rate while not resisting pressures for currency appreciation as an equilibrating response to unanticipated surges in capital inflows. The message from the experience of these countries is unambiguously clear: disciplined and credible macroeconomic policies obviate the need for large currency realignments, and are at the heart of disciplined exchange markets.

Notwithstanding Mr Khan's comments on the Fund's image in developing countries, the reality is that there is simply no counter factual to the steady, determined pursuit of a soundly-based strategy of macroeconomic policies and efficiency-enhancing structural policy reforms if a country is to be put firmly on a path of high growth with social stability. AAlternative Strategies of macroeconomic populism and indebtedness, excessive protectionism and interventionism only heighten the risk of marginalization and stagnation. Mr Khan's reference to social and political tensions, to hardship and dislocation, points to an ineluctable concomitant of adjustment and reforms. The challenge for policymakers is to persevere even in the face of resistance, while protecting the truly needy and poor with a well-designed social safety net, so that the benefits of reform can be felt and there is increasingly widespread public support for the adjustment process itself. In this way, the economy can, through a process of circular and cumulative causation, be placed on a permanently higher growth and investment equilibrium, strengthening the link between social equity and the sustainability of the reform process.

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