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Tuesday May 28, 2024

Why getting IMF involved in polls is a bad idea

Question is why IMF is being asked to look into Pakistani elections — and what lender of last resort can even do about this

By Ammar Habib Khan
February 23, 2024
A pedestrian walks past the International Monetary Fund (IMF) headquarters in Washington, DC. — AFP/File
A pedestrian walks past the International Monetary Fund (IMF) headquarters in Washington, DC. — AFP/File

THE recently held elections leave much to be desired in terms of providing political stability that can transition towards macroeconomic stability. This is being made worse by an attempt to send letters to the IMF to withhold extension of any new facility to Pakistan. For context, PTI party leader Ali Zafar said on Thursday that PTI founder Imran Khan will write a letter to the IMF, demanding it stop its support for Pakistan due to “rigged elections”.

The question is why the IMF is being asked to look into Pakistani elections -- and what the lender of last resort can even do about this. This was also pointed out by South Asia Institute Director at The Wilson Center Michael Kugelman who tweeted on Thursday that the proposed letter by Imran to the IMF would “be disregarded and have no value, but what a terrible idea. Pakistan badly needs a new loan. Not getting one would be catastrophic for the economy.” Pakistan is stuck in a low-growth trap. Any growth that is in excess of the population growth rate can mostly be due to additional debt, unless the economy is retooled to move away from import-financed consumption, to investment and export-oriented growth.

The fact is that the country requires access to IMF funding to wade through the liquidity crisis, which can facilitate macroeconomic stability. Compounded inflation over the last five years has been in excess of 100 per cent, eroding real incomes and purchasing power across the board. The inability to instill macroeconomic stability may only make things worse, making the population vulnerable to more income and price shocks.

The inability to access the facility will further push the country towards a heightened economic risk scenario, which may further accelerate inflation in the process, and lead to more supply chain distortions. In such a scenario, such assertions that delay the availability of financing facilities can have disastrous consequences for the economy. Such assertions can be deemed anti-people, and will inadvertently hurt the population at large -- while political machinations continue.

The economy is close to the edge. The economic growth attained during the last fifteen years has been through pumping up consumption financed largely through debt. The availability of debt to continue on such a growth trajectory will remain constrained.

Pakistan’s economy needs serious reforms, and that requires all political and non-political participants to develop a consensus on a roadmap that steers the country from a low-growth trap. Political machinations may continue, but making the people, and the economy, victim to such machinations will hurt people more than anything else.

Such volatility may serve the interests of a few hundred power players, but considerably hurts the economic and social outlook for the country’s population. A consensus needs to be developed where we may have to decide whether the country exists to serve the interests of a few hundred power players and rent-seekers, or almost a quarter of a billion people that live in the country.

Engagement with multilateral institutions and other lenders needs to be done in a very cautious and methodical manner, such that the necessary confidence required is not shattered. The populist mantra that can hurt such confidence heightens an already elevated sovereign risk, making it even more difficult to instill macroeconomic stability.