close
Monday June 17, 2024

IMF: reform or ruin?

The debt crisis has led to development and growth crises

By Dr Shahida Wizarat
May 23, 2024
The International Monetary Funds (IMF) building in Washington, United States. — AFP/File
The International Monetary Fund's (IMF) building in Washington, United States. — AFP/File

For the last three decades, Pakistan has been borrowing heavily from the IMF -- giving rise to a chronicle of crises. The debt crisis has led to development and growth crises. Together, these three crises give rise to the distributional crisis, which has increased a skewed distribution of income, and thereby led to more poverty.

All this has led to a social crisis – seen in an increase in thefts, robberies, kidnapping for ransom, murders, etc – and a political crisis.

Our debt crisis is on account of a large chunk of resources leaving the economy to service debts and the IMF conditionalities. In the 1990s, we witnessed the closure of 5000 industrial units rendering 20,00,000 workers unemployed. The decline in output, employment, and business profits worsened the recession. The present crisis is however much more severe, with an estimated one crore fifty lakh employees rendered unemployed. The present IMF programme’s total impact on the economy is far more devastating than was the case in the 1990s. The Asian Development Bank estimated that the poverty level rose to 50 per cent of the population, whereas in rural Sindh it was 85 per cent in the 1990s. But this time around it is much worse and has implications for food security since the increase in food inflation is very steep.

IMF conditionalities have failed to deliver. First, the IMF’s standard prescription of devaluation of the Pakistani rupee has had a severely adverse impact on prices. It is also not increasing our exports or closing the balance of trade (BoT) deficit. Second, the increase in the interest rate by the IMF and State Bank of Pakistan has increased the cost of production, with a very adverse impact on investment, output, employment growth and an increase in poverty. This has resulted in a phenomenal increase in interest payment on debt but has not reduced prices (CPI). Both devaluation and interest rates are increasing prices and the debt burden.

Foreign borrowing of $6 billion from the IMF has resulted in increasing interest payments on foreign debt to the tune of $150 billion from 2018 to 2023. The massive increase in domestic debt due to the government’s inability to borrow from the SBP due to its so-called autonomous status is in addition to this. This results in 90 per cent of the total taxes collected by the FBR being used for payment of interest to commercial banks.

Other IMF conditionalities like increasing tariffs on electricity, gas and petrol are also increasing the cost of production and prices, making industry nonviable. We then see a secondary round of inflation through an increase in transportation costs and thermal power generation. Can all this be called reforms? Are the IMF and our economic managers completely unaware of the havoc they are causing to the economy?

The hollowness of the IMF's austerity programme can be gauged from extravagant payments to wealthy Pakistanis and foreigners but denying the Pakistani population of its very basic needs. The program amounts to squeezing the sweat and blood of the lower middle class and poor Pakistanis, only to splash it on wealthy Pakistanis and international financial institutions.

The IMF’s revenue generation strategy which focuses on increasing tariffs on utilities and as well as GST makes the tax structure very regressive as well. While the IMF’s revenue generation in Pakistan is focused entirely on the middle, lower and poor classes of the population due to indirect taxation, the major beneficiaries on the expenditure side are Pakistan's affluent classes and foreigners. This is through increases in remuneration, perks and privileges to parliamentarians, judges, bureaucrats, foreign consultants, State Bank heads, commercial bank presidents and senior officials and through payment of pensions to retired civilian and non-civilian bureaucrats abroad, and the hiring of foreign and Pakistani experts residing abroad.

While the wealthy classes are the major beneficiaries of the government’s expenditure policies, the major victims of expenditure cuts are the middle, lower and poor classes on account of the reduction in health, education and other expenditures consumed by the poor. Do economic reforms generate resources from the poor and transfer them to the rich?

Pakistan is also being converted into a minority shareholder in Reko Diq, where currently Pakistan and Barrick Gold hold 50 per cent shares each. Barrick Gold, a foreign company, will transfer its total profits and revenues abroad, courtesy of the very liberal foreign exchange regime crafted by the World Bank and IMF-led government of Moeen Qureshi and his ‘Chicago Boys’ in 1993.

One fails to understand why the government wants to go to the IMF again in light of the devastation these policies have had on the economy for the last 30 years. Why are better alternatives not a preferred option? It is stated that we are borrowing from the IMF to avoid default. But this is not true, as the only available research by Mansoor, Baig and Lal (2020) shows that Pakistan’s foreign debts were sustainable till 2019, but have since become unsustainable – that is: if we take more foreign loans, we will default.

Another serious drawback of borrowing from the IMF is that whatever alternatives are available to us now will not be available once we sign a new programme with the IMF since it will then decide our policies. During the financial crisis of 2008-9, the US, UK and Europe intervened heavily in the market by injecting liquidity and nationalization of companies, banks and financial companies. Although these countries are the greatest bastions of the free market, they intervened in the market to avoid the collapse of companies, banks, financial institutions, and the economy.

This option of intervening in the market will be lost to us once we are on the IMF programme. We need to keep the option of intervening in the market to prevent the free fall of the economy open -- should the situation arise. The failure of Pakistan’s economic policies and managers and the continued efforts to thrust the same failed policies and expect better results is insane.

IMF conditionalities cannot be termed as reforms when they are taxing the lower middle and poor classes and using transfer payments to enrich the wealthy. In effect, it is supposed to be the reverse: civilized countries tax the rich and use transfer payments to provide goods and services to the poor.

Second, IMF policy prescriptions are recessionary; they are leading to a decline in growth of investment, output and employment. Third, they are resulting in de-industrialization, resulting in layofthe fs, and skewed distribution of income and poverty. Fourth, transferring the control of Pakistan's strategic and profitable companies to foreigners. Fifth, they are making Pakistan a minority shareholder in its own Reqo Diq gold mine.

Pakistan needs real homegrown reforms formulated and executed by homegrown Pakistani economists. We need to formulate a debt management strategy that will ensure that we service our debts without sacrificing our growth and basic needs of the population. We should crisis manage our balance of payments and devise our resource mobilization strategy which will generate resources for growth, development and repayment of our debts.

The privatization and restructuring policy has to focus on devising policies for strategic, non-strategic, profitable and loss-making state-owned enterprises. We need to formulate our industrial, agricultural and mineral policies to increase our growth rate and provide employment opportunities to the 65 per cent population that is less than 30 years old. We need science and technology, IT and AI policies that will foster technological change in the country. And a regional policy has to ensure that our smaller provinces don't suffer from a sense of exclusion by improving living standards and sharing prosperity with them.

We need to strengthen Pakistan’s economic, political and strategic stature by integrating our economy with regional countries like Iran, Afghanistan, China, Russia and beyond.

The writer is an economist and author of ‘Alternative to the IMF and Other Out of the Box Solutions’. She can be reached at: drshahidawizarat@gmail.com