Misunderstanding the IMF

The IMF has agreed to release the sixth tranche of $518 million under the $6.67 billion Exchange Fund Facility (EFF), obviously after having satisfied itself about the structural benchmarks, performance criteria and projected targets pertaining to the review period.
The finance minister was able to convince the Fund about the success of the economic initiatives, which despite the challenging circumstances were on track and producing encouraging results. The claims made by the finance minister are difficult to challenge in the face of the concrete and irrefutable evidence.
When the PML-N government was installed, the GDP growth rate was 3 percent; it now stands at 5.1 percent. The budget deficit, which was nearly 9 percent at that time, has been brought down to 4.9 percent and the inflation rate, which hovered around 9 percent in 2013, has been brought down to 5.77 percent. Reportedly the Mission Chief of IMF for Pakistan Jeffery Franks appreciated the performance of the government in meeting these and various targets. There is no doubt that some targets like tax collection had to be revised downward but the overall performance of the economy was never in doubt.
However, there is no dearth of economists who are essentially critical of the government’s and who denigrate the initiatives of the government and doubt the assessments of the IMF. Their scepticism is misleading the public about the necessity of the IMF loans, and their rationale and role in stemming economic aberrations.
Ironically, the opposition parties have also used the bogey of IMF loans to take a dig at the economic policies of the sitting governments, notwithstanding the fact that starting from 1958 almost all governments in Pakistan have sought IMF loans under various arrangements to bolster the balance of payments position and to meet other financial needs. Some economists have also been critical of the conditions attached to IMF loans and termed them as self-serving for the institution rather than accruing desired benefits to the recipient county.
To understand the role of IMF loans and why Pakistan has not been able to throw the begging bowl away, it is pertinent to cast a cursory glance at the basic objectives of the IMF loans and the policies of the successive governments. The IMF was established to ensure stability of the international monetary system – the system of exchange rates and international payments – that enables countries and their citizens to transact with each other as well as promoting employment, sustainable growth and reducing poverty.
To achieve these objectives the IMF assists member states on their request. Concessional loans are granted to low-income countries at lower rates with a market-based interest rate through different mechanisms including the EFF.
While extending these loans the IMF does not ask for collateral like commercial banks but insists on the fulfilment of certain conditions in the form of structural reforms of the economy, curtailment of expenditure, reduction in the subsidies and broadening the tax base with a view to enabling the recipient countries to rely more and more on their internally generated resources and be in a position to amicably pay off their loans in the process.
Looking at these terms from an economic point of view, they seem a perfect recipe for any developing country aspiring to achieve self-sustained growth. No economic growth model can succeed without these measures. Between 1958 and 1979 Pakistan received seven loan facilities from the IMF amounting to $460 million, and in November 1980 another loan of $1.27 billion was provided under the EFF. Between 1984 and 2010 we were given 11 loans.
Now the question arises: if the IMF loans are meant to help the ailing economies of the developing countries, why is it that Pakistan has not been able to achieve sustainable growth? The answer is quite simple. No government has ever shown the political will to take tough decisions and initiate the desired reforms programme. A culture of tax exemptions and an irresistible knack for prestige projects that have no connection with the country’s economic realities, and the strategy of planning the projects first and then looking for resources to defray them, have all led the country to a situation where the economy is almost on the verge of collapse. As is evident the fault does not lie with the IMF conditions but with the failure of the successive governments to faithfully implement them.
The PML-N government had no choice but to approach the IMF for another EFF facility amounting to $6.67 billion over a period of three years. Pakistan was likely to default on its loans and badly needed this injection to save it from the ignominy of default which could have had very serious economic and political consequences for the country. It is indeed satisfying to note that the government has shown the political will and resolve to take some tough decisions as dictated by the ground realities.
It has also initiated measures to bring about necessary structural reforms, broadening the tax base and withdrawal of subsidies in a phased manner. Though these steps might hit some sections of society in the short run, they are absolutely essential for the health of the economy in the long run and bringing much needed relief to the masses.
Apart from the IMF endorsement of the turnaround in the economy and the success of the economic initiatives of the government, some other developments also testify to these claims. The World Bank is reported to have approved financing of five energy projects in Pakistan which would add 10,000MW electricity to the national grid after completion. This development indicates the growing confidence of world institutions in the revival of our economy and their willingness to work with the present government in nudging forward economic growth.
The PML-N government also lobbied hard for GSP Plus status and was successful in achieving it. As a result of this initiative, Pakistani exports to EU countries have increased by $1.8 billion between January and October during 2014 as compared to the same period of 2013. This is surely another success story in regards to the economic policies of the present government.
Managing the economy is a very difficult assignment, owing to the socio-economic complexities and linkages of the economy with the outside world. The initiatives of the government may not have achieved their targets in their entirety but there is no doubt about the fact that they have certainly set the ball rolling in the right direction. It needs to be remembered that there are no quick-fix solutions available for our economic woes that have accumulated over decades of mismanagement of the economy.
Considering the fact that our economy sustained a loss of $100 billion in the war against terrorism, was severely hit by devastating floods and enormous resources were being diverted to the military campaign against the terrorists and for the IDPs, the results achieved so far are commendable to say the least.
The writer is a freelance contributor.
Email: ashpak10@gmail.com