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August 6, 2018

Weighing the IMF option

Opinion

August 6, 2018

In the ongoing debate over whether or not to seek an IMF bailout, the paramount choice facing the incoming government has not received the attention it deserves: will you govern yourself or be governed by the IMF?

The case for recourse to IMF has been made most ably and persuasively by one of our finest economists, Waqar Masood Khan, who recently retired as perhaps the longest-serving finance secretary to the government and has to his credit the successful completion of an IMF programme during his term. In his most recent article ‘Do we need the IMF?’, published in this newspaper (July 31), he has argued that immediate problems need to be dealt with separately and urgently from the short to medium-term problems.

While his long-term solutions are yet to be published, he feels that in the short-term imports cannot be compressed, because “the bulk of our imports are petroleum (24 percent), machinery (20 percent), industrial (textiles, transport and metal groups) raw materials (21 percent) agriculture inputs (15 percent) and food and edible oil (13 percent)”. Moreover, he states that because “our external account deficit is the mirror image of what is wrong in our fiscal affairs” raising revenues and reducing expenditures is unavoidable. Since the IMF binds the government to a sensible set of policy actions that we would undertake anyway, he asks: “If we are ready to do what has been suggested above on our own,” then why not enter into an IMF programme?

The answer, based on long-term concerns, was provided earlier by yet another distinguished economist, Nadeem Ul Haque, who has served both the IMF and the government in senior positions. In his article ‘The cycle of mistakes, published on these pages newspaper (July 17), he has primarily argued that an IMF programme, so to say, restores the health of a drug addict who has overdosed but does not want to address the addiction itself. Moreover, the IMF’s approach to rehabilitation has harmful side effects.

The Fund imposes ‘austerity’ more on the weak and the poor than on the rich and powerful, who can ‘game’ the programme. It neither analyses nor addresses the non-financial aspects of either the causes of the crisis of solvency or the remedies it proposes (like productivity, employment, income distribution, the informal economy, real causes of state enterprise losses, and linkages of the economy with security and social conditions). The Fund also results in raising the influence of the finance bureaucracy in government, privileging the means of governing (securing financing) over the ends (providing justice and security).

A more complex theoretical case, based on the belief in the superiority of Keynesian over Chicago-school solutions (favoured by the IMF), is made by the vice chancellor of the Pakistan Institute of Development Economics Asad Zaman. In his article ‘Once more, unto the IMF’, published in Business Recorder (July 31), he argues for: (i) looking at the composition (in addition to the size) of the fiscal deficit in assessing its impact not only on growth but also on productivity, employment and income distribution; and (ii) strengthening external finances by including non-tariff (in addition to tariff-based) interventions in managing trade and capital flows – not unlike the US today or the Soviet Union economies in the past.

The arithmetic of the budget deficit (whether it is 7.1 percent or 6.1 percent of GDP) is less important than its economics. A higher budget deficit resulting from the kind of taxes and expenditures that produce greater growth and employment may be preferable to a smaller deficit that does the opposite. Similarly, there is no good reason as to why in addition to exchange rate and tariff measures, trade and capital flows should not also be negotiated and managed selectively. This can be done by trading partner(s) or bloc(s) for selected goods and services and projects, instead of eschewing these policy instruments as an ideological affirmation of faith in ‘markets’.

It would seem then that going to the IMF is neither necessary nor sufficient. But if we don’t go to the IMF, what do we do? The answer is obvious once we realise that the IMF provides only two things: a ‘programme’, of policy actions designed and monitored by the IMF and executed by the government under the IMF’s supervision, and loans, directly by the IMF and indirectly by other OECD members of the IMF – conditional on our remaining in compliance with the programme.

With America’s open hostility towards Pakistan and the effective dissolution of the Atlantic alliance, the availability of loans from OECD sources is likely to be quite small and dependent more on bilateral considerations than on an IMF programme being in place. Our urgent external liquidity requirements are already being met from China and Saudi Arabia/UAE. We now have sufficient experience to design not only a short-term stabilisation programme of the IMF variety, but also a vastly superior programme that supplements a financial programme with economic, social and security components. Unlike the mechanical one-size-fits-all static programmes of the IMF, our programme can be strategic and tailored to changing circumstances.

In this situation then, to go into self-managed receivership and cede economic sovereignty to the IMF would be a sheer folly. The pursuit of a habitual course of action that both logic and experience have demonstrated as being ineffective and contrary to our national interest will be foolish, especially when an alternative and superior feasible course of action is available.

The writer is a retired economist.

Email: [email protected]hoo.com