Efficacy of IMF bailouts

In the wake of the Second World War, Western countries realized and acknowledged the need for global institutions that could help these countries get back on their feet, financially and economically.

Leaders of 44 countries gathered during the summer of 1944 at Bretton Woods, New Hampshire and signed the famous Bretton Woods agreement, which gave birth to two of the major multilateral organizations of the world – the World Bank and the International Monetary Fund (IMF). The Bretton Woods Institutions have played a significant role in improving the world economies, but the International Monetary Fund (IMF) in particular has played a vital role in rescuing numerous economies – many often at the verge of bankruptcy. Notably, both of these institutions were created to help rebuild Europe following the major war.

Slipping away from its initial goal of merely pegging US dollars to gold, the in 1973 the IMF started to act as the lender of last resort by providing loans to fix Balance of Payments (BOP) problems in the world – mainly assisting developing and under-developed countries. Since then, the IMF has managed to pull out hosts of countries from the brink of financial turmoil. Following the Latin American crisis in the 1990s, the IMF changed its policies by implementing what is referred to as ‘the Washington Consensus’. These policies comprised conditions against which the IMF would provide financial assistance to recipient countries. These conditions, inter alia, include reducing fiscal deficits by putting a limit on borrowing, promoting businesses by slashing corporate taxes and cutting down on subsidies.

Notably, another change that came with the diversion from focusing on the currency scheme was to move away from Latin American, African and Asian countries towards extending loans to European countries. For instance, in 2010 Greece was pulled out from a financial collapse by the Fund with the help of European Commission and the European Central Bank. The bailout extended to eight years with a total package of $375 billion. Along with Greece, many other European countries were financially aided as well, including Portugal and Ireland. At this stage, the IMF has transformed from a mere watchdog of monetary and exchange rate policies to an assertive financial firefighter.

This global financial firefighter has aimed to extinguish BOP-related fires across the world by lending financial as well as technical assistance. One of its current beneficiaries is Pakistan which has acquired 22 IMF programmes since 1958 – on average, that is one programme every three years in the last six decades. This persistent need to be rescued by the Fund is a perhaps an indication that the IMF medicine might be curing the symptoms but not the disease. Moreover, it is undermining the very core value of the IMF – to provide financial stability to a country.

Many of the Fund’s intervention which were celebrated as successful often brought about a series of issues in the long term. For instance, the programme of $6.68 billion concluded between IMF and Pakistan in 2016 was hailed as one of the most successful ones in Pakistan’s history. During this period, Pakistan had managed to increase its foreign exchange reserves to a whopping $18 billion along with one of the highest GDP growth in the country’s history.

However, these were just prima facie milestones – the real issues, which were also put forward as conditions by the IMF, were to curtail the continuous increase in the country’s circular debt, adopt fiscal austerity measures, reduce state subsidies, and ameliorate the abysmal performance of state institutions by privatization. Some of these have worsened over time. For example, circular debt that stood at Rs500 billion in 2013 currently stands close to Rs1.4 trillion. Similarly, instead of austerity, Pakistan’s imports shot up from $41 billion in 2013 to a mammoth $56 billion in 2017 – thus, leaving the IMF conditions unfulfilled and targets unrealized.

The case study of Pakistan brings one question to light: is the IMF rescuing countries or putting them in enduring debt traps?

Many economists and researchers are coming forward with the view that the IMF is a double-edged sword. For instance, the Fund is providing financial breathing space but with stringent and unproductive conditions. These conditions in turn, as shown in Pakistan’s case, often worsen the economy in the long-term and make countries like Pakistan fall in a debt trap.

In his book, ‘Globalization and its discontents’, Nobel Laureate Joseph Stiglitz has pointed out that the conditions that the IMF puts forth as economic reforms – including fiscal austerity, open capital markets, and high interest rates among others – are rather counterproductive. (Because) Similarly, Keynesian economists argue that in a financial turmoil, instead of fiscal austerity, expansionary financial policies should be the way-forward. In case of Pakistan, as reported by Dawn, the IMF has restricted Pakistan in reducing its spending by at least 10 percent, putting enormous pressure to halt existing and new investments.

This view by Stiglitz is also shared by William Easterly in his book, ‘The White Man’s Burden’: that fiscal austerity in the face of crisis is seldom the right choice. In addition, Easterly points that many of the IMF conditions follow a blanket approach without keeping the local economic conditions in mind. To give an example from Pakistan, the country is in the midst of spending in large number of infrastructure and other projects under the framework of the China-Pakistan Economic Corridor (CPEC); the conditions by the Fund have affected the investment portfolio. Such austerity can hamper the already fragile economy.

The IMF is certainly the lender of last resort and may have saved numerous countries from the brink of financial crisis; yet, they cannot apply universal policies across the world. The policies which may have worked in Ireland, Greece or Portugal will not necessarily work in Latin America, Africa or Asia.

The Fund needs to re-evaluate and re-design its policies to ensure that it not only focuses on the immediate scenario in a country but also the holistic system. Only then can the IMF be truly called a saviour.

The writer is an economist and agraduate of University of East Anglia.

Email: sikanderbizenjo@gmail.com

Twitter: @sikanderbizenjo