Thursday May 19, 2022

Whose interests does the IMF Programme serve anyway?

November 11, 2021
Whose interests does the IMF Programme serve anyway?

ISLAMABAD: Pakistani officials say all contentious issues have been settled, but the IMF sources say talks are on Pakistan has met all the IMF demands as part of the latest review of an EFF (Extended Fund Facility) programme, but an IMF announcement to this effect is still awaited, officials say. Islamabad and the Fund staff have been locked in threadbare negotiations for more than two weeks now to finalise the Memorandum of Economic and Financial Policies (MEFP) for the completion of the Sixth Review under the USD 6 billion EFF programme. An agreement, however, has been elusive. But officials now say agreement has been achieved over all contentious issues.

To a question, Finance Ministry Spokesperson Muzammil Aslam asserted that an agreement had been achieved with IMF (International Monetary Fund) over all major issues and an announcement to this effect was expected shortly.

He dispelled the impression that the dialogue with the IMF had failed. The government is hopeful that after successful completion of negotiations, the IMF will announce release of the next tranche of USD500 million, which is important for Pakistan due to many reasons.

If we look at Pakistan’s history of relationship with the IMF since 1950, when Pakistan became a member of IMF, Pakistan has always approached the Fund to meet contingencies that characterise its unpredictable economy, heavily dependent on imports. Prime Minister Imran Khan’s government inherited large balance of payment deficit and foreign reserves that were barely enough for two months’ imports. Although, the PTI was able to secure financing from friendly countries, including KSA, UAE, and China, it was nevertheless forced to approach the IMF for assistance given the condition of the economy.

This was Pakistan’s 22nd IMF programme – an EFF totalling USD 6 billion, of which USD 1 billion were immediately released. This programme had conditions like energy tariffs increase, discontinuation of subsidies, increase in taxation, privatisation of public entities and fiscal adjustments to the budget. Now the Sixth Review of Pakistan’s performance under the programme economy has been concluded and Pakistan is expecting an IMF announcement to this effect soon.

On the other hand, there is a controversy brewing over whether the programme is really helpful to Pakistan. Almost all politicians sitting in the government are of the view that the IMF programme is against interests of Pakistan and should be presented before parliament.

A senior official in the Finance Ministry, talking on condition of anonymity, said apparently, all demands of the IMF had been accepted but the Fund was still reviewing these actions. He further stated that this programme of total USD 6 billion actually cost Pakistan more than USD40 billion in just two policy areas – increase in discount rate and devaluation of rupee.

Most of the economists serving in the Planning Commission are saying that the SBP under pressure of the IMF has increased the discount rate to control inflation on the premise that there is an inverse relationship between discount rate and inflation. For Pakistan’s economy, however, the relationship is direct, so that one percent increase in policy rate causes the CPI-based inflation to rise by 1.3 percent.

A senior official of the Commerce Ministry, talking on condition of anonymity, said that devaluation would improve the competitiveness of our industry abroad and hence would help increase exports. However, based on over 100 months of exports and exchange rate numbers, it is clear that our exports have moved in a narrow monthly range of USD1.7 billion to USD2.3 billion, irrespective of exchange rate, whether it is PKR 106 or PKR 160 per USD.

Many eminent Pakistani economists concur, maintaining Pakistan cannot increase its exports by adjusting its exchange rate. This is because rupee devaluation raises input cost of export-oriented industries and makes them non-competitive.

Dr. Ishrat Hussain, former Governor State Bank and former adviser to Prime Minister, is of the view that close to 60 percent of the inputs to export-oriented industries are imported.

In other words, rupee devaluation inflates the cost of 60 percent of our inputs, rendering our industries non-competitive in the international market. While devaluation failed to increase exports, it certainly added PKR4,666 billion to public debt without borrowing a single dollar during July 2018 to March 2020.

Thus, the twin policies of policy rate increase and rupee devaluation have cost Pakistan PKR6,353 billion or approximately USD40 billion for a USD 6 billion IMF Program. This colossal burden may well be the reason why Pakistan’s economy is in a tailspin. A look at history shows that Pakistan has been thrown a bailed-out package by IMF on 13 occasions, the largest of them being the current EFF programme.