A dream gone sour

The IMF has a one-size-fits-all cookie-cutter approach removed from the unique ground realities of borrowing countries

A dream gone sour


or the past few days there has been a feeling of suspended animation about Pakistan. Many Pakistanis waited with a baited breath to learn whether the International Monetary Fund will agree to continue its stalled bailout programme for the country? There was the fear of sovereign default and the resulting chaos.

Pakistan appears to have finally received a nod of approval from the Fund. However, the terms of the agreement are unclear. Was an agreement reached in return for an increase in taxes on the salaried class, revision of tax slabs, higher customs duty and petroleum development levy? Shortly after there was an indication that an agreement with the IMF was on the cards, a consortium of Chinese banks signed a $2.3 billion loan facility with Pakistan.

Do these developments justify a sigh of relief, or should we instead hang our heads in shame? The following paragraphs recall the history of Pakistan’s relationship with the IMF and its impact on the conomy.

Pakistan has been engaged with the IMF since 1958. It has availed 22 bailout packages. Pakistan has availed IMF programmes under four categories: the Extended Credit Facility (ECF), the Extended Fund Facility (EFF), the Standby Arrangement (SBA) and the Structural Adjustment Facility Commitment. It may be helpful to briefly explain the broad contours of these four programmes.

The Extended Credit Facility (ECF) provides financial assistance to countries with protracted balance of payments problems. The ECF is the Fund’s primary tool for providing medium-term support to low-income countries.

The Extended Fund Facility was established to assist countries experiencing severe payment imbalances because of structural impediments or slow growth and an inherently weak balance-of-payments position.

The Standby Arrangement framework allows the Fund to respond flexibly to countries’ external financing needs and to support their adjustment policies with short-term financing. Through the Structural Adjustment Facility, the IMF provides low-interest loans to developing countries.

Do the global economy and politics have an overlap? The answer seems to be positive. Pakistan turned to the IMF three times from 1958 to 1968 under Gen Ayub’s regime. This corresponded with Pakistan’s increasing engagement with the US on the diplomatic front. It marked the beginning of a special relationship. Pakistan acknowledged US President Eisenhower as the leader of the Free World and sought his help in resolving its many problems, including an adversarial relationship with India, the Communist threat from Russia, Pakistan’s need for military hardware and regional configurations like the CENTO.

Following secession of Bangladesh, Pakistan availed four more IMF bailouts between 1972 and 1977 under the Standby Arrangement programme. Under Zulfikar Ali Bhutto, economic policies favoured nationalisation and the landed elite were brought into the tax net.

Pakistan went to the IMF four times from 1980 to 1988: twice under the EFF and once each under Standby Arrangement and Structural Adjustment Facility Commitment. There was a new pattern under Gen Zia. For example, before the 1980s, the most extensive package Pakistan had received from the IMF was 100 million SDRs in 1973. In 1977, Pakistan had received another 80 million SDRs package from the IMF. By comparison, the first package under Gen Zia in 1980 was worth 1,268 million SDRs – nearly 16 times the previous package. Zia had executed Bhutto in 1979, suspended political parties, banned labour strikes, gagged the press and imposed a martial law. He was a pariah in the public opinion in Pakistan and worldwide. However, he had now embarked on a US-financed military buildup in response to the Soviet Union’s invasion of the neighbouring Afghanistan.

From 1993 to 1995, Pakistan availed the IMF facilities four times: twice under a Standby Agreement and once each under the Extended Credit Facility and the Extended Fund Facility, totalling over 1,100 million SDRs. Pakistan went to the IMF twice in 1997 and got two separate packages under the Extended Credit and Extended Fund facilities. Next, Pakistan went to the IMF in 2000 under a Standby Agreement.

The social media in Pakistan is justifiably abuzz with why the IMF fails to press the government to do away with the largesse available to the elite. Why does the IMF always support policy measures that hurt the poor?

The next major package, in 2001 totaled over 1,000 SDRs (the second highest after Zia’s martial law). The country was now ruled by Gen Pervez Musharraf. 2001 was also when the US invaded Afghanistan.

The next time Pakistan turned to the IMF for a bailout package was in November 2008. The IMF gave Pakistan the largest package in Pakistan’s history (7.23 billion SDRs). It should be recalled that Gen Musharraf had resigned in August 2008 and the PPP-led government was struggling on account of a grim energy crisis and Pakistan’s heightened engagement in the War on Terror.

The package negotiated between the PML(N)-led government and the IMF in 2013 totaled 4.39 billion SDRs. At its conclusion in 2016, the programme was touted as the only IMF programme that had been successfully completed.

Pakistan’s frequent appeals for IMF bailouts raise the question: why do IMF programmes not deliver in Pakistan? The IMF encourages governments to take short-term measures rather than long-term reforms. To understand this point one needs to understand why governments need the IMF help in the first place.

Governments around the world that turn to the IMF generally need financial resources to manage the balance of payment issues. They also need the IMF nod to secure loans from other sources. The fact that a consortium of Chinese banks agreed to provide a loan to Pakistan hours after an approving nod from the IMF is a case in point. Many governments use IMF programmes to boost investor/ lender confidence and attract foreign direct investment.

Because long-term reforms require painstaking course correction, governments are tempted to take palliative measures and then consolidate their political fortunes through populist policies. There can be no genuine economic reforms without revisiting the national security paradigm and elite capture.

A taxation regime favoured by the IMF may also adversely affect the chances of an economic turnaround. The IMF programmes have typically required Pakistan to increase withholding tax and the rate of surcharge and levies on essential commodities even though these measures increase unemployment and stunt investment growth. When governments fail to achieve fiscal targets, mini-budgets almost always follow. Another remedy in the IMF’s toolkit is to cut public spending. This too stunts economic growth. Pakistan’s low spending on education for example is consistent with the IMF’s focus on spending cuts to improve the balance of payments.

Borrowing governments in the IMF programmes scramble for low-hanging fruits at the expense of genuine reforms. Economic theory and conventional wisdom hold that achieving macreconomic stability is a long-term process and that sustained growth is key to it. Real economic growth is often consistent with budgetary deficits and large public debts. However, the axe frequently falls on the sectors – education, energy and infrastructure - that can help ensure sustained growth.

Part of the reason IMF programmes do not result in long-term economic prosperity is the political instability in Pakistan. No head of parliamentary party in Pakistan has been able so far to complete a constitutionally mandated tenure.

The current discussion regarding “neutrals” neatly sums up the vagaries of politics in the country. Thus the governments rarely look beyond election manifestoes and routinely indulge in populist decision-making. A stark example of this are the populist measures announced by Imran Khan, including energy subsidising that cost $2.1 billion and ran counter to the spirit of his government’s agreement with the IMF.

The current government too dithered before revoking the subsidies. Once it became clear that no further tranche from the IMF was forthcoming without it, it massively ratcheted up the price of petroleum products in a narrow window. Beyond immediate misery, this has set the stage for heavy inflation.

Joseph Stiglitz says that the IMF conditionalities are not based on intuitive economic fundamentals but the ideology of “free market supremacy and antipathy to government.” The IMF has a one-size-fits-all cookie-cutter approach removed from the unique ground realities in each country and almost always hurts the poor.

The social media in Pakistan is justifiably abuzz with why the IMF fails to press the government to cut down on military expenditure and do away with the largesse available to elite. Why does it always support policy measures which hurt the poor and the vulnerable the most?

The writer is an associate professor in the Department of Economics at COMSATS   University Islamabad,  Lahore Campus

A dream gone sour