A dream that turns sour | Political economics


ver the past few days, there has been a sense of suspended animation about Pakistan. Many Pakistanis have been anxiously awaiting whether the International Monetary Fund will agree to continue its stalled bailout program for the country? There was the fear of sovereign default and the resulting chaos.

Pakistan appears to have finally received IMF approval. However, the terms of the deal are unclear. Has an agreement been reached in exchange for an increase in taxes on the working class, a revision of the tax slabs, an increase in customs duties and the oil exploitation royalty? Shortly after there was an indication that an IMF deal was on the cards, a consortium of Chinese banks signed a $2.3 billion loan facility with Pakistan.

Do these developments warrant a sigh of relief, or should we rather bow our heads in shame? The following paragraphs recall the history of Pakistan’s relations with the IMF and their impact on the economy.

Pakistan has been engaged with the IMF since 1958. It has benefited from 22 rescue packages. Pakistan has benefited from IMF programs in four categories: Extended Credit Facility (ECF), Extended Financing Facility (EFF), Stand-By Arrangement (SBA) and Commitment under the Adjustment Facility structural. It may be helpful to briefly explain the broad lines of these four programs.

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

The Extended Credit Facility was created to help countries experiencing severe payment imbalances due to structural impediments or slow growth and an inherently weak balance of payments position.

The Stand-By Arrangement framework allows the IMF 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 overlap? The answer seems positive. Pakistan turned to the IMF three times from 1958 to 1968 under the regime of General Ayub. This corresponded to Pakistan’s growing engagement with the United States on the diplomatic front. This marked the beginning of a special relationship. Pakistan recognized US President Eisenhower as the leader of the free world and asked for his help in solving its many problems, including a contentious relationship with India, the communist threat from Russia, Pakistan’s need for military equipment and regional configurations like CENTO.

After Bangladesh’s secession, Pakistan enjoyed four more IMF bailouts between 1972 and 1977 under the Stand-By Arrangement program. Under Zulfikar Ali Bhutto, economic policies favored nationalization and the landed elite were brought into the tax net.

Pakistan approached the IMF four times between 1980 and 1988: twice under the EFF and once under the Stand-By Arrangement and the Structural Adjustment Facility commitment. There was a new model under General Zia. For example, before the 1980s, the largest package Pakistan received from the IMF was 100 million SDRs in 1973. In 1977, Pakistan received another package of 80 million SDRs from the IMF. In comparison, the first package under Gen Zia in 1980 was worth 1,268 million SDRs, almost 16 times the previous package. Zia executed Bhutto in 1979, suspended political parties, banned strikes, gagged the press and imposed martial law. He was a pariah in public opinion in Pakistan and around the world. However, it had now embarked on a US-funded military build-up in response to the Soviet Union’s invasion of neighboring Afghanistan.

From 1993 to 1995, Pakistan used IMF facilities on four occasions: twice under a Stand-By Arrangement and once under the Extended Credit Facility and once under the Extended Credit Facility, for a total of more than 1,100 million SDRs. Pakistan approached the IMF twice in 1997 and obtained two separate envelopes under the Extended Credit Facility and the Extended Fund. Then Pakistan went to the IMF in 2000 under a stand-by arrangement.

Social media in Pakistan is rightly abuzz over why the IMF is failing to pressure the government to get rid of the largesse available to the elite. Why the IMF Always Supports Policy Measures That Harm 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 General Pervez Musharraf. 2001 was also the year the United States invaded Afghanistan.

The next time Pakistan turned to the IMF for a bailout was in November 2008. The IMF gave Pakistan the biggest package in Pakistan’s history (SDR 7.23 billion) . It should be recalled that General Musharraf resigned in August 2008 and the PPP-led government was struggling due to a severe energy crisis and Pakistan’s increased commitment to the war on terror.

The package negotiated between the PML(N)-led government and the IMF in 2013 amounted to SDR 4.39 billion. At its conclusion in 2016, the program was touted as the only successful IMF program.

Pakistan’s frequent calls for IMF bailouts beg the question: Why aren’t IMF programs working in Pakistan? The The IMF encourages governments to take short-term measures rather than long-term reforms. To understand this point, one must understand why governments need IMF assistance in the first place.

Governments around the world that turn to the IMF generally need financial resources to manage balance of payments problems. They also need IMF approval to obtain loans from other sources. The fact that a consortium of Chinese banks agreed to provide a loan to Pakistan within hours of IMF approval is a good example. Many governments use IMF programs to build investor/lender confidence and attract foreign direct investment.

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

A tax regime favored by the IMF can also harm the chances of economic recovery. IMF programs have generally forced Pakistan to increase withholding and surcharge rates and commodity levies, even as these measures increase unemployment and dampen investment growth. When governments fail to meet budget targets, mini-budgets almost always follow. Another remedy in the IMF’s toolbox is to cut public spending. This too is holding back economic growth. Pakistan’s low spending on education, for example, is consistent with the IMF’s emphasis on spending cuts to improve the balance of payments.

Borrowing governments in IMF programs are scrambling for low-hanging fruit at the expense of real reform. Economic theory and conventional wisdom hold that achieving macroeconomic stability is a long-term process and that sustained growth is the key. Real economic growth often goes hand in hand with budget deficits and large public debts. However, the ax frequently falls on the sectors – education, energy and infrastructure – that can help ensure sustained growth.

Part of the reason IMF programs are not translating into long-term economic prosperity is the political instability in Pakistan. No parliamentary party leader in Pakistan has so far been able to complete a constitutional term.

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

The current government also hesitated before revoking the subsidies. Once it became clear that no other IMF tranche was available without it, he massively pushed up the price of petroleum products in a narrow window. Beyond immediate misery, this paved the way for high inflation.

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

Social media in Pakistan is rightly abuzz over why the IMF is failing to pressure the government to cut military spending and cut largesse available to the elite. Why does he always support policy measures that hurt the poor and most vulnerable the most?

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

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