The International Monetary Fund (IMF) is not an icon of economic management even among economists. There are all kinds of opinions out there: dissolve IMF; reform it; revolutionise! However, it may be argued that IMF – at times – faces a larger share of criticism than it deserves, especially from the political and intellectual circles.
Those who criticise the IMF claim that IMF forces governments to cut subsidies thus raising prices for the poor; it taxes people already in the midst of a crisis; it is a part of the Western conspiracy to privatise our strategic assets – and the list goes on.
There may be a grain of truth in all such claims. Yet a compelling explanation lies in a completely different view. IMF does not force a country to borrow. Pressure mounts on the economy when (i) our spending internationally exceeds our foreign receipts and transfers; (ii) when investments by us abroad are greater than investments by foreigners in our country. The logic is simple: to keep spending, we have to have ‘money’ in our pocket. If a country is short on foreign exchange reserves (other name for ‘emergency’ money useable in the international market) it has to borrow from the IMF, subject to some conditions that IMF sets. These policy reform targets are a modern economists’ guideline to the gap between how things are and how they should be. That is to say, they are not devoid of economic logic, quite the contrary.
Let us put things into perspective by reflecting on the last five years of people’s elected government in Pakistan. The Pakistan People’s Party (PPP) came into power in February, 2008. The state of the economy was dismal, owing in part to policy inaction during political transition, but equally due to the global financial meltdown, consequent recession and the food and oil price shocks. Thus, in fiscal year 2008 (FY2008), export growth had stagnated; the cost of imports was upwards; in an effort to stabilise rupee, the level of reserves was falling; the fiscal deficit was looming at 7.6% of GDP; inflation was hovering around 12%, and economic growth had fallen by 3.1 percentage points to 3.7%. Consequently, Pakistan had to enter into the 23-month IMF Stand-by arrangement (SBA) in 2008.
The government failed to implement the IMF-prescribed reforms, possibly due to their unpopularity. No one wanted subsidies to be cut and taxes to be raised. Unprofitable industries did not want protection from foreign competitors – in the form of tariffs – to be removed. At the same time, the government had to prove its benevolence in a timeframe of 5 years. It wanted to spend today rather than investing in a tomorrow they had little odds of seeing in office. The programme got suspended in 2011 with little success if any at all.
Meanwhile, the structural weaknesses kept deepening. Based on IMF’s projection of a fiscal deficit of 7.5% of GDP for FY2013, the average fiscal deficit during the five PPP fiscal years (FY2009-13) was 6.7%. Transition year (FY2008) excluded, this represents a 3.1% rise in fiscal deficit in PPP-years, compared to a deficit of 3.6% in the last five Musharraf years (FY2003-07).
The rising fiscal deficit was a result of popular policies. These included profligate redistributive policies; power subsidies as opposed to proper distribution, billing and recovery; compensation to crippling railways and falling planes; but also unprecedented levels of corruption, poor governance and tax evasion which cost the likes of Rs.8.5 trillion – as reported by Transparency International Pakistan.
The position of external account was not very encouraging either, primarily due to poor exports growth and relatively rapid (value-terms) imports growth. Trade deficit –which is the major component of external account- rose from 5.8% during FY2003-07 to 8.9% in FY09-11 in percentage GDP terms. If the figures for FY2012 and FY2013 are included, this average would be higher. This rise in trade deficit was a reflection of a power-starved industry on the domestic side and a struggling world economy in the international perspective.
The economy now is in a bad shape. The level of reserves is continuously falling and barely enough to cover 2 month imports at present. This along with weak financial inflows, a weak rupee, and heavy debt repayments to be made in the coming two years will force Pakistan to go the IMF again. The Fund will advise Pakistan officials to slash expenditures, phase out subsidies, liberalise trade, possibly privatise and/or restructure unprofitable public sector enterprises, and reform tax policy. Thus, a hullaballoo against the harsh policy prescriptions of the Fund will ensue!
Censuring IMF then for suggesting bitter medicine – or even a surgery – for remediating the economy would be injudicious to state the least. It is absurd to expect the tax payers in the rich countries to pay – and keep paying – for the economic mismanagement, tax evasion and corruption of our elite – not to mention our nonsensical choices of representatives in parliament. When IMF lends, an institution in which the rich countries have the major stakes, it has a right to remind us there is no free lunch!
Let us pin our hopes in the following government to take the tough steps for once, spend within means and favour only the performing sectors, setting the economy and the wellbeing of our generations on the right track.