The IMF conundrum

Courtesy:-  Malik Muhammad Ashraf

Beginning from 1958 till today almost all the governments in Pakistan have sought IMF loans under various arrangements to bolster balance of payment position and to meet other financial needs. The irony about these loans has been that the oppositions of the sitting governments have invariably used them as a whipping horse to castigate them for their wrong policies that necessitated approaches to IMF but when they had the opportunity to rule they also followed the suit. Some economists have also been critical of the conditions attached to IMF loans and term them as self-serving for the institution rather than accruing the desired benefits to the recipient country.

To understand the role of IMF loans and why Pakistan has not been able to throw the begging bowl away, it would be pertinent to cast a cursory glance at the basic objectives of the IMF and the policies of the successive regimes. The IMF was established to ensure stability of the international monetary system — the system of exchange rates and international payments — that enables countries and their citizens to transact with each other as well as promoting employment, sustainable growth and reducing poverty. To achieve these objectives, the IMF gives assistance to member states on their request. Concessional loans are granted to low-income countries as lower rates through Poverty Reduction and Growth Facility (PRFG) whereas non-concessional loans are extended with a market based interest rate through five mechanisms: the Standby Arrangement (SBA); Extended Fund Facility (EFF); Supplemental Reserve Facility (SRF); Contingent Credit Lines (CCL); and the Compensatory Financing Facility (CCF).

IMF while extending these loans does not ask for collateral like commercial banks but insists on fulfillment of certain conditionalities in the form of structural reforms in the economy, curtailment of expenditure, reduction in the subsidies and broadening the tax base with a view to enabling the recipient countries to rely more and more on their internally generated resources and be in a position to amicably pay off their loans in the process. Looking at these conditions from economic point of view, they seem a perfect recipe for any developing country aspiring to achieve self-sustained growth. No economic growth model can succeed without these measures.

Between 1958 and 1979 Pakistan received seven SBAs amounting to USD 460 million and in November 1980 received US$1.27 billion under EFF. During 1984 to 2010 Pakistan received five SBAs, three ECFs, two EFFs and one Structural Adjustment Facility from IMF. Now the question arises if the IMF desired measures are really a panacea for an ailing and developing economy. Why is it that Pakistan has not been able to achieve sustainable growth? The answer is quite simple. No government has ever shown the political will to take tough decisions and initiate the desired reforms programme. The culture of tax exemptions and an irresistible knack for prestige projects having no connection with the economic realities and the strategy of planning expenditures first and then looking for resources to defray them, has led the country to a situation where the economy is almost on the verge of collapse. As is evident the fault does not lie with the conditionalities of the IMF but with our failure to faithfully implement them and the flawed and politically motivated policies.

The present government had no choice but to approach the IMF for another EFF facility amounting to US$ 5.3 billion over the next three years. Pakistan was likely to default on its loans and badly needed this injection to save it from the ignominy of default which could have had very serious economic and political consequences for the country.  Finance Minister Ishaq Dar, explaining the reason for seeking this latest facility, said, “Pakistan has to avoid committing default on loans. That is the only reason we are going to the IMF with a homegrown programme of reforms”.

The IMF has agreed for this facility on the understanding that Pakistan would phase out tariff deferential subsidy, broaden the tax base, remove all existing statutory regulatory orders (SROs) and taking other steps that grant special rates and tax exemptions. These are more or less the same requirements as were attached to the previous loans. The only way available for the government is therefore to faithfully implement these reforms with a view to revive the economy and getting the country out of the self-imposed debt-trap.

It is satisfying to note that the government has shown the political will and resolve to take some tough decisions as dictated by ground realities and initiated measures to bring about necessary structural reforms, broadening the tax base and withdrawal of subsidies in a phased manner. Though these measures might hit some sections of the society in the short run but are absolutely essential for the health of the economy in the long run and bringing the much desired relief to the masses. As a result of the steps taken by the government the stock exchange index is on the upward curve and the multinational companies operating in Pakistan have made additional investments in the country. The GDP recorded a growth rate of 5.1% during the last quarter as compared to 2.9% during the corresponding period last year, revenue collection has gone up by 16%, exports have experienced 5% increase and remittances have shown upsurge by 9%. The government is also working on a programme to remove tax exemptions and abolition of SROs which are estimated to boost the revenues to the tune of Rs500 billion.

Austerity measures such as withdrawal of discretionary funds at the disposal of prime minister and other government functionaries and abolition of secret funds given to some ministries will also save Rs40 billion. The efforts of the government to raise money at the international level have also started producing results. A delegation of Bank Credit Suisse which visited Pakistan recently reportedly showed interest in joining a consortium which would provide balance of payment loan of US$ 225 to Pakistan. The delegation informed the minister that international capital markets had a growing interest in Pakistan and the investors were looking forward to planned issue of Euro Bonds and the initiatives for accessing international markets. The IMF has expressed satisfaction over the progress in the reform agenda.

Through persistent efforts and lobbying the government has also been able to clinch GSP Plus status which would boost our export to the extent of US$ 1-2 billion besides generating employment. These are all very encouraging portents and promise a break from the unenviable economic past and eventually riddance from IMF loans.