Pakistan and IMF
Dr Muhammad Yaqub
Publishing Date: May 22nd 2012
The IMF has been off-and-on involved with Pakistan for more than thirty years. At present, Pakistan has no operational arrangement with the IMF. However, it owes the IMF about $8 billion: $1.8 billion is due to be paid to the IMF in 2012, $3.9 billion in 2013 and $2.1 billion in 2014. Thus, in the absence of a new arrangement, Pakistan will have to repay a total net amount of $7.8 billion to the IMF in a period of less than three years.
The foreign exchange reserves of the State Bank of Pakistan (SBP) at present amount to $11.8 billion. The country is running an annual current-account deficit of around $5 billion, to be financed largely by drawdown of reserves.
It is obvious that any time in the next two-three years the country will default in its payments to the IMF and/or other creditors, in the absence of another borrowing arrangement with the IMF or substantial net lending by other foreign sources. If there is a run on reserves in anticipation of external debt default or to meet future import requirements, the SBP will exhaust its reserves earlier than indicated above. No wonder that there is again a talk in official circles of going back to the IMF for another borrowing arrangement in the foreseeable future.
The past borrowing arrangements made by various governments with the IMF were based on a commitment by the governments to adopt certain economic policies to achieve balance of payments viability. Those policies were made by the IMF a part of its conditionality for disbursement of its loan, but those were the policies willingly accepted for implementation by successive governments.
The IMF staff presented those policy programmes to its board, assuring it that those policies will indeed work to improve the balance of payments during the programme period so that the country will be able to pay back the loan to the IMF on due dates, and, after a stabilisation of the economy, will attain a higher rate of growth with relative price stability and balance-of-payments viability.
The ground reality is that the IMF programmes only bailed out particular governments in periods of crisis, and avoided international financial turmoil emanating from potential defaults, but the underlying state of the economy has gradually gone from bad to worse in all that period.
The fundamental question is as to why the economic policy programmes worked out with the IMF have not led to an improvement in the economy and strengthening of the balance of payments, and why is it that the IMF and Pakistan have remained engaged with each other in spite of the fact that their long association and successive policy programmes have failed to produce any positive returns for the country? The answer lies not in deficiency in policy prescriptions but in motivating factors on both sides behind these programms.
The governments knocked at the doors of the IMF in critical times not to reform the economy but to borrow from the IMF, supplemented by additional lending/debt relief by other international financial institutions and bilateral sources, to meet their immediate foreign exchange requirements. There was a lack of genuine commitment by successive governments to carry out the necessary policy reforms.
The real purpose, indeed, was to dodge the bullet and mark time by relying on borrowing from the IMF. In implementing the policy package, the easier policy actions were taken on time, some of the targets and ceilings were met on paper only through statistical manipulations engineered by bureaucrats, and when it came to hard policy choices either waivers were requested or programmes abandoned. Successive political leaders were thus able to save and sustain their governments by borrowing from abroad without any genuine effort to undertake the needed difficult reforms.
The role and behaviour of the IMF was less clear and more intriguing. It appears that the IMF adopted its accommodative approach of granting waivers and agreeing on repetitive arrangements in spite of the poor track record of implementation of policies for any or all of the following reasons:
First, the IMF played in the hands of its major shareholders who used it to help sitting governments at critical times to keep them floating by using its clout in the IMF and thereby to promote their own security and other national objectives. Unlike the UN General Assembly, the IMF has a weighted voting system in which the US and its European allies have voting majority.
Second, the IMF wanted to remain engaged with the country to avoid the consequences for the international financial organisations and for world financial markets of a debt default by a major debtor country of Asia. It may be recalled that major debt of Pakistan is owned to the IMF, the World Bank group and the Asian Development Bank.
Third, the IMF staff did not do its job properly and misled its board in presenting the economic programme that met the board requirements but was based by the staff on unrealistic estimates relating to the budget, the balance of payments outlook and some other aspects of the economy.
Viewing the IMF-Pakistan relations in the historical perspective of more than thirty years, the most important conclusion that emerges is that every government approached the IMF for financial help, after the economy has been mismanaged for some time, only to avoid foreign exchange shortage, external debt default and an economic crisis. They succeeded in getting external financial assistance and avoiding a crisis, but failed to undertake important economic reforms.
Given the past record of broken promises and abandoned programmes both the government and the IMF should seriously review their track record for a more meaningful future arrangement that helps the country out of its deep-rooted problems, rather than bailing out a sitting government or avoiding turmoil in the international financial system. For the sake of Pakistan, both should change their approach.
The government does not need the IMF to diagnose Pakistan’s problems and find the solutions. Any economist of standing can formulate a correct policy package: control government expenditure, raise the tax/GDP ratio, reduce the budget deficit, dismantle the underground economy, eradicate corruption, privatise or restructure public-sector corporations, free the SBP to conduct a prudent monetary policy to encourage private sector activities and control inflation, have an export-led growth strategy financed by mobilisation of domestic savings, build strong economic institutions and ensure good governance. The SBP should be able to help the government to cast its own home-grown program in the IMF mould, ensuring consistency, viability and balance-of-payment sustainability, by using its macroeconomic framework that is very similar to that of the IMF.
A home-grown programme so developed to tackle the country’s structural problems, keeping in view the financial programming framework of the IMF, can be “sold” to the IMF to galvanise the necessary external financial assistance by a technically competent economic team. But statistical trickery and false promises should be replaced by a genuine effort to address the deep-rooted economic problems of the country.
The IMF should accept for financial assistance a genuine programme developed and owned by the government to stabilise the economy and promote a higher rate of growth with relative price stability and balance-of-payment viability, even if it is modest in its contents. It is better to support a programme that is owned by the country and implemented seriously than to impose an ambitious programme on paper that is likely to fall apart at the implementation stage.
If a government is not committed to implementing its home-grown programme with full ownership of policies, visits to the IMF headquarters and agreement on a programme paper with the IMF may be helpful once again in saving a government, but not in improving the fundamentals of the economy.
The writer is a former governor of the State Bank of Pakistan.
Courtesy: Daily The News