The bitter IMF pill

Pakistan, as a member of the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD), commonly known as the World Bank, has repeatedly sought financial support for various purposes.

These international financial institutions have consistently provided assistance to help Pakistan overcome its financial crises, yet the country remains mired in economic difficulties. Despite ongoing efforts, Pakistan continues to struggle with financial instability and has not succeeded in resolving its economic challenges.

As a result, the IMF has increasingly imposed stricter conditions for approving financial packages aimed at addressing Pakistan’s unmet needs. While Pakistan has been hesitant to accept these stringent terms, it has ultimately had to swallow the bitter pill due to its precarious economic situation.

The history of loan packages dates back to 1958, when Pakistan first approached the IMF for a Standby Arrangement (SBA) and has continued to receive financial support in various forms up to the present day. The most recent SBA was signed on June 30, 2023, amounting to approximately $3 billion, aimed at preventing the country from defaulting on its sovereign debt, which posed a significant threat to the economy. This latest SBA came with stringent terms and conditions, which the government committed to fully implement, and these tough measures carried a high political cost for the ruling coalition in the last general elections.

However, the need for financial support did not end there. Fresh negotiations with the IMF began shortly after the completion of the June SBA. As a result, a new staff-level agreement was reached in July this year, securing a further $7 billion, once again tied to another set of stringent conditions as part of a broader reforms package.

The last Extended Fund Facility (EFF) of $7 billion, agreed upon at the staff level between the IMF and the government of Pakistan, marks the 24th financial assistance package. However, it is still awaiting approval and ratification by the IMF’s executive board. The government is working hard to meet IMF conditions by securing external financing through loan rollovers from friendly countries. These friendly nations, however, are hesitant to provide support on concessional terms and want Pakistan to first secure the IMF loan before rolling over their loans.

On the other hand, the IMF insists on loan rollovers as a prerequisite for the executive board’s approval of the EFF. This has created a "chicken-and-egg" scenario. In parallel, the government is also negotiating with international commercial banks for higher-interest commercial loans to secure the necessary financing for the IMF’s EFF facility.

Interestingly, the IMF staff managed to secure approval from their executive board for Pakistan’s budgetary proposals for the fiscal year 2024-25, which were subsequently announced by the government. The implementation of the so-called reforms package has already begun, and it is taking a heavy toll on the industrial sector, driving down production and reducing exports. There is a widespread belief that the IMF’s proposed guidelines and reforms are more focused on increasing revenues through heavy taxation rather than promoting GDP growth.

Typically, annual budgets function like a balance sheet of income and expenditure, outlining a strategy to improve the economy in the upcoming financial year through GDP growth. GDP growth naturally boosts revenues by increasing taxable earnings and expanding the tax base. However, in the current scenario, heavy taxation has been proposed to ensure higher revenues, but at the expense of growth. It appears that growth is being sacrificed for revenue generation, which is widely seen as a flawed strategy.

Now that the management and manipulation of Pakistan’s economy are largely dictated by IMF directives, it is increasingly evident that the international financial institution has become more of a bane than a boon. The IMF keeps a tight grip on every sector of the economy, ensuring that no condition is loosened or relaxed, even in areas where economic growth could be fostered.

For instance, the fuel price adjustment mechanism, which could help control inflation, is subjected to monthly adjustments per IMF directives, hindering industrial growth. The power tariff mechanism, another aspect of the reforms package, has severely hampered economic progress. This approach to pricing has stifled growth, as inflation cannot be controlled in this way, and economic expansion remains elusive, especially in the face of imported cost-push inflation.

Moreover, the floating exchange rate mechanism is causing further havoc, with market players and profiteers manipulating open market operations. This must be checked at all costs, as high interest rates and a flexible exchange rate, which lead to currency devaluation, have done little to control inflation or boost the country’s nearly stagnant exports. Instead, these measures are only exacerbating the country’s already massive loans and debt burden.

The IMF has effectively taken control of all decision-making processes in Pakistan, whether political, economic, or otherwise. A country like Pakistan, with its primarily agrarian economy, needs to regulate prices through support price mechanisms, particularly for key crops like wheat, cotton, and sugarcane.

However, the IMF is interfering even in this domain, issuing directives not to regulate these agricultural products through support price mechanisms but to allow market forces to determine prices. The unchecked influence of market forces will severely impact the poorest segments of society, exacerbating poverty. Pakistan is already grappling with rising poverty as a result of these market-driven policies, with more people being pushed below the poverty line due to open market operations.

The IMF is now questioning the subsidy of approximately Rs14 per unit, provided to electricity consumers using up to 500 units in Punjab for only two months, even though this relief is funded by cutting the province’s own development budget. The logic behind this objection is difficult to comprehend. Similar concerns are being raised about the solar subsidy policy currently under consideration in Punjab, as it seems IFIs are opposed to any relief measures for the poor unless explicitly approved by them.

The harsh reality is that Pakistan’s economy is so fragile that it cannot afford to disregard any of the IMF’s stipulations or observations.

Our complex relationship with the IMF is an intriguing subject. Every time Pakistan seeks a loan facility from the IMF, the authorities declare it will be the last time. Yet, time and again, Pakistan returns to secure a bailout package to prevent a looming sovereign default.

The risk of default is once again on the horizon, as Pakistan faces an external financing gap identified by the lender. The economic crisis is worsening by the day, with no short-term or long-term plans in place to escape the chronic debt trap the country finds itself in. While it may seem strange, this is the reality. There is no alternative but to accept the IMF’s stringent conditions for temporary relief and support, which are necessary to prevent Pakistan from defaulting on its sovereign debt.

The IMF is clearly acting as an economic hitman, with its policy framework designed for the benefit of the wealthy while completely neglecting the country's poor. BISP is merely a superficial measure, offering little to a population where half are living below the poverty line. Immediate relief for the poor is essential. This relief should be rooted in a long-term policy framework that focuses on creating employment opportunities by expanding the services sector, establishing industrial clusters and zones, and boosting productivity and exports to earn foreign exchange.

The solution is not to further tax and suppress the services sector and industry. Industries are shutting down due to the escalating cost of production, making them  uncompetitive in the international market and discouraging exports. This requires urgent attention.

The writer is a former additional secretary and can be reached at: [email protected]

Disclaimer: The viewpoints expressed in this piece are the writer's own and don't necessarily reflect Geo.tv's editorial policy.

Originally published in The News