Pakistan is going back to the IMF, the ‘global lender of last resort’, to support the deteriorating level of its balance of payments, its declining foreign exchange reserves, and its difficulty in repaying foreign debts and meeting international financial obligations. In principle, there is nothing wrong with asking an international lender for financial support. However, in the case of the IMF, this is not straightforward.
There are a number of concerns to be addressed even before formally asking for an IMF loan. This is the reason that Imran Khan was in denial about going to the IMF, both before the election and after taking power. The main question about an IMF loan is: ‘What will be the impact of IMF policies on the poor and on the social sector?’ More specifically, what will be the cost of the IMF’s condition that the poor pay to stabilise the country’s economy?
The IMF is a political institution with a controversial reputation as an international lender. This is mainly due to its rigid economic policies and its orthodox conditions for achieving economic austerity through structural adjustment programmes.
Stieglitz, the Nobel Economics laureate, in his book Globalisation and its Disconnects, originally written in 2002 and revisited in 2017 (with additional sections to discuss the misery of Trump’s election on the world), sketches a painful picture of the IMF’s conditions and their adverse effect on the poor of many countries.
The relationship between the IMF and Pakistan has a chequered history. The majority of IMF loans and agreements have been either signed or initiated during the tenure of non-democratic and interim governments. Pakistan received its first major loan from the IMF, over a billion dollars, in 1980. This was during the period of office of General Ziaul Haq, who had overthrown the civilian government in July 1977 and ruled with an iron hand until August 1988. The size of loan was higher than the sum of all the loans from the IMF made since 1958 and was received immediately after the Soviet invasion of Afghanistan in 1979. Pakistan as a society is still struggling to come out from its role in the Jihad and the subsequent consequences on the fabric of society.
The other large financial support from the IMF was received in 2002. It was during the period of General Pervez Musharraf. It is no surprise that the loan was received immediately after the tragic incidents of the 9/11 and the arrival of US and allied forces in the Afghanistan. The US, Afghanistan and Pakistan are still paying the cost of this decision. Pakistan’s relationship with the US is now at one of its lowest levels in the country’s history. Ironically, Mike Pompeo, the US Secretary of State, was quick to raise the concern of an IMF loan — rather than providing a helping hand to ease the financial hardship of the newly-elected government of Pakistan!
Despite political rhetoric, the elected governments have also received a number of IMF loans in the past. All the elected PPP governments from 1971 to the last one in 2013 received IMF loans, most of which were not completed. Similarly, the PML-N government also received IMF support during its different tenures since 1993. The last PML-N government signed a major IMF loan of over $6 billion after coming into power in 2013 and completed it in 2016. This was received with the slogan of ‘last IMF loan for the country.’ A main feature of this loan was that the IMF and the government both celebrated its completion as the successful achievement of macroeconomic stability and growth in the economy.
Despite the so-called success story of this loan, why has Pakistan gone back to the IMF within two years of its completion? Similarly, why — after so many loans and so much financial and technical support from the IMF — is Pakistan still ranked as one of the lowest countries in the world both in its human development index and in a number of other social and economic rankings?
The IMF argues strongly in favour of its programme’s positive impact on the country’s economy. It claims that its conditions and its culture have changed in the light of the criticism, particularly after the Southeast Asian economic crises in 1997. It also argues that now it takes more notice of poverty through its poverty reduction programmes and its social sector performance! If a country like Pakistan, it argues, is back to the IMF again, it is simply because it has not followed the loan conditions and has not reformed and restructured the economy. Therefore, the country needs more structural reforms and adjustments to benefit!!
Kentikelenis, Stubbs and King (2016), in the journal of the ‘Review of International Political Economy’, evaluate IMF programmes and their policies for developing countries. The paper covers nearly 30 years from 1985 to 2014 and analyses IMF policies, and the 55,000 conditions attached to its programmes for 131 countries, including Pakistan. It argues that, despite a change in the rhetoric, the overwhelming emphasis was on the narrow macroeconomic targets — not the social sector and labour policies. Despite explicitly talking about poverty reduction, the IMF did not focus on the deteriorating labour-related issues and the social protection of the poor in the borrowing countries. Pakistan is one among many countries in the analysis which have borne the heavy burden of IMF conditions.
Haroon Jamal (2003) evaluated poverty and inequality in Pakistan during the period of the structural adjustment programme from 1988 to 1999. His analysis, based on micro-level household data, found that poverty and inequality increased during this period and economic growth remained low in the country. The incidence of poverty increased from 23.5 to 29.7 per cent of the population. During the same period, income inequality, measured by the Gini coefficient (1 for perfect inequality and 0 for perfect equality) deteriorated from 0.34 to 0.38 per cent, rising even more sharply in urban areas. Moreover, the share of income for the lowest income group in the economy declined sharply — whereas it increased markedly for the highest income group.
Dr Hafeez Pasha (2018) examined the so-called success story of the last IMF programme (2013-2016). He argued that most of the celebrated indicators, reported as achievements of the programme, were more fabricated than the actual performance of the economy. According to his analysis: a) fiscal deficit, the gap between revenue and expenditure, had been much higher than that officially reported by the Federal Bureau of Statistics during the IMF programme; b) the actual growth rate in the GDP was lower than that reported; c) the unemployment rate was at its highest during the last 13 years in the economy, the rate for youth unemployment and particularly for graduates was even higher; d) exports declined considerably due to bias in the IMF policies; e) the net external debt to the economy increased by almost the same amount as the increase in the foreign exchange reserves; and finally, f) the main burden of the fiscal austerity cuts fell on the social and development sector of the economy which put an additional burden on the poor. This analysis called the IMF programme a ‘Self Servicing Programme’ — new loans are obtained to service the old one and so the cycle goes on!
The recent boost from the Saudi government of $6 billion in the form of deposits and deferred oil payments and some expected support from the UAE and China have lessened the panic of the markets and for the urgent financial requirements of the government. These have also reduced the need for a much higher loan and have improved the position of the government as a borrower.
The IMF loan will be the first major test of the political skills of Imran Khan. How will his economic team negotiate with the IMF and what conditions will his government accept in return for the loan? What will be the impact of the programme on poverty, on the unemployed and on the social sector? If the IMF’s conditions increase inequality and make life worse for the poor, then not only should the IMF be considered responsible. The present government should also be held accountable.
Published in The Express Tribune, November 8th, 2018.