Blaming the IMF is not the solution

Pakistan is facing a serious economic crisis

Pakistan’s economy has been in upheaval, and the political mayhem has added more fuel to the economic slowdown. The country’s currency stabilisation is conditional on higher interest rates, privatisation, and emphasis on reducing corruption to ensure lower spending and higher taxes. The main reason that forces a country to go to IMF for loans is a high budget deficit and a burden of external debts. This article aims to elaborate why countries around the world are going to IMF for a bailout, how the loan packages are failing, and why merely blaming IMF without economic reforms is not the solution.

In the 1990s, IMF instructed Kenya to remove the overflow of capital from state control. As a result, the economic tycoons of the country transferred foreign currency out of the country’s economy, resulting in a foreign currency shortage and leading to an economic recession in Kenya — known as the Goldenberg scandal. The privatisation policies given by the IMF have proved a blessing in disguise for private monopolies in the market. Ultimately, consumers are exploited when market demands are high and supply is low. Interventions from IMF influence exchange rates ultimately slowing down economic stability in the long-run.

Crisis and difficulties go hand to hand. Without strict economic re-adjustments and a cut in budgetary allocations, a country ultimately reaches an economic level that is unable to sustain without a bailout package. However, the IMF bailout package is a short-term remedy for the country’s economic woes with conditions following tight monetary and fiscal policies i.e. higher interest rates and lower spending.

It is a well-known global phenomenon that anytime oil and petroleum prices rise, GDP growth rates fall and inflation increases, which in turn impacts household goods, transportation, agriculture, industry, and the purchase of raw materials for manufacturing industries. The Commodity Markets Outlook for April, 2022 from the World Bank predicts that due to the rising prices of gasoline, food, and fertiliser, inflation will continue globally for the next three years. It is clear that unless some renewable resources are used, market instability for fossil fuels directly threatens energy output and food security.

At the start of 2022, the current account deficit (CAD) of Pakistan reached 5.3% of the GDP and inflation was 12.7%. Then, imports fell by $246 million cumulatively and CAD came to $13,799 million during July and April. Different factors such as the Russo-Ukraine war, political uncertainty, trade deficit, higher imports, shortage of dollars, and subsidies of 2.1 billion dollars given by the previous government have further worsened the economic crisis. The reason for the high inflation rate is that the country’s imports are higher and exports are low. External debt is increasing in Pakistan, and the exchequer is under immense pressure.

The already bailed-out developing countries fail to get the maximum benefit from the loan because there is evidence of failed implementation of IMF policies, strict economic program design, unevaluated economic reforms, and a vulnerable environment for corruption. Undemocratic government changes and frequent political tussles in the government directly impact economic policies, and as a result the bailed-out amount is not fully utilised with sincere spirit.

Simultaneously, multiple government projects were planned to increase government revenues but they failed horribly and continue to run in a deficit, like the BRT program. BRT’s final estimated cost is roughly Rs71 billion, which is higher than the initial projection of Rs41 billion. According to official sources, BRT Peshawar had a deficit of Rs1.882 billion in FY 2020-21, and a deficit of Rs2.79 billion in FY 2021-22.

The governments that request IMF bailout packages are to avert a short-term balance of payment (BoP) crisis. The revival of the economy and putting the economy on the right track needs time and monetary resources, and, in comparison, the bailout package only needs agreement on the conditions prescribed by IMF.

A running government of Pakistan goes for IMF assistance to reschedule and extent time as debt relief, so the government is likely to complete its tenure. In this case, for political parties, IMF — along with the previous government’s fiscal policies — becomes a soft target to blame. Short-term liquidity is possible with IMF assistance as compared to collecting taxes and putting restraints on imports. The difference here is that the IMF has an economic interest in providing the loan, and the politicians striving for government positions have their own political self-interests. Managing an economic crisis is the state’s responsibility, not the IMF’s.

Published in The Express Tribune, July 27^th, 2022.

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