Back in the arms of the IMF

Once again, the international community is stepping in with a large dose of finance to bail out the country.

Pakistan is back in the arms of the International Monetary Fund (IMF), having stayed out of them for just over a couple of years. By way of a letter of intent dispatched to Washington, Islamabad has formally requested the institution to come up with another programme. We need to understand this new approach to the Fund in the historical context.

For the last several years, each new government that took office in Islamabad did so at a time of extreme economic stress. When the military forced itself onto the political stage in October 1999, it found that the economy was in serious trouble. The new government struggled to fend for itself knowing full well that having taken over by forcing an elected government out of office, it did not have many friends in the world outside to whom it could appeal for help. The terrorist attacks on the United States changed the equation. Having promised all the help Washington needed, Islamabad was showered with finance, including a new IMF programme.

In 2008, the military left the economy in a dire situation, which was even worse than the condition it had inherited eight years earlier. But there was one important difference. This time, the new government was in place because of people’s democratic choice. The elected government was certain that if it stretched its arm and held out its hand, the world would respond positively. A world pleased with the fact that politics in Pakistan had taken a turn for the better would make an effort to help the country make the economic transition as well. Islamabad’s confidence led it to create a Friends of Pakistan club, which the senior officials visited a couple of times in a couple of places. They came back with empty hands. The message given was clear. The government first needed the seal of approval for the manner it planned to pull out of the impending crisis. This only the IMF could provide. The Fund would give the needed signal only if Islamabad was prepared to act so that the country was not visited again and again by crises. It helped Pakistan that its approach to the Fund came at a time when the global economy was reeling under what came to be called the Great Recession. In a special meeting of the G20, the Fund had been provided a large amount of additional resources it could use to help the countries in economic and financial distress. Pakistan was one of them and it received a large package of support.



For a few days after the new government took office, it toyed with the idea of delaying this journey back to Washington. Even before they took over, the new policymakers were fully aware that Pakistan had entered another stretch in its economic roller coaster ride that has taken the economy up and down several times over the last 60 years. However, this time, the downswing lasted for more than six years and there was no sign that an upswing will begin anytime soon. Already, this was the longest period of low growth in history. During this long period of low growth, the GDP increased by a slightly more than three per cent a year.

A consensus has built up that to revive the economy and to take it on to higher plane of growth, policymakers will have to do things differently. Islamabad needs a new model of economic growth. It will, of necessity, have some of the attributes of the old model but will also have a number of new elements. The new line of thinking is being developed by the donor community led by the IMF.  Islamabad is set to receive $12 billion over the next three years, from 2014 to 2016 calendar years. Slightly less than one half of the amount will come from the Fund, the rest will be provided by the traditional set of donors.

The new programme will be presented to the Fund board in early September. Following the board’s discussion and its approval, the staff will proceed to have more detailed discussions with the Islamabad authorities. These conversations will lead to the filling of the details in the programme that for the moment exists in only broad outlines. The one similarity between the approach being developed at this time and those that were attempted on a number of previous occasions is to continue to rely on external finance in order to achieve stability. With the provision of $12 billion over a three-year period, Pakistan will receive four billion dollars a year. In terms of purchasing power parity, this is a bit less than two per cent of national income. Once again, the international community is stepping in with a large dose of finance to essentially bail out the country. The financial markets call this the ‘moral hazard’ approach — provision of help when an entity too important and too large to fail is standing at the edge of disaster. What do those who step forward to help receive in return? Invariably, those who assist are promised good behaviour and sound economic management. This did not happen in the past and may not happen again. If the latter is the case, Islamabad will be back bowl in hand begging once again.

Published in The Express Tribune, August 19^th, 2013.

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