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Pakistan and the IMF

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  • Pakistan and the IMF

    A LOT has been said and written recently about the role and relevance of the IMF in addressing or deepening Pakistan’s economic problems, particularly in the context of the decision of the government not to make a request for the revival of the old or negotiation of a new standby arrangement.
    It has been hailed as a courageous decision by some and a suicidal one by others. The reality is that it was a decision dictated by circumstances. It would have been difficult for the IMF to revive the old or agree upon a new programme without prior action by the government to meet the old conditionality. The government was unable or unwilling to take difficult policy decisions at this juncture. Accordingly, it took the pre-emptive action of disengagement. In the background and history of IMF-Pakistan relations, it was not a surprise move nor will be an irreversible decision.
    The IMF was created to provide temporary financial assistance during which period a country can take policy measures to correct the fundamental disequilibrium in its balance of payment. It was never intended to provide long-term assistance to help a country out of its underdevelopment and poverty. With the passage of time, the IMF modified its charter and stretched its mandate to cover the developmental aspects of economies by acting as a catalyst for the mobilisation of international resources and to organise debt-restructuring of heavily indebted countries through the Paris Club.
    Pakistan, on the other hand, is a developing country suffering from the deficiency of saving and investment and needing long-term concessional financing to grow out of poverty. Its problems of development could not be addressed by short-term balance of payment support from the IMF. However, with the passage of time, Pakistan accumulated a large bilateral and multilateral debt that was used unproductively, leading to a major debt-servicing problem without the buildup of debt-repayment capacity. When it got to the stage close to a debt default, the government knocked at the doors of the IMF in the 1980 and has remained locked in that position since then.
    The IMF focused on economic stabilisation as a precondition for sustained growth. While committing on paper to take stabilisation and structural reform measures, particularly those relating to public finances, no government sincerely ‘owned’ the policies that were agreed on with the IMF. Most of the time, it dodged or delayed the necessary policy action, acted half-heartedly in some areas, met some conditionally but only on paper and sought and got waivers from the IMF in the case of others. As a result, Pakistan earned the dubious distinction of being a ‘one-or-two-tranche’ country and a prolonged user of IMF resources.
    At the same time, the IMF never put its foot down to make any government address the country’s structural problems. The reason is that it is in its self-interest to continue to remain engaged and get itself paid the past debt and avoid a jolt to the international financial system by a potential debt default by a major Asian country that has accumulated a large debt mainly from international financial institutions.
    Now Pakistan does not need the IMF to identify its economic problems. Even ordinary citizens know that our budget is out of control both on the revenue and expenditure side, and that a serious effort should be made to raise more revenue and reduce wasteful expenditure. We know full well that the government should stop its relentless borrowing from the State Bank of Pakistan (SBP) and commercial banks because it is inflationary, crowds out the private sector and pushes up nominal interest rates. There is recognition that SBP autonomy is critical for financial discipline.
    Several public-sector corporations are bankrupt and must be either restructured on a sound footing or privatised. There is no disagreement that income at a given level should be taxed equally and the tax base should be expanded. Widespread corruption and pilferage inflict harm on the economy and need to be stopped. Our problem is not the lack of diagnosis but of leadership to take the necessary measures to put the economic house in order. If Pakistan has to survive as a respectable nation, it needs to take several measures on its own without the involvement of the IMF.
    First, the silent majority must awaken to get rid of the corrupt and insincere leadership and elect honest people who will put national interest above personal greed.
    Second, an honest and lean government must give top priority to good economic governance by addressing the country’s deep-rooted economic problems by taking the public into confidence about the real state of the economy.
    Third, the government should commit to living within its means and put an embargo on additional foreign borrowing on commercial terms or the printing of notes to finance wasteful government expenditure. Austerity and honesty should be the national slogan and the political leadership should demonstrate its commitment to these in public and private life. In fact, we should all replace conspicuous consumption by modest living. Fourth, the government must introduce a broad-based income tax applicable to all at the same level of income and a generalised consumption tax that must be paid by anybody who consumes rather than saves his income.
    Fifth, we should dismantle the underground economy and bring it to the surface to expand the revenue and production base.
    Sixth, we must let all economic institutions function professionally without undue government interference.
    If we do all that in our own national interest, we may not need the IMF. Even if their assistance is solicited, the IMF and international financial community will be willing to assist on our terms. On the other hand, if we cannot do these things, we should stop approaching, and later blaming, the IMF or our stars for our misdeeds, misfortune and miseries and be prepared to live in the servitude of others and gradually drift towards debt default and more economic chaos.
    The writer is a former governor of the State Bank of Pakistan.