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Back to the Fund

AS Pakistan goes back to the IMF, it is useful to review our 60-plus years’ ties with it. With 23 loans since 1958, we are the most IMF-addicted state regionally. Of these, 20 programmes were triggered by 25-60 per cent falls in foreign reserves emerging from our structural external deficits.

But these programmes have given mixed results. Thirteen were abandoned. Our major economic indicators show a mixed trajectory before and after the start of most IMF programmes. We identified 13 distinct programme sets, as often there were multiple programmes in the same or consecutive years, and compared the level of 11 key indicators in the years before and after each programme set. For many indicators, information was missing for earlier years. So GDP growth increased after seven programme sets but reduced after six. Inflation reduced after seven but increased after five as did the trade deficit-GDP ratio.




Foreign investment’s ratio to GDP fell after six programmes and improved after four. Even foreign reserves fell after five and improved after eight. The ratio of development and education expenses to GDP fell after five sets each and improved only after one while the health-GDP ratio increased and fell after three each. The indicators largely positive most times were the fiscal deficit-GDP ratio and foreign remittances-GDP ratio which improved almost every time, but would seem to be so only marginally due to IMF programmes.

This mixed trajectory was due to not only IMF programmes but also other factors, like global recessions, sanctions, terrorism and disasters. However, this mixed trajectory over six decades raises questions about the suitability of IMF conditions and our willingness and ability to implement them. Detailed information on programme conditions is only available for five programmes after 2000. Among five areas of conditions (monetary, fiscal, exchange rate, state enterprises and others), most related to fiscal deficit which almost equal those in the four other areas put together. In fact, the major goal of state enterprise reform is also to reduce fiscal deficits. This is surprising as the main trigger of IMF programmes are current account deficits and falling reserves.

IMF programmes have given us mixed results.

The biggest chunk of fiscal conditions related to increasing indirect taxes that are regressive. While some of them did produce intermediate results, eg a new income tax law, many others such as on elimination of circular debt failed. Overall, our tax-GDP ratio remains among the lowest globally and has also fallen further since 2018 despite this huge IMF focus.

Editorial: Pakistan’s low tax-to-GDP ratio is at the heart of the country’s chronic economic, financial woes

The key monetary condition was interest rates hikes. Key economists say they choked growth without increasing foreign reserves. Currency depreciation was there in most programmes and was unavoidable due to fast falling reserves. However, it failed to increase exports and reduce imports. So the rupee has fallen 80pc-plus since 2010-11, but imports have still increased by 50pc-plus while exports over these 10 years have shown near-zero growth.

Read more: Dollar creates another high against rupee, soars to Rs173 in interbank market

State bank autonomy has also been a frequent condition, which has shown partial results. Overall, the main IMF conditions of currency depreciation, indirect tax, interest, utility and energy rate hikes and privatisation have failed to deliver sustainable growth or even fiscal or external deficit reduction over four decades. They all choke immediate growth and according to US economist Joseph Stiglitz even long-term growth.

There is little in IMF conditions focused on growth-inducing policies by increasing exports or FDI as IMF has no expertise in these areas. But then many ask why global powers have created an entity to bail out developing states in crisis which specialises only in growth-red­u­cing policies. Also, the global economy run by rich states str­ongly discourag­es growth in developing states. So, strong imports barriers in rich states discourage exports from po­­o­­rer states that could help them control their external deficits.

Tax havens encourage capital outflow from these states and make it harder for them to increase taxes due to risk of such outflows. Failure to take reforms in and outside IMF programmes by states, especially us, is a major issue too. But the presence of a fairer global economy may encourage the emergence of more reform-minded leaders in more states.

Read more: Pandora Papers show London is a key hub for tax avoidance

Thus, IMF programmes/conditions may look necessary from a narrow, short-term view as in their absence, states may face greater pain. However, from a broader, long-term view, they seem a poor basis for ensuring sustainable growth in developing states, which require structural changes in the global economic system. So, as we go back to IMF, it is likely this new programme too may avert an immediate crisis but do little to encourage long-term growth and may even reduce its prospects.

Niaz Murtaza is a political economist with a Ph.D. from UC, Berkeley.

Aqib Rauf Abbasi is a student at Quaid-i-Azam University.

[email protected]

Twitter: @NiazMurtaza2

Published in Dawn, October 19th, 2021

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