Approaching an ‘augmented’ IMF programme

What is likely to happen if the country goes into another International Monetary Fund (IMF, or simply the ‘Fund’) programme, which is neoliberal, and pro-cyclical in nature, as both the Fund and a prolonged user of IMF resources, Pakistan has been doing since its active engagement with the Fund since late 1980s? Before reaching towards a rather very obvious answer perhaps, a qualification is necessary, whereby while it is rightly said that the country has seldom completed an IMF programme, the fact remains that similar, neoliberal, and pro-cyclical policy stance has been the main common denominator of economic policy, even outside of an IMF programme, given the deep influence of ‘Chicago boys’-styled policymakers during the last four decades or so; a time period that coincides with the landslide tilt of both academia, and public policy in general globally towards neoliberal policies.

This thought-process has otherwise received a strong backlash after the failures of the golden age of privatization, and liberalization of the 1990s, and early 2000s, in the wake of the Global Financial Crisis (GFC) of 2007-08, and the seriously negative outcome globally of related austerity policies to the neoliberal and pro-cyclical policy mindset in terms of acute rise in income inequality and, in turn, the quality of democracy.

Moreover, these policies got further exposed when Covid pandemic hit, and over-reliance on market fundamentalism – that this neoliberal, pro-cyclical, austerity inclined policy mindset favours – over the years indicated a weakly capacitated public sector to deal with the ravages of the pandemic, especially in terms of lack of capability of the public health sector, and lagging overall ability of the governance structures to deliver due to years of outsourcing experience, while government is mainly there to facilitate the private sector, which mainly works on short-termism, and profit-motivation, and has little incentive to provide broad services and goods that are otherwise termed as public goods, and services.

Pakistan’s economy stands at a major cross-road – to once again take on a neoliberal, austerity-based, pro-cyclical programme with the IMF, and continue to manage inflation, for instance, from the channel of aggregate demand squeeze policies, and remain stuck in overall stagflationary situation, or go for a non-neoliberal, non-austerity, counter-cyclical IMF programme.

For that, to start with, Pakistan from its side will have to bring in reforms that allow enhancing the tax base significantly, and rationalizes indirect taxes downward to reduce burden in terms of both cost of living, and doing business.

Secondly, Pakistan will have to present an ambitious reform plan to stem leakages from inefficient situation of both state-owned enterprises (SOEs), and in the energy sector. The plan should not have any compromises in terms of non-commitment on increasing efficiency, and ambitious timelines, may that be in implementing SOE-related law, improvements with regard to line losses or bills’ recovery, transitioning to green, low-cost energy, and privatization where needed, and where strategically viable.

Thirdly, current expenditure rationalization plan should be shared with IMF, covering both federal and provincial levels along with a plan whereby subsidies will be shifted away from income groups, and towards lower income groups.

Moreover, a non-austerity based programme will allow expanding of fiscal space at the back of lower burden of domestic debt repayments, and less inflation due to squeezing of cost-push and imported inflationary channels.

Pakistan needs to spend for both increasing domestic production, and for increasing exports. It needs development spending to bring much-needed resilience with regard to climate change, ‘Pandemicene’ phenomenon, and public health sector in particular. It needs reform in economic institutions, underlying organizations in both public and private sector domain, in markets, and in public service to enhance productivity so that what is being spent brings both productive and allocative efficiency. It should come up with such reforms and share it with IMF.

Moreover, Pakistan needs to tell IMF that more than 40 percent of its population is below the poverty line, and situation of both poverty and inequality has significantly worsened since the pandemic, especially due to very high level of inflation, falling real wages and employment levels, for long double-digit policy rate, and a catastrophic flooding in 2022.

It has also worsened because the country is among the top-ten most vulnerable countries in terms of climate change, not to mention lack of fiscal space has not allowed provision of any significant level of stimulus spending both during, and in the aftermath of the pandemic.

Also, the country is under severe debt distress, with gross financing needs in excess of $20 billion for this and the following few years, a time period which also coincides with need to tackle otherwise fast unfolding climate change to avoid breaking the global warming threshold of 1.5°C.

Hence, IMF needs to understand that a usual neoliberal, austerity-based, procyclical IMF programme should not make sense. Both Pakistan and the IMF need an ambitious plan, a plan that allows both spending, and increasing productivity.

While Pakistan should show needed resolve on the lines indicated above, IMF should be facilitated by its major donor countries like US, by increasing the pool of resources, for giving a nod to greater special drawing rights (SDRs) related issuance, especially for highly climate change vulnerable countries like Pakistan; a country, which has less than one percent carbon footprint, and therefore in addition to climate change-related greater SDR support, should also receive significant climate compensation under both ‘loss and damage’ fund, and as debt relief.

It should assist Pakistan, which should think on more drastic lines, and together the country should achieve reasonable terms with regard to debt rescheduling/reprofiling, especially given the country has relatively less burden of private lending.

Remaining in an austerity-based IMF programme, as has been the case is not only supported by the research department of IMF itself, which identifies the need for counter-cyclical policies, and greater growth for successfully lowering debt burden.

Moreover, to this should be added the need to increase revenues, unclogging domestic supply for curtailing cost-push channel of inflation, and enhancing exports, all of which require high and more inclusive, sustained, and green economic growth.

It therefore, makes most sense, that the likely new IMF programme, which is expected to be an extended fund facility (EFF) programme – that allows for focus on both macroeconomic stabilization, and economic growth concerns – to have an ‘augmented’ IMF programme with all the supporting circumstances, and possibly more, to reach a non-neoliberal, non-austerity, counter-cyclical IMF programme.

Copyright Business Recorder, 2024