In the statement released by International Monetary Fund (IMF) on September 27, it indicated that it had approved a 37-month extended fund facility (EFF) programme, which unlike a very natured standby arrangement (SBA) programme by the IMF, is rather quite a long-term programme focusing on not just macroeconomic stabilization – as done under an SBA programme – but on both macroeconomic stabilization, and economic growth.
Although a good news for the economy in terms of staving off fears of default, the underlying programme policies, lack of debt restructuring emphasis during the programme may, and weak multilateral spirit globally, will continue to keep default fears beyond the programme; not to mention over-board austerity policies will not allow any significant build-up of economic resilience.
The stated goals as per the statement include ‘…(i) rebuilding policy making credibility and entrenching macroeconomic sustainability through consistent implementation of sound macro policies and a broadening of the tax base; (ii) advancing reforms to strengthen competition, and raise productivity and competitiveness; (iii) reforming SOEs and improving public service provision and energy sector viability; and (iv) building climate resilience.’
To implement the above-mentioned goals, overall, the statement points towards the need to implement ‘sound’ policies, which mainly mean firstly, continuing with fiscal consolidation, or fiscal austerity policies. This, in other words, means primary surplus.
Secondly, although the programme favours lowering policy rate in the wake of falling inflation, it still underscores the need for ‘…maintaining an appropriately tight monetary stance.’ Hence, the balance of monetary policy should continue to remain tilted towards monetary austerity. Thirdly, it basically emphasizes the role of structural reforms, which can create competitiveness, productivity, and climate resilience.
It needs to be noted here that throughout IMF programmes being followed in the country since the 1980s, and globally as well, the above recipe based on neoliberal, and austerity-based, pro-cyclical policy has been virtually a consistent basis for its programme conditionalities.
Unfortunately, this package of conditionalities has virtually led to lack of provision of sustained macroeconomic stabilization, and economic growth on one hand, and the unnecessarily high growth sacrifice – especially in a country with a high population growth rate –has not allowed enough fiscal space to have expenditure interventions of a rather routine nature, particularly in important sectors like health, education, and welfare, what to mention spending anywhere appropriately for increasing climate resilience.
Hence, instead of IMF appropriately allocating special drawing rights (SDRs) to support welfare needs generated during the Covid pandemic – and in the absence of which country’s debt distress increased significantly – and for supporting build-up of climate resilience related spending, IMF in addition, narrowed the space for the country to adopt counter-cyclical policies, and instead naively called for enhancing the tax base in a rather radical way when it should have known that years of under-investment into the social and welfare sectors have kept the demos weak in terms of their economic and educational standing, and therefore, it is very difficult to push the policymakers in parliament to pursue reforms that tax the high income classes.
A point that needs to be clarified to the finance minister, who otherwise reportedly thinks that the country under serious debt distress, its hand will be forced into doing serious reforms, is mistaken, given revenue enhancement continues to primarily coming through increasing (regressive) indirect taxes, and mostly enhancing direct taxes on the salaried, and manufacturing sectors; with poor showing of domestic resource mobilization effort by the provincial governments.
Moreover, over-board emphasis on monetary-, and fiscal austerity policies will not allow build-up of aggregate supply, given a lack of impetus coming from strong squeeze of aggregate demand from consolidation policies. Hence, instead of increasing depth of the aggregate supply sector, will likely continue to put pressure on the imports, raising difficulties in the balance of payments sector. It is therefore difficult to see a future without another IMF programme if the same policies continue to be pursued – in or outside of the IMF programme in general over a number of decades now – as have produced consequences of unsustainable economic conditions in the past.
Hence, unlike the lens worn by the finance minister, which allows him to see a situation, whereby reportedly he feels improvement in inflation numbers, and cushion of the IMF programme could allow ‘leveraging economic gains’, lack of basis of producing sustainability in economic growth or macroeconomic stabilization, especially when external shocks – commodity price shocks in particular – due to rising level of climate change, and geo-political conflict in the middle east, and following structural reform policies entrenched in market fundamentalism, and overall Neoliberalism, will likely lead to greater perpetuation of instability, and lack of build-up of economic resilience.
Copyright Business Recorder, 2024
The writer holds a PhD in Economics degree from the University of Barcelona, and has previously worked at the International Monetary Fund. His contact on ‘X’ (formerly ‘Twitter’) is @omerjaved7
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