Neoliberalism, IMF’s exceptional financing & recidivist behaviour of programme countries—I

Traditionally, Pakistan has been infamously called a ‘one-tranche’ country, which although is correct in the context that it has left International Monetary Fund (IMF) programmes after receiving a few initial tranche disbursements, apparently so that it does not have to comply with least amount of reform conditionalities, yet whether in or outside of the IMF programmes, the country has continued to adopt neoliberal policies – and underlying austerity-based mindset – which constitute the bread and butter policy framework of IMF.

While on the face of it the above statement indicates a contradiction that what was the basis of reluctance of the country because of which it had to leave the IMF programme, when even after leaving the programme, it continued with neoliberal policies? There is no contradiction here since all governments under IMF programmes found it useful to adopt, firstly, market fundamentalism and secondly, austerity, or fiscal consolidation, or aggregate demand squeeze policies since they enabled the government to deal with macroeconomic instability, including safeguarding against debt default– although in the sense of pushing the can down the road – by not taking up reforms on the aggregate supply side like lowering transaction costs and information asymmetries since those dented the extractive institutional design of political-, and economic elites – and disturbed their rent-seeking collusion – and also allowed vested interest groups in markets that favour elitist interest like financing election campaigns, or directly allowed benefit to elites in their business and power interests to ride the profit wave under the (wrong) mantra of ‘market knows best’ because that satisfied their profit motives, although at the cost of economic resilience in terms of sub-optimally reaching productive-, and allocative efficiencies.

So, the policymakers followed the neoliberal conditionalities of IMF programmes to the extent of following its features like market fundamentalism and austerity, but any reforms on the aggregate supply were left to the maximum possible, which in any case have been far and few in IMF programmes since under the neoliberal mindset there is anyways little scope for doing any hardcore reforms on the aggregate supply side.

This is because the neoliberal worldview wrongly sees little role of aggregate supply in achieving either macroeconomic stability – like controlling inflation – or economic growth, since they once again wrongly see little role of transaction costs – which in turn means little role of institutional reforms, and hence few policy conditionalities on better involvement of government in bringing in more meaningful governance-, and incentive structures in ministries (or institutions), underlying departments/SOEs (or organizations), and markets – in determining production function – which IMF under neoliberal mindset mostly takes as exogenous to policy intervention, which is also why IMF traditionally has remained reluctant even in the narrow sense of seeing any major role of industrial policies – or, in other words, economic growth.

This is why it strongly appears that while countries like Pakistan have continued to leave multiple IMF programmes incomplete, yet IMF has not only not stopped giving that country programme after programme, it has generally not even delayed in any significant way.

This has allowed countries to adopt recidivist behaviour, whereby they continued to leave IMF programmes, or complete them with a lot of waivers on conditionalities, since it strongly appears countries in programmes follow the programmes to the extent of following neoliberal policy framework that does not dent their extractive politico-economic institutional design

– while the demos suffer greater poverty, and rising income inequality due to austerity, which resultantly also diminishes their political voice, otherwise an important determinant of how forcefully they dent this ‘design’, including putting meaningful pressure for those demands of IMF like broadening tax base – but which otherwise does not allow bringing any reasonable level of sustained economic, and political stability!

There is a contradiction in IMF policies, whereby feeling the need that countries were in such a financial bind with respect to dealing with balance of payments crisis, especially in the context of being in debt distress – although accentuated by austerity policies, but has surprisingly received little revision in IMF policy mindset – and having deep need for reforms that would take time and in the meantime filling twin deficits needed exceptional financing, that is, well beyond their allocated quotas while, on the other hand, placed heavy surcharge on them to discourage them from taking loans again and again, which remains counter-productive, given such burden only adds to their already difficult debt and balance of payments situation, and does not allow them to meaningfully avoid taking exceptional financing under its ‘exceptional access policy’ (EAP).

The inherent problem is that while IMF in allowing countries to access more than their quotas, through the EAP policy they adopted in 2002, a policy that deserves praise, but to this extent of better understanding of needs of countries as more and more financial crises have risen since the start of neoliberal era, which among other undesirable steps called for much less regulation of the financial sector, and unjustifiably high level of liberal approach taken towards global capital flows.

Hence, the adoption of neoliberal mindset in IMF programme philosophy – mainly through the behavioural assumptions it adopted in its financial programming and policies framework, but also in taking forward the same message in its policy advocacy globally, not to mention the reflection of the same in its policy conditionalities – in the first place contributed to developing countries in particular facing more brunt of greater financial liberalization, and weak regulation financial crises in particular due to their already weak development of safeguards in the financial sector both in terms of institutional capacity of financial regulator, and other financial institutions, and also in terms of the frail capacity, traditionally speaking, of placing capital controls.

So, in addition to bringing in the EAP, there has been no revision of IMF policy away from the neoliberal model, especially as weak financial sector, and loose capital controls have created all the more hurdles to build up economic resilience in the face of rising challenge from the existential threat of climate change, and associated ‘Pandemicene’ phenomena.

Sadly, recipient countries like Pakistan have also had no apparent internalization of this issue in any depth, and have neither adopted any major revision on neoliberal policies, nor have taken it up with IMF. Moreover, a general trend of bankers running the finance ministries, or former employees of Bretton Woods institutions being at the helm of such affairs, rather than more often than not economists, especially political economists, and that too from institutions other than those produce ‘Chicago boys’ who have better grasp of the needed economic philosophical change, has also significantly contributed to the above-mentioned attitude.

(To be continued)

Copyright Business Recorder, 2025