The cost of IMF programme

Pakistan has been a prolonged user of International Monetary Fund (IMF) resources since the decade starting 1990, where a country is a prolonged user if in a period of ten years, it is in IMF programmes for seven or more years in a decade. It was during the 1980s that the IMF first started extending its role in a significant way in terms of the number of countries using IMF resources, which increased after the breakup of the Soviet Union.

Hence, one could see that during the decade of the 1980s there were no prolonged users of IMF resources from among the members of the IMF, so while countries went into IMF programmes, there were no prolonged users. During the next two decades, there were 44 countries, including Pakistan, which became prolonged users. Moreover, there were 12 countries, including Pakistan, that remained prolonged users in both the 1990s and the 2000s.

So, the argument that Pakistan, for instance, is a ‘one-tranche’ country, meaning it left IMF programmes at a very early stage, and hence, the programme is not to blame, does not hold ground for two reasons — firstly, because even if it left early, which in many cases it did, it entered a new programme so many times, and with so little time in between, so the leaving early did not matter as such.

Secondly, even when outside the IMF programme, the country was run by policymakers, who most often than not, just like the ‘Chicago boys’ of Chile, remained so much influenced and convinced of neoliberal styled policies — at the back of their education in mainstream western universities, and also on account of their experience in multilateral institutions like the IMF or the World Bank, both of which ascribe to neoliberal policies – that even when there started a serious rethink of such policies, for instance in terms of their less than optimal consequences for economies, like for instance witnessed during the East Asian financial crisis of late 1990s, and then later on, and more vociferously in the wake of Global Financial Crisis (GFC) of late 2000s, no such revisionist reflection in terms of policy prescription was seen being practiced by them, or by institutions like the IMF.

The result of following neoliberal styled economic policies, of the nature of ‘shock therapy’ for instance, where IMF programmes, and ‘Chicago boys’-styled policies demanded radical liberalization of trade and capital flows, not caring whether developing countries generally entering IMF programmes do not have much developed financial and trade sectors, and have weak regulatory capacity to meaningfully check the highly volatile nature of portfolio investment — where many developing countries went through the brunt of the decisions of this ‘virtual senate’ in terms of how hot money chasing better interest rates, entered and left economies virtually at their primarily profit motivations, with little check from liberalized environments as prescribed by IMF programmes.

The same liberalization in terms of little role of government in market regulation, or in terms of push towards greater privatization, and siting on the sides of economy, while only ‘facilitating’ private sector, and governments asked to ‘outsource’ work as much as possible under the mantra of glorifying small governments, as smart governments, all led to weakening of public sector, and a limited sector, under-capacitated to fix markets and not just react to market failures, not reach effective contracts with private sector, and not adopt counter-cyclical policies to cushion growth and its needed inclusivity.

So, since the active period of IMF programme rollout in terms of countries, research indicates that programme countries were at most growth neutral, even after a lot of growth sacrifice due to the pro-cyclical and over-riding austerity stance, could not achieve any sustained macroeconomic stabilization.

Moreover, since economic institutional determinants could not be developed on any sound footing, given the acute tilt towards weak governments, regulation, and counter-cyclical incentive structures, any macroeconomic stability reached was soon lost after the programme ended because, for instance, aggressive monetary policy tightening to rein in inflation from mostly the perspective of applying aggregate demand squeeze only gave some respite from inflation, if at all, in the very short-term, but since the inflation had a major causal channels in the shape of supply-sided institutional bottlenecks, high component of imported inflation, and cost-push channel, lack of needed subsidies, and a very liberal environment of capital flows movement, all caused resurfacing of inflation, if such a channel already did not overpower the squeeze applied by the demand-pull channel.

The same way, growth was negatively affected from the rise of twin deficits, as a consequence of rise in inflation, and with it, greater financing needs, not to mention the increasing difficult to keep debt sustainable, and facing the consequences of deficits once again of meeting higher interest repayment needs.

China and India, for instance, did not prescribe to this neoliberal mindset, and therefore, unlike Russia and Pakistan, for instance, did not go through ‘shock therapy’ calling for active price and trade/capital flows liberalization, and privatization programme, with limited governments and regulation, and in turn were able to see themselves growing at high and sustained growth rates.

Pakistan, sadly, continues to follow neoliberal economic policy agenda in or outside of the IMF programme. There seems to be widespread ‘intellectual poverty’ among policymakers, since especially after the GFC there has been a strong reaction against IMF programmes and neoliberal policies across countries.

It was all the more frustrating to see that while the main political parties, including the reign of military dictatorships/pseudo democratic rule, neoliberal policies were adhered to without reflection that in addition to not delivering economic fundamentals that allowed sustained economic growth and macroeconomic stability, poverty and income/wealth inequality were rising, and along with a lack of interest in political discourse by demos, given diminishing political voice in the wake of falling economic empowerment — both of which kept shifting towards the already rich political and economic elites, and this allowing them greater influence on public policy, to further perpetuate their extractive institutional designs — the rise of third force in the shape of Pakistan Tehreek-e-Insaf (PTI) into power also showed confidence in neoliberal IMF programme, citing the reason that it brought needed fiscal and current account discipline, including reducing inflation, attracting foreign inflows, and in putting growth on sustainable path. And most of all, the PTI government said they went to the IMF to get much needed cheap financing to bridge huge current account financing gap.

It would have been better to raise less cheap finance from private/commercial creditors, and not follow the neoliberal, pro-cyclical, and overboard austerity programme, since, even after paying growth sacrifice during the initial phase of the programme, the country could not get on inclusive and sustained growth trajectory, and found great resistance and delayed release of much-needed tranches from the IMF when the government tried to adopt counter-cyclical policies, and rightly, in the wake of the recession-causing pandemic, global commodity supply shock, and the one made worse in terms of imported inflationary consequences in the wake of war in Ukraine by Russia.

Here, while the previous government indicated that bottom-up approach was adopted and welfare programmes/loan schemes/subsidized housing was introduced, but the lack of institutional reform unlocking opportunities for people to work, do business and gain from agriculture, and adoption of pro-cyclical policy stance overall, had a far greater negative impact on inclusivity in terms of coverage and sustained emphasis on large swathes of people in low-income groups, which most probably increased during the pandemic. Even, the continuation of reliance on pro-cyclical policy stance, and lack of institutional reforms, on one side, made difficult for people to generate some level of sustained income streams from the subsidized/free loans received, and on the other, continues to put the banking sector and people under lot of stress in terms of not to default on the subsidised loans — for instance, caped mortgage rate — given interest rate is unnecessarily raised and kept at high levels from time to time to deal with inflation, when it is a cost-push phenomenon most often than not, and also in wrongly using interest rate to attract highly volatile portfolio investment.

On top of that, when it was clear that developing countries, including Pakistan, were struggling to provide needed stimulus and meet financing needs from managing their fiscal and monetary policies alone, and needed active and meaningful financing by rich, advanced countries, and multilateral institutions, the IMF was first slow to react, whereby it allocated enhanced level of SDRs after almost one-and-a-half years in August last year, but there too, it gave most of that allocation to rich, advanced countries — by following the usual practice of making allocations of country quotas with the IMF, when it was no usual time — with no such needs, and which had already injected trillions of dollars domestically; where IMF supported giving stimulus in the western countries in general, and as s double standard have been asking countries in the global south to follow austerity policies – where, according to Oxfam, in 87 percent of the programmes overall during the last two years, IMF has asked countries, including Pakistan, to follow austerity policies.

Now the new government, many times bitten by the neoliberal IMF programme, and which in the opposition a months ago had the opposite opinion, is once again accepting three billion dollars over the next twelve months or so, at the cost of taking the country down the path of pro-cyclical, austerity, and overall neoliberal policy stance. Taxes to be increased, subsidies to be reduced, especially on oil, which feeds inflation actively throughout the economy, continuing to see the little role of supply-driven, cost-push nature of inflation. The government is trying to tackle the rising inflationary challenge with a tight monetary policy that takes a lot otherwise in terms of much-needed fiscal space through higher interest payments, not to mention pro-cyclical policies will most likely stoke inflation.

Moreover, the PML (N)-led vast coalition government is making the same mistake that virtually all other before this government had made, and that is to think that remaining in the IMF programme is necessary to unlock inflows from other multilateral and bi-lateral donors, which is a clear misconception, since all the IMF member countries remain under Article-IV consultations, and reporting from time to time, and donors can know the macroeconomic situation of any member country, including Pakistan, and therefore can make up their mind with regard to committing aid/investment decisions accordingly.

Hence, it should be of immediate concern to the current government that they should go back to the IMF, highlighting to them on one side, that inflation is primarily a supply-driven, cost-push phenomenon and needs a counter-cyclical policy stance, including lowering policy rate, which will help reduce interest payments on debt, and in turn, for creating much-needed fiscal space for subsidizing oil, energy tariffs, essential food items including wheat, and palm oil, and steel.

All of these are important for maintaining the growth momentum, and for not stoking inflation and the cost of production. Alternatively adopting a pro-cyclical policy stance will most probably not only hurt the current good momentum of LSM growth, but will also likely to produce negative impact on the export sector, and in turn much-needed foreign reserves inflows, which currently stand at only 1.7 months of import coverage.

At the same time, the government should take the route of economic diplomacy with the IMF, US Federal Reserve, and other rich, advanced countries to get greater debt moratorium/relief, unlock committed climate finance – which will not only allow increase in reserves, but more importantly shifting towards renewable and much cheaper sources of energy over the medium-term — and push for passing of enhanced SDR allocation bill to the tune of $2.2 trillion in the US Congress, and also to get greater relocation of enhanced SDR allocation from rich, advanced countries to developing countries like Pakistan, through the window of IMF’s Resilience and Sustainability Trust.

If the IMF does not accept this stance, it is almost essential that Pakistan leaves the IMF programme, and seeks recourse from bilateral partners, and private/commercial lenders, along with making much increased effort with Saudi Arabia for putting greater level of oil imports from it on deferred payments, not to mention asking OPEC+ group of countries to significantly increase oil supply so that oil prices can come down meaningfully for the benefit of many developing countries, which are net importers of oil like Pakistan, and seriously struggling with regard to managing balance of payment, especially during the overall global supply shock, and large speculative activity in the commodity markets overall, which is likely to further stretch the impact of high imported inflation in terms of greater depth of impact and duration.

(The writer holds a PhD in Economics from the University of Barcelona; he previously worked at the International Monetary Fund)

He tweets@omerjaved7

Copyright Business Recorder, 2022