EDITORIAL: In documents uploaded on the International Monetary Fund (IMF) website in the early hours of this Friday past titled “Article IV Consultation and Request for an Extended Fund Facility – press release; Staff report; and Statement by the Executive Director for Pakistan”, the cause of considerable angst within the general public is the following observation: “reputational risks would arise if the Fund were perceived as treating Pakistan differently from other members that ostensibly enjoy less support.
Alternatively, not proceeding with a new programme also raises reputational risks as the new authorities, or other members, may accuse the Fund of not being evenhanded especially following the successful SBA (Stand-by Arrangement).
Although near-term financial risks have declined since SBA approval, they remain very elevated and are to be mitigated through phased access, burden sharing, and adequate financing assurances.” The question is whether this angst ought to be directed at Fund prescriptions that are at present the reason behind unaffordable utility tariffs as well as high petroleum prices (petroleum levy taxed at 60 rupees per litre) or the government for failing to convince the Fund staff to tailor its standard conditions to those prevailing in the country.
Criticism of standard IMF prescriptions by internationally well regarded economists has been ongoing for decades – criticism based on the fact that there have been few, if any, success stories after completion of an IMF programme.
An article dated 16 September 2024 authored by Nobel laureate Joseph Stiglitz, Kevin P. Gallagher, Martin Guzman and Marilou Uy for Project Syndicate argues that “a group of 22 financially distressed countries, including Pakistan and Ukraine, has become the largest source of net revenue to the International Monetary Fund in recent years, with payments exceeding the Fund’s operating costs.
The institution entrusted with providing the global public good of a well-functioning international financial system is, in effect, asking countries that are hardly able to pay their own bills to pick up the tab for the rest of the world. This unseemly state of affairs is the result of the IMF’s surcharge policy, which levies additional fees on countries that exceed thresholds for the amount or length of their borrowing from the Fund.
Imposing fines on countries like war-torn Ukraine or Pakistan, a lower-middle-income country, where flooding two years ago submerged one-third of its territory, seems antithetical to the IMF’s mission: maintaining stability in the global financial system”. The article proceeds to note that the effect of these surcharges implies that the IMF’s basic rate of, under one percent, is close to 5 percent raising the total lending rate for those paying surcharges to as much as 7.8 percent.
Criticism of the IMF policies is strengthened in terms of Pakistan’s twenty-fourth programme conditions that have clearly shackled the government into a vicious cycle: (i) rise in utility tariffs to meet full cost recovery, an economically viable plan, has raised input costs to an economically unviable level leading to factory closures – a trend that has been strengthened by a very high discount rate which has all but shriveled private sector credit with a negative fallout on growth; (ii) a consequent decline in growth is having a negative impact on revenue collections, to the tune of around 300 billion rupees this year, already compromised due to failure to begin implementing the tax on retailers and income from agriculture; thereby activating the contingency taxation plan, which envisages higher indirect taxes whose incidence on the poor is greater than on the rich; (iii) the IMF focus on primary deficit instead of fiscal deficit has kept the country in the realm of ever rising debt servicing payments, from what was budgeted, a highly inflationary policy; and (iv) failing to insist on time-bound curtailment of specific allocations to the elite sectors (current expenditure) and instead putting the onus for curtailment of expenditure (lower subsidies) and revenue generation (from indirect taxes) on the general public (read non-elite).
True; that successive Pakistani administrations have consistently supported policies of elite capture, to high end industry, including exporters, as well as the farm sector, and tried to mitigate the possibility of socio-economic unrest by subsidies and post-2008, through cash disbursements directly to the beneficiaries of the Benazir Income Support Programme, yet with their cessation, as per the ongoing EFF, the associated socio-economic and political risks highlighted in the report become all the more relevant.
So the question is what prompted the Fund to refer to its reputational risks with respect to the ongoing EFF? The answer perhaps is in Western governments/multilateral institutions sustained criticism of the deals under the ongoing China Pakistan Economic Corridor projects, and repeated concerns on the Sovereign Wealth Fund as well as the Special Investment Facilitation Council.
It is discomforting to note the Fund’s observation that “the programme duration allows sufficient time for implementing policies to correct the structural imbalances underlying Pakistan’s inherently weak BoP (balance of payments) position, and build policy credibility over four budget cycles” clearly does not take account of imminent pitfalls associated with a further rise in poverty levels that are currently at an unsustainable 40 percent in Pakistan.
Copyright Business Recorder, 2024
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