Speaking out in defence of IMF lending

Following the approval of a $7 billion funding agreement by International Monetary Fund (IMF) Executive Board, there is a certain amount of optimism that this bailout takes care of all the fiscal challenges facing Pakistan.

Prime Minister Shehbaz Sharif’s optimism escalated to the point that he is reported to have stated that this IMF programme would be the country’s last programme.

The federal finance minister, Mohammad Aurangzeb, expressed similar optimism. Unfortunately, however, the ground realities do not support this optimism as of now. Much has to be done to come up to that level of optimism.

There is also a persistent argument that the IMF programme undermines government’s authority and that it does not work in favour of the middle and lower segments of society.

To grasp the complexity of IMF programmes and Pakistan’s lending dilemma, one has to look at a bigger picture as to what the IMF loan is all about.

The IMF programmes have worked brilliantly for many countries and its people and have been a disappointment for some countries and their people. Which country did what with the programmes makes all the difference.

To ascertain that one needs to review: (1) the countries that rightly employed the IMF programmes for the purpose that they were meant and walked out of them after having achieved the objectives; never looked back; and (2) the countries that could not make it and therefore remained perpetually hooked on the lifeline of the IMF programme.

Established in July 1944, The IMF works to stabilize and foster the economies of its member countries. Its focus is on restoring macroeconomic stability, promoting structural reforms such as fiscal discipline and encouraging economic growth.

The first challenge that the IMF confronted was the economic chaos in Europe at the end of the Second World War.

So great were Europe’s economic problems that the American government was obliged to intervene, launching the Marshall Plan—the European Recovery Program—in 1947 to help kick-start the beleaguered European economies.

By 1958, IMF helped stabilize the fiscal part of most of Europe’s economies when ten West European countries made their currencies freely convertible for global transactions.

The year 1958 thus marked an important point in the development of the modern international monetary system and significant progress was made towards liberalizing the international payments system; whereas, during the same decade, the World Bank supported infrastructure development in the war-ravaged Europe.

Working in tandem, the IMF and World Bank also supported Japan to emerge successfully from a similar crisis.

The decade of the sixties witnessed Germany and Japan as the fastest growing economies of the world followed by other European economies.

What is a behind this rapid success is the sincere deployment of the IMF programme funds for the assigned purpose and adoption of sound macroeconomic policies and reforms that targeted fiscal sustainability and monetary stability. This success marked the end of IMF engagement in Central Europe and Japan in a short period of time.

Before long, the remarkable post-war growth rates in the industrialized countries began to seem unexceptional as the newly industrializing countries—what we now called emerging markets—took off. The IMF diverted its focus to support emerging markets.

The most spectacular performance was in East Asia. Growth accelerated rapidly in South Korea, Hong Kong and Singapore, the first members of the group known as the ‘Asian tigers’. In 1960, South Korea embarked on a radical programme of economic policy reform, including opening the economy for free trade. Other countries in the region—Malaysia, Thailand, and Indonesia among them—soon followed suit. Thereafter, we have seen high rates of growth for over more than two decades in China, lifting hundreds of millions out of poverty.

Once again, what is common among these successful emerging economies is that the IMF lending was sincerely employed and macroeconomic policies and reforms that targeted fiscal sustainability and monetary stability diligently implemented.

The same is the success story of our eastern neighbor; India. In 1990, amidst severe economic and fiscal crises India opted for an IMF bailout.

In 1991, economic reforms were introduced and IMF loan was effectively employed to achieve fiscal sustainability to support its economy.

Thereafter, Indian growth accelerated significantly and this first IMF programme became the last IMF program.

Conversely, countries that struggled to benefit from IMF programmes include Zimbabwe, Argentina, Greece and couple of more countries in the emerging markets. These countries experienced continued economic decline and recurring crises despite repeated IMF involvement.

The reasons evaluated by experts are political instability, poor governance, social unrest despite significant financial assistance, lack of political consensus and commitment, failure to maintain macroeconomic stability and above all reluctance to implement compelling economic reforms.

The case study of countries that benefited from IMF programmes and those that did not vividly exhibits that the IMF programme can provide critical support to countries facing economic crisis, but its success largely depends on the commitment of the borrowing countries to implement necessary reforms, their political environment, and other economic factors.

As such, while many nations have successfully emerged from crises with IMF assistance, others have found themselves struggling with one IMF programme after another. They are the ones that did not sincerely deploy the IMF funds nor did they efficiently carry out reforms to make their government’s processes and systems efficient.

The conclusion is that the countries which successfully deployed the funds received from IMF for the right purpose have benefited from IMF programmes and the countries that squandered the funds remained dependent and subservient to IMF while their people suffered. It is not difficult to comprehend in which category Pakistan is placed. Needless to say, Pakistan is hooked on IMF lending since 1958.

Copyright Business Recorder, 2024