Was it an 'arrangement' or an IMF Programme in a traditional sense? The recently concluded three years IMF Programme under the Extended Fund Facility (EFF) is under scrutiny among the independent economists, within and outside Pakistan. An overwhelming consensus emerged among the critics shows that it was not an IMF Programme in its traditional sense. Rather, it was an 'arrangement' to bail Pakistan out from a difficult economic situation by the US authorities, under the garb of an IMF Programme. Why have independent economists arrived at this consensus is the subject matter of this article.
The readers would recall that the present regime inherited an extremely fragile economy in June 2013. It inherited a nervous private sector; declining investment, both domestic and foreign, low economic growth, rising unemployment, deepening poverty and growing income inequality. It also inherited a large fiscal deficit, owing to a faltering resource mobilisation effort, on the one hand and reckless spending on the other. There wasalso a consequential rise in debt burden, a looming debt payment crisis, with the country heading towards external debt default, andrapidly declining foreign exchange reserves reaching $6 billion by end-June, 2013, sufficient to finance six weeks of imports.
In fact, net reserves were negative as gross reserves included over $7.5 billion borrowed resources. In the absence of credible external flows, Pakistan would have defaulted in external debt payment obligations by November/December 2013. Default would have caused a serious economic and political destabilisation in Pakistan, which were neither in the interest of the newly elected government nor in the interest of the United States as it was engaged in the process of withdrawing/scaling down its troops in Afghanistan.The United States, therefore, wanted a relatively peaceful environment in Pakistan, both on economic and political fronts.
Had the US taken the Congress route to bail Pakistan out, it would have taken a longer time as well as there was no guarantee that the US Congress would have approved any financial package to bail Pakistan out. It is where, independent economists believe, the US had asked the IMF to bail Pakistan out. The IMF Mission was already in Pakistan (June 19-July 3, 2013) for Article IV Consultation- a routine bilateral discussion with the member countries. Since they received a nod from the US to bail Pakistan out, the IMF mission in fact extended its stay and entered into discussion with Pakistani authorities to prepare a bailout programme for three years. The Mission hurriedly put together a programme which suffered from several defects which were already highlighted by independent economists in the past. It was therefore abundantly clear to the independent economists that it was not an IMF programme in a traditional sense, rather it was an 'arrangement', put together by the US authorities to prevent economic and political destabilisation in the country. Subsequent events proved that the independent economists were right in their assertions.
Firstly, all the reviews (twelve in number) were conducted outside Pakistan (Dubai). It was strange that the IMF conducted reviews of its programme with a member country in a third country. In so doing, it shielded itself from other stakeholders of the programme (the business people, industrialists, bankers, professional economists etc). In other words, the IMF never bothered to get the alternative views of other stakeholders about the state of the economy. They relied exclusively on the briefings and the statistics provided to them bythe Finance Minister, which were mostly manipulated and were accepted wholeheartedly by the IMF staff. Since this was not an IMF programme in traditional sense, they did not bother about the authenticity of Pakistani statistics.
Secondly, in a three years programme, the IMF has extended sixteen waivers. Perhaps never in the history of the IMF did a country receive such a large number of waivers. In plain language, a student who failed in sixteen papers in the exams was promoted to the next class. The IMF, in so doing, has set a precedence for other member countries in giving such a generous waiver. The member countries currently under the IMF programme may use Pakistan as a reference country for seeking waivers. Egypt has recently entered into a $12 billion IMF programme. The Finance Minister of Egypt must happily be monitoring the generous waiver accorded to Pakistan by the IMF authorities.
Thirdly, since this was an 'arrangement' under the garb of an IMF programme, it appears that the IMF had simply asked the Pakistani authorities to just meet all the performance criteria on paper. No matter how these criteria were met, it was not the concern of the IMF. As such, it encouraged massive manipulation of statistics, be it tax revenues, expenditure, budget deficit, growth, unemployment, poverty etc. Accordingly, the Pakistani authorities in connivance with the IMF staff indulged in all kinds of accounting tricks and gimmickries and in the process have severely damaged the key economic statistics of Pakistan. Many independent economists have vociferously written on this subject but the IMF staff failed to take any cognisance of such a large-scale manipulation of statistics.
Fourthly, how serious was the IMF staff in implementing, monitoring and achieving the results of the programme? Was there any ownership of the so-called IMF programme by the IMF staff themselves? To answer these questions, I have reviewed the Staff Report (August 22, 2013) and all the press releases issued after every review (twelve in numbers). It was surprising to note that the issues discussed at the time of preparing the so-called programme were discussed in all the subsequent reviews with little or no change in language.
The issues that were discussed at the finalisation of the so-called IMF programme included: i) broadening of tax bases; ii) reforming the tax system and tax administration; iii) increasing foreign exchange reserves to enhance external buffer; iv) energy sector reforms; v) greater flexibility in exchange rate; vi) strengthening operational independence of the central bank; vii) strengthening of public debt management; viii) privatization of State Owned Enterprises; ix) improving business climate in the country x) trade liberalisation; and xi) protecting the most vulnerable. Under the programme, Pakistan was supposed to accomplish the above-mentioned objectives.
The seriousness of the IMF Staff would be judged as to how much Pakistan succeeded in achieving the above-listed goals. After the 2015 Article IV Consultation (January 12, 2016), the IMF staff writes "long standing structural impediments remain key obstacles to growth and investment; pervasive tax evasion combined with still prevalent tax exemptions and loss-making state-owned enterprises constrain the fiscal space for public investment and social spending; despite recent improvements, the energy sector still accumulates payment arrears and is unable to meet growing demand...".
After Eleventh Review (June 27, 2016), the IMF Staff writes: "effort should be made in the areas of energy sector reform, competitiveness enhancing reform, improving business climate, broadening tax bases, loss-making SOEs...". And after the 12th and final review (August 4, 2016), the IMF Staff writes: "the economic reform agenda needs to continue after the program ends. In this context, it will be important to further strengthen public finances and external buffers, broaden the tax net, improve public financial management, strengthen the monetary policy framework, address losses in PSEs, complete the energy sector reforms, and accelerate competitiveness enhancing improvements of the business climate, including trade regime".
This is nothing but an acknowledgement of the total failure of the IMF programme. This has also exposed the seriousness of the IMF Staff in implementing, monitoring and achieving the goals of the program. The readers must have noted that the issues discussed at the beginning of the programme (August 22, 2013) have also been raised at the end of the program (August 4, 2016). Nothing has, therefore changed in the last three years under the so-called IMF programme with the exception that the IMF continued to use political/diplomatic language during each review. The independent economists have now been proven correct. Such a large number of waivers along with the long distance political reviews and manipulated statistics have simply confirmed that this was an 'arrangement' to bail Pakistan out by the US authorities and was not an IMF programme in a traditional sense.
What have been the achievements of the 'arrangement' or the IMF Program? Pakistan has succeeded in increasing foreign exchange reserves and hence strengthening external buffer through extensive and expensive external borrowing. It has prevented Pakistan from defaulting on its external debt payment obligations and most likely prevented default in the next two years after the end of the program.
What were the ill-effects of the 'arrangement' or the IMF Program? Certainly, it has severely damaged the key economic statistics of Pakistan; introduced large-scale accounting tricks and gimmickries, never witnessed in the history of this country. It has further weakened the economy as critical reforms were postponed for the last eight years in a row. This 'arrangement' or the IMF programme has worsened the unemployment situation, particularly educated youth unemployment. The IMF, a great institution, has lost respect and credibility in the eyes of the people of Pakistan in general and independent economists in particular in Pakistan. Most importantly, the 'arrangement'or the IMF programme has drowned the country under debt.
(The writer is Principal & Dean at NUST School of Social Sciences & Humanities, Islamabad. Email: ahkhan@s3h.nust.edu.pk)