Impossible Mission Force – to the uninitiated, IMF, can stand for that! Nevertheless, the International Monetary Fund (IMF) is a crucial cog in the global financial system. Love it or hate it, it is here to stay. Although the IMF and World Bank came about as part of the Bretton Woods accord after World War II, they have completely different mandates. The IMF oversees the stability of the world’s monetary system, while World Bank aims to reduce poverty by offering assistance to middle- and low-income countries. Thus, the IMF is directly concerned with the macro-economic indicators of a particular country such as Pakistan.
There has been a lot of debate among the policy making elite about the need to rely on the IMF. Opposition after opposition has chastised sitting governments for seeking help from the IMF, although the same opposition does exactly the same thing when in government! For Pakistan, is the IMF a necessary option? Yes. Is it evil? Maybe somewhat. Consider.
The first thing to remember is this – for countries near economic ruin, IMF is optional not mandatory. The IMF bosses have been at pains to explain that although it is in their interest to ensure macro-economic stability in countries – particularly so that the fiscal contagion doesn’t spread further – but countries are welcome to use other means of improving the health of their economies. When Hillary Clinton was Secretary of State and visiting Pakistan, she was asked by a student forum that the US asks Pakistan to do a lot in return for loans and bailouts. Her response was quite apt as she pointed out that it is not obligatory for Pakistan to take these handouts, it can decide to exercise other alternatives if possible. In the global scheme of things, other alternatives are far and few in between! So is the case with the IMF. The sitting government explored a lot of avenues before coming to the conclusion that it – like so many before – will need to reach out to the IMF. Before coming to power, and while sitting in the opposition, every future Prime Minister ridicules the government of the day for selling out to the IMF. The sad truth lies in the adage ‘beggars can’t be choosers’. No matter how much patriotic fervour is on display and no matter how many jingoistic speeches are made, the financial reality remains grim. And thus, in the absence of any other suitable funding to bridge the gap, the Extended Fund Facility (EFF) from the IMF is quite a compulsory road to take.
Like any money lender, the IMF is also interested in recovering its loans to Pakistan. While this may be an important concern, an equally important objective for the IMF is to enable Pakistan to improve and become an equal and trusted economic partner at the international stage. So much so that the vision of the IMF is to not have countries come back to the IMF after the initial EFF. That is the reason that people believing that the IMF wants to see a further collapse of the Pakistani economy are deluding themselves. Would the IMF put $6BN at stake just so that it can lose it? Nevertheless, critics of the IMF are correct that IMF loans come with conditions (read: reforms). But which loan doesn’t? Definitely some of the big five conditions in the latest agreement are tough to swallow. One, withdrawal of tax exemptions and subsidies. This is something that the IMF almost always insists as part of a reform agenda so that the true nature of the economy is revealed and currency valuation judged.
Two, an increase in the petroleum levy. This is a cash cow in all countries. In the UK, the government charges 57.95p tax per litre of fuel, which comes out to approximately 40%! Three, higher energy tariffs. In countries where line losses are extreme and circular debt is rampant and energy tariffs are not in line with the median, the IMF will normally ask these tariffs to be increased. The issue with these three conditions is that it affects the common person in the street – directly, as household bills continue to rise and indirectly, as inflation increases. Though, it has to be said that previous governments didn’t take any of these politically challenging decisions and perhaps lacked the moral courage to do so which has exacerbated the state of affairs to such poor dimensions! The last two conditions seem generally simple and straightforward – autonomy of the State Bank of Pakistan (SBP) and audit of the extra $1.4BN provided as COVID-19 relief. In almost all countries central banks operate independent to the government albeit with oversight through parliamentary committees and audit of funds is a routine affair. Thus, at least these conditions can be deemed logical, realistic and favourable.
It is a given that the IMF is not a silver bullet for all ills inflicting Pakistan. As per previous recipient countries of the EFF, the economic revival of Pakistan will not only be due to the IMF programme but also, and mostly, due to the government governing well and making tough choices! Moreover, the IMF proposes efficient liberalisation, increased transparency, better accountability and increased auditing. Consequently, making it much harder to get away with corruption, mismanagement and fraud. Cue the cacophony of political noise!
