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Another goodbye to the IMF

That we have come out of the reliance on the IMF is just a political slogan; argue some of the leading economists of Pakistan

Another goodbye to the IMF

The incumbent government has a cause to celebrate. The International Monetary Fund (IMF) has cleared payment to Pakistan of a final $102m tranche in a $6.4 billion three-year programme.

The government claims Pakistan is now able to stand on its feet in economic terms. While addressing his party lawmakers soon after the announcement by the organisation, Prime Minister Nawaz Sharif has reportedly said that it is time to “say goodbye to the IMF.”

The government takes credit that, after the IMF and Pakistan concluded their twelfth and final review in Dubai early this month, the former was satisfied at the progress made by Pakistan in its economy.

The IMF says in a statement that Pakistan’s growth is expected to reach 5 per cent in Fiscal Year 2016/17, “supported by buoyant construction activity, strengthened private sector credit growth, and an investment upturn related to the China Pakistan Economic Corridor (CPEC).”

The organisation believes, “Pakistan’s economy has made significant progress toward strengthening macroeconomic and financial stability and resilience” and that would give way to “more sustainable, and inclusive growth.”

The IMF has not painted an all a rosy picture. It has also pointed out declining exports and delays in power distribution company reform as a matter of concern. Besides, it has indicated that there is little development on the privatisation of public sector enterprises, a key part of the IMF programme.

While Finance Minister Ishaq Dar believes “successful completion of the last review is indicative of the government’s strong commitment in implementing difficult structural reforms in the areas of taxation, energy, financial sectors and public sector enterprises,” many of the country’s leading economists are not impressed.

“The IMF programme, as it does everywhere, curtails spending and acts as a deterrent to growth. This is what has happened to Pakistan over the last three years,” says S. Akbar Zaidi.

“Since the elite refuses to tax itself, it complains that it has no revenue or resources to spend on what it calls development, mainly beautifying rich cities. Since it has so few resources, it borrows. This is the easy option. Go to the IMF and avoid far-reaching tax reforms,” says S. Akbar Zaidi.

“There was little choice in going to the IMF in 2013, given Pakistan’s class system where the elite refuses to pay taxes and all governments give the elite huge benefits and concessions in the form of SROs and other tax loopholes,” he explains.

Akbar Zaidi points to the source of the problem when he says that “since the elite refuses to tax itself, it complains that it has no revenue or resources to spend on what it calls development, mainly beautifying rich cities and spending in developed areas for the elite.”

What happens as a result? “Since it has so few resources, because it refuses to tax its own, it borrows. This is the easy option. Go to the IMF and avoid substantive and far-reaching tax reforms. The IMF has helped the incumbent government stabilise the economy, but it has sacrificed development and growth in the bargain,” he elaborates.

Zaidi also hints at the political dynamics. What happens after the government doesn’t have the cover of the IMF funds and it is going into elections? “Over the next two years, without the straight jacket of the IMF, and with a clear focus on the 2018 elections, this government is going to spend excessively as part of the political business cycle. I am quite sure that we will see lots of so-called projects being initiated and monies being spent so that the PML-N can buy its way to another electoral victory.”

He see Pakistan going back to the IMF once this illusionary period is over, “Because of the over-spend, the fiscal deficit will deteriorate, and after the 2018 elections, we will be back with the IMF asking for yet another bailout and more stringent conditionality to curtail spending and growth.”

Dr Akmal Hussain, senior economist, seconds Akbar Zaidi when he says that “The claim that Pakistan has been freed from dependence on the IMF balance of payments support is questionable if we analyse the trends in the key elements of Balance of Payments.”

Hussain enumerates why: “First, the trade deficit has been widening over the last four years. Exports declined by 6.9 per cent in July 2016, compared to July 2015, while imports increased by 6.2 per cent over the same period, thereby increasing the Balance of Trade deficit by 18 per cent in this one year monthly comparison alone.”

The situation has been deteriorating over the last few years, “In the preceding four years, the increasing trade deficit has been largely compensated by continued large remittances on the capital account. However, this year, even the capital account has deteriorated due to a 20 per cent decline in remittances,” he informs.

Dr Akmal Hussain arrives at the same conclusion as did Akbar Zaidi, “Consequently, the overall balance of payments can be expected to deteriorate significantly. If the present trend of sharply rising foreign borrowings and liabilities continues and the trade deficit together with the remittances continue to deteriorate, it is likely that after the election in 2018, the new government will once again have to fall into the IMF lap.”

Hussain delves a little into history, “This has been the historical pattern since the 1960s: Ayub Khan’s regime started with buoyant balance of payments in the early 60s, but when it left, there was a balance of payments crisis. Similarly, the General Ziaul Haq’s government in the early 1980s was plush with foreign exchange, but the next government of Prime Minister Benazir Bhutto Shaheed inherited a balance of payments crisis.”

The Musharraf regime was no different under the then prime minister Shaukat Aziz, “During the Musharraf government, prime minister Shaukat Aziz claimed to have broken the IMF begging bowl but at the end of its tenure in 2007 Pakistan faced another balance of payments crisis,” he says.

Hussain shows the way out, “Instead of getting euphoric over temporary increases in State Bank reserves, it is necessary to address the underlying structural factors that push Pakistan into recurrent balance of payments crises and repeated reliance on the IMF rescue packages.”

Dr Hafeez A Pasha, renowned economist, is equally disappointed with how the government is handling the economy vis a vis the IMF, “Our outstanding external debt stands at 71 billion dollars and look at the figures of our declining remittances. Our coming generations will be paying this debt. How can we say that we have got rid of the IMF?” he asks, adding, “We have claimed 19 times that we will not go back to the IMF since 1988 to date. This is what it is.”

Ather Naqvi

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