The $7.6 billion IMF loan to Pakistan must have been welcomed with a sigh of relief by both our government and those holding our sovereign bonds. Should people welcome this. The answer is lukewarm yes. Should this be seen as a vote of confidence in the government? No, it is a resounding no.

No doubt the economy was (is) at a precarious position and without this loan Pakistan would have faced serious balance of payment problems. Without taking a position on whether the economic crisis was a result of economic policy shortcoming or as the IMF puts it, a result of “... large shocks ... including adverse security developments, higher oil and food import prices, and the global financial turmoil”, it is clear that the loan was necessary.

All of our ‘friends’ were unwilling or unable to provide assistance and with the financial markets in tatters, tapping the international capital markets was not an option.

The swiftness and the size of the IMF loan were a surprise. The IMF press release says that the size of the programme is nearly 500 per cent of Pakistan’s IMF quota. This is exceptional since IMF lending is generally limited to 300 per cent of quota other than in special circumstances. So what explains this generosity by the IMF?

The political bias in IMF’s lending decision has been an active area of research since the Asian crisis. The Meltzer Commission report, sponsored by the US Congress on IMF and the World Bank reforms, suggested that G7 governments and particularly the US use the IMF to promote their own political goals.

The current IMF loan is a necessary evil under present conditions. The question is how much of a role did our government play in getting that loan? IMF just like other international agencies is more a political organisation rather than a market driven financial institution. It is only accountable to its executive board where majority of the voting power is held by advanced economies. .

No doubt that IMF staff attempt their best to carry out due diligence on any loan. But once the programme has gone to the board, political considerations overtake economic realities. If you are in favour of the US government or the western governments in general, no sin is too big to forgive.

For supporting the US and it allies after 9/11, Pakistan was given a PRGF (poverty reduction and growth facility) loan to the maximum limit allowed under IMF rules. The question of whether or not Pakistan could manage the loan amount was not even considered.

Fast forward to 2008, suddenly the floodgates of the IMF funding have been opened for Pakistan again. But as long as we behave. A lot of fuss has been made in the press over the strict IMF conditionalities and the cutting of defence and social expenditures. But the reality is that Pakistan could agree to anything because the enforcement of these conditionalities is itself conditional.

For example, Pakistan has made a pledge that it will limit borrowing from the SBP and instead rely on bank borrowing. Suppose after the first tranche, it is suddenly discovered that the borrowing is continuing as usual. The IMF staff can write-up a harsh report recommending that future tranches be discontinued. But the decision is not theirs, the board decides and as long as Pakistan continues supporting US and its allies, nothing it does will cancel the programme.

The only role that the government has played in getting this IMF loan is to acquiesce to anti-terrorism co-operation. The economic programme itself is irrelevant since Pakistan has a checkered history of programme completion. The programme is certain to have some assurances of cost cutting, increase in tax collection, and targeted subsidies.

The loan should in no way be considered an endorsement of the government’s economic recovery plan. It is only a measure to prop up an ally in the war on terror. As soon as that is over, even the most brilliant economic plan is unlikely to get a second look.

The more important consideration is why did the government make such a big show of hesitating on an IMF loan and is now touting the approval as an endorsement of the government’s economic recovery plan? In addition to being able to pay our international lenders and supporting the rupee, the IMF programme also gives the government a carte blanche in terms of economic activity. For example, now the government is free to carry out a fire sale of assets, cut social programmes or cancel contracts handed out by the previous government, all in the name of thrift. Any decision can now be justified as being necessary to please the IMF and the international investors. Being in an IMF programme further erodes the limited checks and balances on the government behaviour.

At the same time, the reliance on IMF loans diminishes national sovereignty. We have to fall in line or lose our IMF loans. This reliance limits the development of institutions within the country which can prevent a government from driving the economy to the ground. These include an independent central bank, a transparent ministry of finance, an independent audit institution and rules which ensure that a government’s spending plans are checked by the availability of resources.

As long as we continue to make our decisions based on an ad hoc basis and deflect every attempt at rules based governance, we cannot “break the begging bowls.. Unfortunately, no government, military or political, wants to see effective rules passed and implemented, because tomorrow these rules/institutions may constrain them as well.

One may hope that the current government uses this respite to put the country back on the track of prosperity and restore the macroeconomic imbalances persisting for so long.