All International Monetary Fund (IMF) programmes come with very high social costs of elevated poverty and unemployment. The moral of the Fund’s structural reforms implemented around the world is the same: you need political capital to see the IMF programme through.

It is hard to find IMF’s success stories. If the benchmark for ‘success’ is to step out of the spiral of debt-bailout-debt then one such example is of India. India approached the IMF seven times during the 1980s and ’90s.

However, after the last package in 1993, it stepped out of the cycle and averaged a GDP growth rate of 6.61 per cent. The IMF projects its growth rate will be 7.5pc in 2020.

What does India have that Pakistan does not?

“India is a success story because it has political continuity,” said veteran economist Dr Hafeez Pasha. “In the 1990s, P.V. Narasimha Rao and Manmohan Singh were able to implement their reform agenda while Nawaz Sharif got caught up in a political quagmire.”

‘Reforms that the IMF suggested should be taken by Pakistan’s political elite without the IMF’s conditionality,’ says S. Akbar Zaidi

The IMF styles itself a saviour of sorts, mandated to protect countries in severe financial troubles, unable to pay international bills. Its role is of crisis resolution with a key objective of reforms that provide crisis prevention in the future. But the question remains, have countries in need of the Fund’s support benefitted from it?

Currently, the Fund has 36 lending arrangements of which the largest borrowers are Argentina ($57 billion), Ukraine ($17bn) and Egypt ($12bn). At $6bn, Pakistan’s bailout is considerably smaller but comes with a very heavy price tag.

“This is the worst IMF programme that Pakistan has ever signed. All IMF programmes are bad, but this is the worst,” says political economist S. Akbar Zaidi.

Mr Zaidi is not alone in condemning the IMF programmes. Since 1958, Pakistan has reluctantly approached the IMF 22 times. But Pakistan is hardly the only country to be caught in a debt cycle that requires bailouts.

Washington Consensus

The IMF’s funding did not always come with numerous strings attached. Since the 1990s, after the Latin American crisis, the IMF implemented “the Washington Consensus” that demands structural reforms in exchange for immediate financial help.

In a one-size-fits-all formula, these include lower government borrowing to discourage high fiscal deficits, cuts in subsidies, free-floating currency exchange rates, free-trade policies, and privatisation of public assets.

Nobel laureate and former World Bank chief economist Joseph Stiglitz criticised the Fund’s policy of structural reform. He said “it didn’t make sense to apply it blindly” to countries with different challenges and backgrounds.

IMF doom and gloom

Take Argentina as an example. It has approached the IMF 21 times since its membership. In between various programmes, the country has been widely praised by the IMF for its achievements in stabilisation, economic growth, and market-oriented reforms under programmes supported by the Fund.

Last year, it entered into an IMF programme again with a package of $57bn, the largest in the lender’s history. The loan tranches come with stringent conditions, including a commitment to a zero trade deficit for 2019. This comes at a time when the peso lost more than 50pc of its value against the dollar in 2018.

While Argentina has made huge strides in bringing down its twin deficits, it has done so amid a deepening recession. Inflation remains at an elevated rate of nearly 55pc though interest rates are heightened to 62.5pc.

The poverty level has skyrocketed to more than 30pc of the population, resulting in protests and strikes across the country, which are threatening the current political leadership.

Need for political capital

“The first few years of an IMF programme are geared towards stabilisation. During that time every single economic indicator collapses at a great social cost,” said Mr Zaidi.

For countries like India and Malaysia, the cost is too high to pay and they rather implement structural reforms themselves than be tied down to the Fund’s conditions.

Harvard economist Benjamin Friedman once said, “We cannot reliably know whether the consequences of the IMF’s policies were worse than whatever the alternative would have been.”

However, the question right now is not what will happen if the reforms are implemented, says Dr Pasha. Rather, the question is whether we can implement them politically.

On one hand, if we don’t implement the programme, the default risk approaches — and we are perilously close to defaulting; hence, the harsh set of reforms. On the other hand, the government has a fragile minority without the governance capacity to implement.

“Reforms that the IMF suggested should be taken by Pakistan’s political elite without the IMF’s conditionality,” said Mr Zaidi. “This way, the government can set its own pace and make arrangements to protect Pakistan’s vulnerable population, which the harsh stark naked programme of the IMF does not allow the government to do.”

Having made the case against the IMF, one wonders if there is an alternative. Prime Minister Imran Khan tried to find one, running from pillar to post to avoid the strings attached. He was unable to find an alternative just like governments before his.

Whether he has the political capital to be able to see the programme through and implement vastly unpopular changes that need to be made, regardless of the IMF conditionality, remains to be seen.

Published in Dawn, The Business and Finance Weekly, May 20th, 2019