ONE of the challenges of forming a government in Pakistan is that no sooner have you assumed office than you realise you will have to go to the IMF. This government experienced this realisation, as did the previous government, and many more before them. At first one resists. After all, it is not easy to implement the unpopular measures required by the IMF. Further, there is the perception that a country’s sovereignty is compromised by acting on the dictates of another organisation.
The resistance is not unfounded. The history of IMF programmes is associated with subsequent changes in governments after unpopular measures are implemented. And this is not just the case with developing countries. During the European debt crisis in 2010-12, several European countries, including Greece, Ireland and Portugal, were forced to go to the IMF. In most cases, the government that implemented the unpopular provisions of an IMF programme lost the subsequent election.
Is there another way for a government to do the needful to restore stability, minimise the loss of popularity and also not compromise on self-pride by calling in the IMF? There are lessons that can be learnt from the Philippines, a developing country with striking parallels to Pakistan. The Philippines, like Pakistan, relied heavily on overseas remittances. Owing to fiscal profligacy and energy sector issues it had to repeatedly go to the IMF and in 2002 it was classified, in IMF jargon, together with Pakistan and a few other countries, as a ‘Prolonged User of IMF Resources’.
In 2005, the Philippines faced a fiscal and balance-of-payments crisis similar to the ones repeatedly faced by Pakistan. Its government debt had risen to 71 per cent of GDP by end-2004, its fiscal balance had deteriorated by several percentage points of GDP over previous years, and its foreign exchange reserves had fallen to below five months of imports. At that time, I was heading the IMF office in the Philippines. We worried about the toll that a crisis would take on the economy and poverty levels. We also worried that the authorities might delay calling in the IMF during which period the problems would grow and require tougher measures to address them. At the heart of the matter was raising petrol prices and taxes to cover a gaping fiscal hole, measures that would undermine the popularity of the president.
As events unfolded, the Philippines not only avoided an IMF programme, it also generated an economic turnaround that exceeded expectations. Its strategy generated so much foreign exchange for the country that in December 2006, its president — the same president who was hesitant to take the tough measures — went on national TV on Christmas Eve to make an announcement laced with symbolism, sovereignty and national pride: as a Christmas gift to the country, she had decided that the Philippines would prepay all debts owed to the IMF in one go before year-end.
There’s a need for a group of non-partisan economists to produce a White Paper addressing structural issues.
How did the Philippines go from a country on the brink of a crisis in mid-2005 to prepaying the IMF a year and a half later? A big part of the credit goes to a process led by several of the country’s leading economists, all non-partisan and several who had in the past held senior technocratic positions in public service. This group together advocated and lobbied key stakeholders including the executive and parliament for the much-needed fiscal reforms. As part of their efforts, they also produced a White Paper on the needed measures. Many of their recommendations had significant overlap with those of the IMF, such as raising taxes on petrol and other areas. But, critically, this process and its output were home-grown. It had the ownership of leading Filipino economists. Moreover, the group’s credibility gave its recommendations the necessary traction. At the end of the day, it was more palatable for the president to get behind a home-grown fiscal strategy developed by a non-partisan group of experts than to go for an IMF programme. The Philippines has never gone back to the IMF since.
Does this experience have lessons for us? First, we need to recognise that given the current politically charged environment, any economic strategy proposed by the government would likely not be supported by the opposition. Vice versa, any such strategy prepared by the opposition will likely not resonate within government. This also explains why a charter of economy has not taken off.
Second, there is a need for a group of non-partisan economists with established credibility to organise themselves to produce a White Paper that addresses the few most important structural issues. It is critical that this group’s membership be apolitical and have credibility with the leading parties, within and outside government.
Third, this group would need a platform for consultation and advocacy. This could ideally be done through a leading university which would provide a neutral, non-partisan space, unlike many of the think tanks that are perceived to have political leanings or the backing of particular interest groups. The group should also not be associated with a trade association to avoid the perception of making self-serving recommendations. The group would need to consult with key sectors including industry, agriculture, services, civil society, and others to be appropriately informed. And it would ideally need to be chaperoned by a credible non-partisan leader to bring them all together.
Such an effort may or may not succeed, but it is worth trying. First, it would be home-grown and would avoid the IMF label even if ends up making many of the same recommendations that the IMF may have made. Second, it would be non-partisan. Therefore, its longevity may be beyond the tenure of one government. Finally, we know that the alternative of the current system does not work. If the fundamental, long-standing structural impediments in our economy are not addressed, we will likely need repeated IMF programmes to address the resulting periodic macroeconomic imbalances. A carefully planned, far-sighted and systematic effort in this direction may give us the economic success and sovereignty we deserve.
The writer is former governor of the State Bank of Pakistan.
Published in Dawn, July 17th, 2022