Leading international development economists and social scientists have long maintained that the rarest of rare useful ideas has a life span of no more than 40-50 years.
Perhaps presently, this is best demonstrated by a faltering global financialisation designed to counter the first bout of international stagflation in the early 1970s.
However, conventional wisdom seems to be fast losing its relevance while facing yet another stagflation. And the International Monetary Fund’s (IMF) set of standard reforms and their timelines, in the opinion of many, need to be seriously reviewed.
Keeping in view the ongoing challenges and uncertain environment, the IMF has temporarily increased the limits of its members’ annual and cumulative access to the Fund’s resources in the General Resources Account (GRA), according to an announcement made on March 6. Thus the Fund would provide member countries — particularly emerging markets and developing economies facing increased financial pressures and vulnerabilities — access to higher financial support from GRA.
The Fund must show some elasticity to prevent the country’s economic crisis from getting out of hand
Islamabad also needs to rethink its policies. No serious effort has been made to shake off the economy’s crutches and stand on its own feet. The federal government’s external debt has shot up by 38 per cent and domestic loans by 25pc in the past 12 months. The interest payments as a ratio of revenue, the worst in the region after Sri Lanka, at 42pc, will jump up to 54pc by the end of June.
Instead of putting their own house in order, policymakers have tried to secure a more accommodative IMF programme to make them less painful and more palatable for the domestic constituency.
On the other hand, the IMF’s increasing micromanaging of the economy and its fallout are seen to be too severe by government, industry representatives and citizens alike. For example, while Pakistan is faced with the risk of default, the international lender has been reported to have ruled out foreign debt restructuring.
According to IMF resident representative in Islamabad Esther Perez Ruiz, Pakistan has also to give an assurance that its balance of payments deficit is fully financed for the remaining period of the IMF programme. There are doubts that indicated funding may not come from friendly countries, reportedly suffering from debt fatigue and owing to the country’s worsening crisis.
China seems to be helping Pakistan avoid a debt default for a while. Beijing has committed $2 billion, of which $1.2bn has been received by the central bank.
Earlier, Finance Minister Ishaq Dar told a news conference that the IMF is now helping Pakistan fill a $5bn to $7bn external financing gap for the current fiscal, as the government had completed all the prior actions required for an IMF staff level agreement. Despite experiencing hiccups, the ongoing 23rd IMF programme is likely to be the second one to be fully implemented in the coming weeks.
Historically, of the previous 22 agreements signed with IMF, only one was fully implemented, and that too, with the Fund’s liberal waivers.
Pakistan was then nicknamed a one-tranche country by some observers. Nonetheless, the agreements were terminated in a cordial manner under the prescribed procedure.
Pakistani policymakers have encountered mounting domestic pressures to undertake IMF reforms at a speedier pace and on a continuing basis to prevent the crisis from getting worse. And in the erratic execution of the ongoing programme and current difficult negotiations between the two sides, Islamabad’s ties with the Fund seem to have come under undesirable strain.
Senior finance ministry officials are reported to be annoyed by ‘maltreatment’ by the IMF, whom they accuse of ‘shifting goalposts’ during staff-level negotiations. “We are members of the IMF, not beggars or else our membership be discarded, said a disgruntled senior official.
The current account has to be managed, otherwise, the country would be ‘blackmailed,’ says Mr Dar. He notes that the country has been spending, which it could not afford. It appears that his first priority is to reduce external sector vulnerabilities.
Mr Dar also strongly supported the State Bank’s decision to issue a priority list to domestic banks for sanctioning dollars for import — the instructions that the IMF has asked the central bank to withdraw.
“Since only the formal sector borrows from banks, the policy rate hike would hurt it,” says Pakistan Business Council CEO Ehsan Malik. He argues that the higher cost of borrowing will lead to loan defaults.”Our inflation is supply-push and devaluation linked. The interest hike will not control it.”
Independent analysts, as well as government officials, have raised from time to time issues such as one size does not fit all, the IMF should desist from micromanaging the borrower’s economy, and the lender’s programme should be updated. However, with Pakistan’s continuing failure to bring about meaningful structural reforms, the IMF has responded with more strict terms and conditions.
However, to quote a US-based analyst, the IMF needs to develop more flexible strategies for borrowing countries that are most heavily dependent on the Fund. Pakistan is one of them.
The reported internal studies by IMF experts and experience gained in Fund’s bailout programmes for countries such as Greece, Iceland and Argentina highlight that countries which need deeper reforms require a more flexible policy with a longer timeline, says Mayraj Fahim, a senior fellow at the international think tank, The City Mayors Foundation.
Some of the new IMF conditions, such as linking interest rates with headline inflation rates and the imposition of permanent debt surcharge on electricity, says an opinion piece, seem quite unreasonable. It is argued that the Fund must show some elasticity on these conditions to prevent the country’s economic crisis from getting out of hand.
Published in Dawn, The Business and Finance Weekly, March 13th, 2023
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