The IMF has at last come out with a report of its own admitting that political considerations of its board members do play a role in the Fund’s decision making process.
Discussing the generally held perception to this effect an IMF report (Evaluation of Prolonged Use of IMF Resources — 2002) prepared by the Fund’s Independent Evaluation Offices (IEO), however, says that eliminating political considerations altogether would not be realistic, “since the IMF as an institution should respond to its shareholders, whose views should be taken into account in difficult cases where judgment as whether or not to proceed are finely balanced. “
There is a detailed chapter on Pakistan in the report which while discussing programme design problems rooted in deeper IMF governance issues said that a large proportion of IMF staff involved in Pakistan programmes were also of the opinion that political considerations had, at times, prevailed over technical judgments, not necessarily on the details of programme design but in terms of the overall threshold required for a programme to be supported.
The report further says that while there was no hard evidence or “ smoking gun” either in internal memoranda or in the record of board discussions, that non-economic considerations played a predominant role in IMF decisions to support a request for use of Fund resources or to complete a programme review, there is no shortage of anecdotal evidence — coming from both former authorities and the IMF staff— that such considerations did matter importantly on some occasions.
Moreover, according to the report, a few significant programme ‘events’ closely followed major geopolitical developments, for instance the 1980 EFF following the Soviet invasion of Afghanistan; and the mid-1998 programme interruption following Pakistan’s nuclear tests.
The report said that succession of adverse events of 1998-99 i, e., nuclear tests, a military coup, and the unveiling of past misreporting of fiscal data to the IMF caused a dramatic reversal in shareholders’ views, after which IMF support was perceived by IMF staff and the authorities as unlikely—short of a very strong performance under an extremely ambitious programme. The report, however, does not explain as to why within seven months of the last sanction( related to military take over of October 1999) was imposed, it okayed a SBA in June 2000 and signed an agreement to the effect in November 2000. Wasn’t there a hint that it was approved in return for Pakistan’s cooperation in reducing tensions on the LoC— as a corollary to President Clinton’s visit to South Asia— and then start talking with New Delhi, a process which culminated in Agra?.
Assessing with accuracy to what extent geopolitical considerations did supersede economic ones in programme or programme-designs is virtually impossible, given the element of judgment appropriately present in any decisions, maintained the IMF report but added”the simple fact that IMF-supported programmes are widely perceived as heavily influenced by political factors—both by the authorities who sign onto them and by the economic agents whose behaviour they are meant to influence—probably weakened the efficacy of these programmes.”
In this connection, it has been suggested to the IEO by some IMF staff members that the programme design weaknesses discussed such as unrealistic macroeconomic projections, the pretence of toughness, and sop on were symptomatic of attempts to find a face-saving way to justify continued lending to Pakistan. According to the report Pakistan entered into as many as ten Standby Arrangements(SBA) with the IMF so far and successfully completed as many as six. ( Page 143 - Appendix 3).
So the claim of the present government that by completing the last one (Nov. 2000-Sept.2001) in time it had managed to lead Pakistan, for the first time ever, out of its chronic ‘one-tranche’ country status is no more than an attempt on the part of the present official economic managers to mislead the nation and give themselves credit which they have not earned.
What is more interesting is the fact that Pakistan completed three successive SBAs at a time when the country was completely down and out in the wake of its dismemberment in 1971 and was undergoing massive economic reforms including nationalization ( which was not liked by the donors). These SBAs pertained to years 1973-74, 1974-75 and 1977-78( first year of Zia’s martial law). And one was completed (1965-66) despite being burdened with a war. Compared to the year 2000-2001 when the present official economic managers are supposed to have managed to complete an SBA in time those earlier years when we completed five SBAs in time were perhaps much worse economically.
In fact Pakistan completed even one full Structural Adjustment Facility programme during 1988-92 with one year’s extension despite the fact that the political government had inherited a totally shattered economy( there was only 100 million dollars in the FER kitty) and it was also a longish period of transition from the military to civilian rule.
And if one went by some of the points made in the report under discussion the extension of one year in the SAF from 1991 to 1992 was merited because perhaps the design of the programme was flawed or the targets were too ambitious or may be the implementation capacity was not there. The completion of this SAF was an achievement of sorts when one compared it with the slippages allowed to the present government in revenue collection ( the most important aspect of the SBA) during the last arrangement.
According to the report’s stakeholder analysis of the reforms in 1990s, both Nawaz Sharif and Benazir Bhutto were for reforms but both followed a decision making process which restricted to a very few small group of advisers ( like today). “ Given this structure of decision making, a broad ownership of the reforms had certainly not yet developed. IMF-sponsored reforms were generally presented as a bitter pill that the country was forced to swallow by a powerful outsider.
Implicitly and sometimes explicitly, however, the message was that the pill would not be consumed as bitter as it looked at the time of the negotiations, given the apparently widespread assumption in the informed public that lending was politically motivated for example the reward of political alliance with the United States ( doesn’t this observation sound familiar?). The style of communication on the reforms thus does not show signs of genuine ownership by major political forces( like today).”
The President and his official economic managers have tried to create the impression over the last three years that all the arrangements entered into between Pakistan and the IMF during the 1990s failed because the politicians responsible for running the government then were more interested in looting and plundering and also because their governance was bad. But the IMF report among other things also blames flaws in the programme design for this failure.
“ Most programmes, particularly from 1993 onward were based on overly optimistic projections as regards such key elements as GDP and export growth, as well as regarding the growth of domestic savings and investment...The growth rate was overestimated on an average by one and half percentage points ( over 2 percentage points from 1993 on). Whether this gap resulted from an excess of optimism ex ante or from unforeseen exogenous shocks, the IMF generally proved reluctant to adjust the programme framework and key objectives , especially the fiscal deficit target.
Export growth projections also proved far too optimistic: instead of rising by roughly 15 per cent a year, which was the average programme projection and would have represented an acceleration from the 11 per cent growth rate observed in 1970s/80s, exports rose by barely 5 per cent annually during the 1990s. As a result, current account projections typically projected a too rapid improvement, while capital account projections were, on the whole, too conservative. The outcome was a substantial underestimation of the build-up of external debt servicing charges from the early 1990s onward. Similarly some programme targets proved unrealistically ambitious given the time frame and the implementation capacity available. This was especially the case for tax revenues.
These targets were also very ambitious compared to IMF-wide averages . In multi-year arrangements approved since 1993, the average targeted revenue increase over the three-year programme period was 2.2 percentage points of GDP in Pakistan, compared to 0.7 points for prolonged users as a whole and 1.3 points for ‘temporary’ users. Overall and primary fiscal balance targets were also more ambitious in Pakistan than in both ‘ temporary’ and prolonged users’ programmes on average. Indeed, these targets were never met over the 1988-2000 period in spite of frequent in-programme downward revisions. But the 2000-2001 programme was completed despite not meeting even the downwardly revised targets of revenue collection.
As regards structural reforms, the over-optimism was reflected in the length and diversity of the reform agenda embedded in the IMF-supported programmes from 1988 onward and from the over-ambitious timetable envisaged for reforms that take time to implement even in countries with far more administrative resources than Pakistan.( For instance , effective taxation of the agricultural sector was expected to be put in place within one year and the implementation of a broad-based GST within two years. In both cases, after ten years full effectiveness had yet to be achieved).
The number of areas of economic policy covered by explicit conditions increased from four in 1988 SBA/SAF to eleven in 1997 EFF/ESAF. The result was insufficient prioritization and an overburdening of the policy formulation and implementation capacity of the authorities— a capacity that was limited in part by technical constraints, but mostly by the lack of political will to take measures with significant short-term costs ( for instance, as concerning the removal of tax exemptions). But this is true even today.