Addicted to the IMF

Source: http://thenews.com.pk/daily_detail.asp?id=125888

Part II

Thursday, July 24, 2008
Meekal Aziz Ahmed

There are some other ideas that I wish to comment upon briefly. One economist suggests we let inflation run rampant because it cannot be controlled. Instead we should concentrate on protecting the poor through safety nets. Who the poor are, where they are, how they are to be reached, what kind of safety nets are envisaged and at what cost is left unclear. I, for one, await the implementation of the Benazir Card with trepidation. It will help no one, become a new avenue for corruption, turn into a scandal, and be quietly dropped, having only earned her a bad name.

There are disturbing reports that the government could impose quantitative restrictions on "non-essential" imports, harking back to the closed economy of the 60's. This would be another disaster to add to the list of disasters in Pakistan. The only beneficiaries of such import controls will be bureaucrats, price gougers and smugglers.

An interesting rumour is that the authorities might convince the World Bank into lending fast-disbursing money to Pakistan and also certify that our macroeconomic picture is satisfactory. However, it is not the job of the World Bank to certify any countries macroeconomic credentials. That is the job of the IMF, which has the mandate and expertise to make such a judgement. Would going with the World Bank without the IMF's financial involvement and only a "Letter of Comfort" from them convince donors to offer assistance? It is unlikely.

It is a fact that donors, multilateral and bilateral, have required, indeed have always insisted on, a formal IMF programme as a pre-condition of their pledge of assistance. Since it is the donors who provide the bulk of the financing, with the IMF only putting up roughly 10 per cent of the needed financing, they have an interest in making sure their money is well spent. Moreover, this aid must be spent in the context of some sort of overall programme. Most importantly to donors, the programme should have the formal seal of approval of the IMF on the macroeconomic situation and their financial involvement. Getting donors to pledge resources in the context of an IMF programme is the IMF's "catalytic" role working as it was designed to do.

As far as this writer is aware, there are no known exceptions to the rule of an IMF programme preceded by or concurrent with pledges of donor assistance for balance of payments and budgetary support. This rule is unlikely to change anytime soon. Detractors of this approach will argue that turning to the IMF would be a "disaster" because of the stringent conditions and overly-tight macroeconomic policies they would insist on. In my view, we are already in the midst of a disaster, or more appropriately, many disasters.

A major reason for the seemingly drastic nature of adjustment the IMF imposes is that countries are loath to turn to it until the bitter end and the economic situation has reached dangerously precarious proportions. Pakistan is such an example. Our country has waited till the last minute when the economic situation is on the verge of imploding. One such time was evident when Pakistan turned to the IMF for a bailout following Nawaz Sharif's "yellow cab scheme" which bankrupted the country leaving it with barely $100 million of foreign exchange reserves. This level of reserves was sufficient to pay for a couple of days of imports and no debt service.

The later a country turns to the IMF, the more drastic and urgent the adjustment needs to be. Fiscal and external imbalances are greater and the situation more precarious. In these circumstances, the country needs to pull back harder. In any event, it is true that no country would want to be told that it is courting economic disaster. But, as is often said, the IMF has a propensity to take away the punch bowl just as the party is getting started.

Even the IMF, for all its hard-nosed conditionality, has not been able to get Pakistan to implement serious, lasting economic reform. These reforms are ultimately in Pakistan's own interest and for which Pakistan should take ownership. This can be done by designing its own programme and presenting it to the IMF for financing. The latter for its part should not impose its conditions on Pakistan and in fact it should be the other way round.

To be fair, some good has been done under IMF pressure. However, by and large, Pakistan's track record with the lending institutional has been an embarrassment. It is replete with repeated failure in meeting targets, especially by the FBR, and an approach to economic reforms where they are started and then rolled back. The FBR has also falsified data for which Pakistan paid a heavy fine to the IMF of millions of dollars. In this writer's view, which is based on close and personal observation over many years, adjustment and reform under the IMF in Pakistan has been largely a myth.

If this is so, one wonders what all the fuss is about. If Pakistan has not accomplished much under IMF tutelage in the last fifty years in the context of the repeated use of IMF resources, the IMF could not have had much influence on policy-making. Hence, there would appear to be no reason for the angst about an impending "disaster" if we turn to the IMF. The fact is that the IMF, for all its visibility and power, has not been an important part of our economic decision-making process.

When Pakistan has faced a financial crisis, and there have been many, we seem to want to mend our ways. However we start to falter. As soon as the economy emerges from it's low point and starts to recover, and the reserves start to build up, and confidence returns, and as soon as the IMF programme is over, we stop being responsible. Reforms are undone, some policies are reversed, and anything of substance we may have achieved is lost.

This story has been repeated throughout our economic history. When the IMF programme was completed recently, policies were loosened. If we take inflation as an indicator of how responsibly an economy is run, we have moved from an inflation rate of around three per cent per annum at the time of the IMF programme and stable, to 29 per cent per annum now and rising. While not all of this surge in inflation can be attributed to irresponsible and loose policies, a significant part can.

There are many who feel that what Pakistan really needs is a full-blown crisis, a catastrophic meltdown. It does not need another IMF-sponsored bail-out in which no serious or lasting reforms will be undertaken, leaving the country pretty much where it was before the IMF programme, except with a lot more foreign debt. There are also those who believe the IMF presents a serious "moral hazard". It allows a country to mismanage and take risks because there is an un-spoken assurance that it will be bailed out. The IMF, the champion of sound economic policies, generates perverse incentives and encourages bad policies.

Countries that have successfully reformed, Argentina, Brazil, the Asian Tigers, have done so after facing heart-wrenching crisis and faithfully implemented very tough IMF programmes. They have learnt from their mistakes. Some have implemented reforms without assistance from the IMF, Malaysia being an outstanding example. These countries have no intention of going back to the IMF. In contrast, Pakistan has become what is called a "prolonged user", with no sign of getting rid of its addiction to IMF resources.

It is unfortunate that should such a serious crisis befall Pakistan, it is our poor who will suffer the most for no fault of theirs. They have suffered stoically for six decades, putting their complete faith in successive governments. They have been betrayed each time. The famous statement of Quaid-i-Azam that every successive government in Pakistan will be worse than the one before it has turned out to be correct.

In the meantime, our self-serving elite who hold the fate of our country in their hands and who have the power to change the complexion of Pakistan overnight should they choose, will continue, as before, exploiting the country mercilessly with not a blot on their conscience.

As an economist friend of mine observed, the elite with all their assets held abroad in dollars, and all their liabilities held domestically in rupees, are in an ideal position. They are ready to bolt at the first sign of trouble with their dual nationality passports in hand and enjoy their mostly ill-gotten wealth abroad. Life couldn't be better for these elitists. Only they can sleep easy in Pakistan with their power generators humming through the night.



Concluded



(This is adapted from a paper that he wrote for the Lahore-based think-tank Spearhead Research, headed by General Jehangir Karamat)



The writer has a doctorate from Oxford University and has worked at the Planning Commission and the IMF. Email: Meekalahmed2@aol.com