IMF: A case of stunted growth - Insaf Blog by Samson Simon Sharaf | Pakistan Tehreek-e-Insaf


The decision by the federal government to request a bailout from International Monetary Fund was and will continue to be debated for a long time to come. To get a drift of why the government got lured to IMF needs a roving eye and insight on how Pakistan’s economy has performed in the past fifteen years or more precisely past all IMF interventions and the years in between. 

To be fair, let us not criticise the present government for something it never did. It has a social reforms agenda, leans heavily to the left and believes in home led sustainable growth. The bitter pill it has decided to swallow has more to do with pathological diagnoses than a notion that IMF will emerge as a Messiah. Hence as negotiations proceed, many soiled, dirty and guilty hands working against the interests of the country will be exposed. These include who worked against the Interests of the State to those who did not walk the talk. Thus shall begin a new phase of accountability.

The economic environment as it prevailed in June 2018 was not the making of the PTI government. The situation defies logic and is a replay of 2007-8. There are systems embedded within the system that act as backdoor.  It has been shaped deliberately from 2004-2018 to bring Pakistan to a nadir of economic capitulation. Economic hitmen were carefully rotated as electable/experts and continue to be so. These actors running the governments got Pakistan to a point where ‘powers that be’ wanted it.  

There was no doubt that the PMLN government deliberately sunk Pakistan into a debt trap and economic recession. That IMF was certainly in collusion with Pakistan’s economic managers is proven. They were complicit and repeatedly gave a clean chit to Pakistan’s economy during the three-year $6.67 billion Extended Fund Facility ending September 2016 when the crises were shaped. The ultimate design was to weaken Pakistan’s internal stability. *This is a riddle that must be investigated to chart out Pakistan’s future with IMF?

An alarming development worth analysis is that there was fall in global oil prices from 2013 to 2017. The amount thus saved was equivalent to half of Pakistan’s external debt and many times more than the total national savings. These unexpected gains kept current account deficit below 2 % of GDP until 2015-16. Any sensible government should have used this unexpected boon to curtail Pakistan’s energy crises. Surprisingly, the balance of payments was allowed to grow under the watchful eyes of a complicit IMF. The entire mess was deliberately generated in the past fourteen months.

But why must PMLN do so? It is the ‘my way or no way’ syndrome. 

They reckon that a deteriorating economic situation will somehow expose the invisible establishment. To them, Pakistan’s economic capitulation creates a strong case of civilian superiority. So they kept IMF on board.

There is a group of foreign policy and security experts wary of political implications in highly charged geo strategic environments. Outside commentators not privy to transparency felt that the requested bailout was avoidable. With experience in Pakistan’s foreign policy, Senator Sherry Rehman was amongst the first to disapprove such a request. The PPP government in 2012, despite all the flak avoided it. 
But PMLN government since 2013 has created a firewall around its financial dealings. It is this leaked information that IMF will try to confirm, insist and embarrass Pakistan.

Some economists sift through decades of collaboration with IMF that was stop gap at best and ultimately produced negative results. They cite IMF’s Structural Adjustment Fund (SAF) and Social Action Programmes (SAF) of having curbed domestic growth and made way for import dependent consumerism. IMF in Pakistan is a case of stunted growth. 

The history and results of past IMF interventions in Pakistan did ‘but only so’ impose some fiscal discipline for ‘as long as’ the tranches kept flowing. Successive governments saw it an easy way to avoid non populist hard decisions. Once these expired or were terminated, the government got back to fiscal ill-discipline and corruption. 

In times of economic boon, it was back to the ways of squandering public wealth. Inherent disabilities like taxes and growth were never addressed willfully. There was never an effort at stimulating home led growth and expand direct taxes or close the current account deficit. Consumptive sales tax expanded consumerism and dwarfed direct taxation. For as long as this remains so, Pakistan will keep digging deeper into the consumer cycle. 

In July, Secretary of State Mike Pompeo had indicated US leverage to review the bailout package in view of the massive Chinese debt on Pakistan. He said, "Make no mistake. We will be watching what the IMF does. There's no rationale for IMF tax dollars, and associated with that American dollars that are part of the IMF funding, for those to go to bail out Chinese bondholders or China itself". A day ago US State Department Spokesperson said, "We understand that Pakistan has formally requested assistance from the IMF. As we do in all cases, we will examine closely all aspects, including Pakistan's debt position, in evaluating any loan program". The fact that the spokesperson singled out Chinese loans and import costs for the meltdown, indicate what they will look for. US being the largest donor to IMF will use its clout to have a deep dig at CPEC.  

On Thursday, IMF Chief Christine Lagarde said a bailout deal with Pakistan would require “absolute transparency” of its debts, many of which come from China’s landmark Belt-and-Road initiative. The statement issued through Wall Street Journal is loaded with meaning. 

The major challenge of working with IMF will not be the structural adjustments but rather the non-economic conditionalties that shall be whispered to Pakistan. They could not wait more. This is the opportune time for USA and its allies to exert more pressure on Pakistan.

The hard bargaining by IMF could delay the first tranche of assistance till December 2019. This long delay will generate its peculiar dynamics and complicate matters for the government. It is nigh possible that negotiations would be inconclusive, notwithstanding fiscal space Pakistan would have lost fourteen months hence.  

But Prime Minister Imran Khan’s transition from a politician to a statesman must be swift. He has assumed the onerous task of coagulating all the dirt hopefully through his version of pathology. So while Pakistan negotiates with IMF for the next year, some issues need urgent attention. 

Know thy enemy. He must develop a full understanding of how and why a debt trap was facilitated by successive governments. This will give him a ‘hands on’ lesson in strategy. 

Undeterred by the orchestrated financial crises, he must keep his sights fixed on the distant objectives of making Pakistan prosperous, self-reliant and proud. Each distraction should become the stepping stone to success. 

The spirit of ingenuity must be maintained. Realistically, it would take a maximum of two years to wade out of artificially and deliberately created financial crises. Thereafter, Pakistan would be well on way to hitting the home runs; the bull’s eye.

Two successive agriculture crops in Kareef and late summer if managed correctly could give an immediate boost to the economy during the interim period up to December 2019.  Achieving this target is possible by employing the military corps of engineers to ensure provision of water till the tails. It needs an emergency plan.

The Federal Board of Revenue has to jack up its direct taxes on incomes and properties. Sales Tax has to be incrementally substituted by Value Added Tax. This will help increasing direct taxes. Import of luxury imports has to be curtailed with more levies. Imports of equipment required for CPEC has to be substituted with bilateral arrangements. Austerity is a trend setter. 

The government must invite foreign direct investment in the socio-economic sectors like housing, infrastructure for public utilities and boosting of industrial capability and value addition. Besides boosting outputs, this investment consummated in local currency would build the forex. Board of Investment must become a ‘one window operation’.
The formula of import inputs for boosting exports has to be replaced by FDI and value addition. This means boosting local production that could begin the onerous task of import substitution. 

The central bank must closely monitor the currency markets and money changers so as to check the speculative and sentimental buying of dollars and euros. Ministers and Heads have to be tight lipped on the currency value. 
The SECP has to monitor the stock exchanges, speculations and insider trading. 

The entire energy management system needs a fresh start. It creates escalations in the supply chain, piles circular debt and fails to ensure quality. 

PSO needs reorganization. As of now, it is the single monopoly in the energy sector affecting IPPs right down to consumers. Its pricing mechanisms are opaque and distribution systems fraught with corruption. 
All IPPS have recovered investments and now making huge profits. 

Pakistan cannot be held hostage any longer. IPP agreements and tariffs must be renegotiated. It is nigh possible that the government could facilitate FDI to buy off the most expensive and exploitative IPPS and renegotiate the prices.  

IMF Package or not, the underlying compulsion is that Pakistan has to treat the situation like a T 20 Cricket without losing a wicket and bowling maidens after maiden.