Is an IMF loan actually just a debt trap as is commonly alleged? How accurate is Stiglitz in terming the IMF favoured neoliberalism policies a "straight jacket"?
The World War II changed the global economic-political order. The war saw two powerful alliances fight each other for economic dominance and political influence. It resulted in nearly all countries siding with either, with only a few staying neutral like Afghanistan. With the victory of the allied powers, the US and Soviet forces emerged as the new super powers. It also saw the establishment of the International Monetary Fund (IMF) in 1945. Set up as an organization of 189 member countries, the main objective of the IMF was to provide immediate access to finance economies devastated by the war. Over the years, however, its role has expanded to ensuring stability of the international monetary system i.e. exchange rates and international payments. It does so by keeping a track on the economy – both on a global and national level, lending to countries with balance of payments deficit and giving practical help to members.
Pakistan has approached the IMF twelve times since the late 1980’s. This is more than the number for all countries of the region combined. The stance of opponents of the IMF is centred particularly around the same premise: why do bailout packages i.e. a facility extended to prevent irrecoverable economic downfall, not transform the borrowing country’s economy as sustainable. A position where it no longer has to approach the IMF. Is an IMF loan actually just a debt trap as is commonly alleged? How accurate is Stiglitz in terming the IMF favoured neoliberalism policies a “straight jacket”?
Stiglitz’s view is substantiated by examples from Latin America including Brazil and Mexico, often termed as IMF’s failure. Mexico did successfully repay its bailout package of USD 52 Billion in 1995. However, by 1998, economic indicators were overturning yet again. The real per capita income had fallen sharply to a level last seen two decades ago, and its external debt increased by USD 560 Billion – the government bailed out commercial banks by buying all their bad loans.
Let’s consider Greece as an example. Athens has taken three bailout packages amounting USD 345 Billion. However, that has not been able to save the economy from a continuing disaster. The unemployment rate remains as high as 22 percent and the minimum wage has fallen from USD 1000 to USD 790. The IMF stresses that Athens spends less than it earns, if surplus it to be earned to repay foreign debt.
The economy did experience economic growth, with an increase in stocks, stable currency and foreign exchange reserves reaching a record high amount. However, the rebound was undone as higher oil prices and the growth boom pushed up demand for imports. Consequently, the current-account gap widened and reserves started to slide
The case has however, been different for Pakistan over successive periods. For example, Pakistan borrowed three times from the IMF in the 80’s during Ayub Khan’s regime. Each was a short-term Standby Arrangement and valued USD 3.4 Billion in total. They were utilized for revolution in the agriculture sector and power generation projects that lead to economic growth. In short, the loan amount was used as an impetus for growth.
Turkey has had a similar case. Its interaction with the IMF goes back to 1950s. Istanbul conducted 17 Standby Agreements till 2001. However, in 2001, the post-agreement structural implementation was different. Strict adjustment processes were put in place. It stirred political unrest with the ruling party been outnumbered in the national elections that saw AKP coming in to power as a one-party rule. The reforms still continued. The major changes implemented included monitoring or bans by an independent institution and the Central Bank was made independent.
These cases, even if few in number, show the potential of IMF loan if used strategically. Pakistan, after much debate has reached out to the IMF for the 13th time in Bali earlier this month for a bailout package of USD 7-8 Billion. This compares to the last figure of USD 6.6 Billion in 2013 that was disbursed over a period of three years.
However, a few important facts need to be considered: There was no significant increase in the tax base, with only one percent of the total population filing its tax returns. The money-losing state-owned companies such as Pakistan International Airlines were not restructured ambitiously. The loans were not used for structural reform as advised by the IMF. Instead, they were utilized as oil subsidy.
The economy did experience economic growth, with an increase in stocks, stable currency and foreign exchange reserves reaching a record high amount. However, the rebound was undone as higher oil prices and the growth boom pushed up demand for imports. Consequently, the current-account gap widened and reserves started to slide.
Simple math tells that if you don’t engage in austerity measures, you do not increase the national income level, a country will not be left with enough to pay off existing loan installments. Hence; the need to borrow more money.
After an intense debate over whether to seek financial assistance from friendly countries or reach out to the IMF for a bailout, the incoming government has opted for the latter. It has faced much criticism from analysts and the opposition alike.
A decision has been made. What is important now is the questions that are put forth as they reaffirm the economic road map. Will the government successfully increase the national income by widening the tax base, foreign remittances and curbing money laundering? Will it be able to bring about pro-growth structural adjustments? These are all tough questions and need well thought-out decisions. Pakistan’s ability to utilize the bailout package as a kickstarter for its economy and set in the reforms depends on the political will of the government. It has a challenge ahead but bold decisions need to be made. Will the people of Pakistan stand by its government like its friends in Turkey have with their resolve to not going back to borrowing? The people of Pakistan decide – do you want temporary comfort or a permanent change? I trust us to be wise.
Published in Daily Times, October 16th 2018.