IMF follies in Pakistan
By Dr Muhammad Yaqub

The IMF has been actively involved with Pakistan since the 1980s - with short intervals of temporary disengagement. During this period, Pakistan availed itself of the IMF’s balance of payments assistance under the traditional standby arrangements, emergency lending and extended facilities, and at one time also got debt relief under the Paris Club.

However, most of the programme targets agreed under those arrangements were modified midstream, some of the policy measures were not taken in a timely or appropriate manner, and ultimately most arrangements were terminated prematurely. Then, with varying time intervals, new arrangements were negotiated and adopted whenever requested by the authorities.

Notwithstanding Pakistani governments’ prolonged use of IMF resources and active policy advice, the economy has gone from bad to worse – leading some critics to argue that there is a defect in the design of the IMF programmes. It is alleged that the IMF policy prescription focuses on economic stabilisation measures to the neglect of the imperatives for economic growth. Thus, the IMF is labelled as an anti-growth institution whose policy advice does not suit developing countries like Pakistan.

Moreover, the IMF is criticised for being too intrusive and dogmatic in economic policy matters – impinging on the sovereignty of the country and imposing harsh conditions that hurt the poor most. In that context, it is labelled as an anti-poor institution. It is also accused of trying to fit all countries into one size and design. Successive governments in Pakistan approached the IMF after engulfing the country in high inflation and balance of payments crisis.

A government that has lived beyond its means has to tighten its belt to control inflation and reduce balance of payments pressures as a precondition for restoration and acceleration of economic growth. Professional advice for the treatment of such an economy will be the same, whether it comes from the IMF or elsewhere.

The problem with the IMF programmes was not that their designs had a defect or that they were inflexible, but the fact that its staff based financial programming and policy advice on erroneous, and at many times cooked up, data which was followed by relaxed monitoring of the programmes. This allowed government functionaries to get away with the use of Fund resources without undertaking the necessary policy reforms on a sustained basis or meeting the programme targets in their true spirit. Had there been no IMF assistance, the governments may have been compelled to undertake difficult policy reforms. The availability of IMF resources, therefore, proved to be a hindrance to policy reform.

In economic programming, the IMF staff was mostly driven by considerations of expediency rather than professional expertise or institutional policy underpinnings. In the initial period of engagement with Pakistan, the IMF staff entered into arrangements to have an operational programme with a major Asian country and thereby to improve their own professional standing and clout. In designing these programmes, they easily accepted faulty or doctored data, particularly that relating to the fiscal area. Based on such data, they set ambitious future financial targets to make them look good to the IMF’s board of directors.

The erroneous data and ambitious future targets were bound to end up in the non-fulfilment of the agreed conditionality and non-achievement of the desired outcome but then the IMF staff stood ready to get approval from its board of waivers and modified targets to keep the programmes operational as long as possible.

In the meantime, the economy continued to sink – in clear view of the IMF. If and when a programme ultimately became nonoperational, the IMF would repeatedly scrap it and agree to work out a new programme on the same basis as before without giving due weight to the track record. Accordingly, broken programmes were replaced easily by new ones whenever needed and requested by the government without drawing any lessons from previous experience.

These practices of the IMF created a predictable pattern of behaviour, used by functionaries of Pakistan’s ministry of finance to their advantage. Some senior civil servants would boast about their ‘expertise’ in handling the IMF without undertaking the needed reforms and by superficially meeting the financial targets to the satisfaction of the Fund staff. This enabled the political leadership to continue on its reckless path of fiscal and monetary indiscipline, but proved very costly for the country.

By now an additional factor has begun to play a part in the IMF approach. The IMF is faced with its own dilemma of heavy exposure to Pakistan. It finds it in its own financial interests to enter into an arrangement with Pakistan and rollover its lending to get repaid to itself. Accordingly, and ignoring the track record, the IMF has shown an eagerness to enter into a new programme to ensure continuation of payments to itself. What happens to the economy seems to hold secondary importance to the IMF.

We all know that the IMF is accustomed to advising governments in economic difficulties and not taking advice from anyone. However, in the interest of the country, the IMF may wish to ponder over its own record in Pakistan and pay some attention to the following advice.

First, it should collect the correct fiscal data to estimate the deficit in all the hidden and open fiscal operations of the public sector. The losses in commodity operations and public sector enterprises, loan guarantees by the government, outstanding and anticipated circular debt, delayed government payments to the private sector and several other quasi-fiscal operations are all part of the budget deficit. If these were properly consolidated in defining and compiling the deficit in the public sector operations it will come close to 10 percent of the GDP. The Fund staff should accept whatever the true level of deficit is on that basis and not be scared to present it to its board even if it is alarmingly large.

Second, the future budget targets should be fixed not in terms of the absolute levels that are considered normal but the annual changes that can reasonably be effected. The proposed reduction in public sector deficit in particular should not be of a size that looks good on paper but is difficult to achieve.

Third, an accounting approach to financial programming should be replaced by an analytical approach with more emphasis on specific structural economic reforms that should be included in a new programme as ‘structural benchmarks’. For example, the focus should be on timely policy actions like direct taxation of agriculture and services, introduction of a value added tax, reform/privatisation of public sector enterprises, de facto autonomy of the State Bank of Pakistan (SBP) etc.

Fourth, loan disbursements should be tightly linked to structural benchmarks. It should be made clear to the government that no waivers would be granted by the IMF board in so far as the structural benchmarks are concerned.

Fifth, the IMF should move away from trying to change the laws and divert its attention to implementation. Experience teaches us that laws are as good as their implementation. The autonomy of the SBP is a clear example of this. In 1997, the laws were changed to give the SBP authority to ‘determine and enforce’ the limits on government borrowing from the SBP as well as the commercial banks based on monetary policy considerations. But in reality governments continued to borrow at will from the banking system disregarding the provisions of the SBP Act. In Pakistan, it is not more legislation but rigorous enforcement of the existing laws that would ensure financial discipline.

Sixth, the IMF should be willing to take the risk of default in Pakistan’s payment to it rather than engaging in de facto restructuring of its loan under a new programme without meaningful policy reform. It should be remembered that the focus of attention should be the economy of Pakistan – not the recovery of IMF loans.

The writer is a former governor of the State Bank of Pakistan.