OPINION: Growth model and IMF conditionalities – IV

In the ‘IMF [International Monetary Fund] Country Report No. 25/332’ it could be seen that for reaching the ‘binding’ primary surplus target the health and education related was missed – not to mention in succession over many previous quarters – even when the provincial deficit target was missed, which means that given education and health are primarily provincial matters after the 18th Constitutional Amendment, spending perhaps went mainly towards making non-development expenditures, and not towards these two important sectors, and/or the revenue effort continued to remain weak.

In addition, another contributor to primary surplus came in the shape of government missing its tax refund arrears target, that is, it withheld arrears target, hurting, in turn, business prospects, which already face high levels of cost of doing business.

Very strict emphasis of IMF programme on meeting the fiscal consolidation target – which in the author’s opinion is both in general, and in the specific case of Pakistan, is a fiscal austerity target, given the underlying high pace, and substantial depth of adjustment required in the ongoing extended fund facility (EFF) programme – has continued to be quite a norm in IMF programmes.

OPINION: Growth model and IMF conditionalities — III

The book ‘A thousand cuts: social protection in the age of austerity’ (quoted in earlier parts as well) taking the case in point of West African countries during the time period of 2010-2017 pointed out with regard to the oft-missing of ‘health and other related targets’ as was seen in Pakistan of repeated slippages of health and education related target, during the current EFF programme for instance, as ‘…Table 4.7 shows these targets are frequently unmet in our sample of countries. Of the 313 social spending floors for which we could identify implementation data, only 155 were implemented, about 49.5 percent.’

Moreover, with regard to the lopsided emphasis of programme conditionalities relating to fiscal consolidation, hurting, in turn, health spending, the same book pointed out, ‘As Table 4.8 shows, budget balance conditions were consistently adhered to and often were far exceeded, while at the same time social spending floors remained unmet.’

In fact, the same book indicated that authors ran important regression analyses for the time period 1995 to 2017 for 195 countries, including Pakistan. For instance, one regression analysis pointed out: ‘There is a modest negative association between average annual government health spending as a share of GDP and total number of conditions. They correlate at -0.32.

OPINION: Growth model and IMF conditionalities — II

The association is stronger for the natural log of health spending per capita, correlating at -0.49. Overall, the two figures suggest that the more conditions a country has, the less it spends on health.’ This then takes one back to what was pointed out from the analysis of the same book (pointed out in earlier parts of the article series) that Pakistan had the highest number of conditionalities among all programme countries during 1980-2019 at 1,303, and the wide extent of likely negative impact this would have generated for health spending!

Hence, while fiscal consolidation targets were quite regularly met in, for example, West Africa during 2010-2017, social spending, which includes health spending for instance, were missed quite often. This was quite strongly the result of IMF’s emphasis on countries meeting fiscal consolidation-related targets, which more often than not appeared in programme as binding constraints.

Citing examples of apparent complacency of IMF to properly emphasize the importance of meeting of health-related spending for instance – similar to the situation apparently in Pakistan, where it is seldom that non-performance of Pakistan with regard to missing ‘Cumulative floor on general government budgetary health and education spending (billions of Pakistani rupees)’ is made a big issue, where, for instance, the country has missed repeatedly such targets in the ongoing EFF programme, but such conditionality remained as ‘nonbinding’.

Growth model and IMF conditionalities — I

The same book raised a similar concern with regard to IMF’s apparent sub-optimal emphasis on social spending related targets in comparison to much more emphasis placed on programme countries meeting fiscal consolidation related targets, as ‘…Cabo Verdean authorities indicated that meeting IMF-mandated fiscal targets would interrupt recruitment of new doctors… The country later reported to the WHO a 48 percent decrease in the number of physicians between 2004 and 2006… Another example is Mali, which was exposed to IMF programmes from 1995 to 2010.

In 2005, when government expenditure on health reached 3.0 percent of GDP, IMF staff encouraged authorities to reduce spending due to concerns that due to concerns that “financing substantial increases of education and health sector wages with HIPC [Heavily Indebted Poor Countries] Initiative resources might eventually prove unsustainable”… Similarly, authorities in Benin – a country that met only 13 of its 51 [almost one-fourth of the total] social spending floors – cut poverty reduction spending (including health) in 2005 to “ensure achievement of the main fiscal objectives”… Such patterns were also observed in Guinea and Sierra Leone just prior to the Ebola outbreak.’

Hence, it is strange, to say the least, that both authorities – including apparently the majority of public intellectuals, and media – in Pakistan, and the IMF over the years have virtually turned a blind eye to such findings with regard to IMF programme’s wrong lopsided over-emphasis on meeting fiscal consolidation, or fiscal austerity targets, and under-emphasis on social spending targets, not to mention IMF also running into a moral hazard problem of repeat offender member countries in terms of missing social spending targets by IMF approving repeated new loan issuances.

One significant reason why authorities could perhaps continue to make slippages on social spending targets is a reinforcing impact of lack of social spending in keeping political voice on a diminishing trajectory. Needless to say, demos are not putting enough pressure on the authorities to make needed course correction. For IMF to continue to do this underlines the apparent lack of reflection on the misgivings of following an over-board austerity agenda in this case in the shape of missing social spending targets in programme countries more as a norm than being an exception.

This moral hazard problem, in turn, highlights an adverse selection issue in IMF’s programme approval process, whereby it apparently continues to provide member countries with loans that would often miss social spending targets in previous programmes.

Not only does it continue to provide countries with multiple programmes in the wake of presence of such non-performance with regard to meeting social spending targets, the IMF even does not change programme design to bring such conditions for those countries at least under ‘binding’ quantitative performance criteria (QPC) – although this change should take place for all programme countries, given the importance of social spending targets, especially health and education holding essential-natured consequences in terms of basic human rights, political voice, and economic growth, both in terms of pace and distribution.

Highlighting this issue, the same book pointed out: ‘According to some academic observers, the non-implementation of social spending floors is linked to a lack of capacity or interest in borrowing countries… Extending this line of argument, even if governments choose not to meet these conditions, the IMF will continue to provide financial support as long as the programme’s fiscal and financial targets are achieved.

Indeed, social spending floors almost always feature as nonbinding conditions, so their non-implementation does not necessarily affect access to IMF credit. While such an account is plausible, it neglects potential contradictions in the IMF’s policy advice. For example, the IMF mandates overly restrictive macroeconomic targets that may limit funds available for social spending. It also overlooks conflicting statements from countries signifying a desire to increase spending…’

Such an austerity agenda could very well be by design by politico-economic elites in power in both the developed countries – that hold majority voice in multilateral institutions like IMF – and in developing countries to maintain the ‘capital order’ as pointed out by renowned economist Clara E. Mattei in her famed (2022) book ‘The capital order: how economists invented austerity and paved the way to fascism’, where she pointed out in this regard: ‘While austerity policies may not be identified by name, they underscore the most common tropes of contemporary politics: budget cuts (especially in welfare expenditures such as public education, health care, housing, and unemployment benefits), regressive taxation, deflation, privatization, wage repression, and employment deregulation. Taken together, this suite of policies [the ‘capital order’] entrenches existing wealth and the primacy of the private sector…’

On one hand, neoliberal IMF programmes reduced spending on health due to fiscal consolidation conditionality and, on the other, diminished the role of government in reducing transaction costs through leaving economic exchange significantly on profit motive, rather than active role of institutions providing ‘rules of the game’ through governance and incentive structures that allow reaching both productive- and allocative efficiencies, while also meaningfully protecting the demos against vested interests along with significantly providing welfare.

So, basically, neoliberal IMF programmes reduce public development expenditure while the impact of spending also gets diluted due to sub-optimal role of institutions, which are ministries providing laws, rules, regulations, and procedures to provide meaningful governance- and incentive structures. Moreover, sub-optimal presence of an appropriate level of social spending and a lack of efficiency of economic institutions, in addition to underlying below par performing organisations and markets, negatively impact growth and its distribution.

(To be continued…)

Copyright Business Recorder, 2025