Pakistan should come out of the International Monetary Fund (IMF) programme, pursue active economic diplomacy, and usher in deep non-neoliberal institutional, organizational, and market reforms, for which the PM should establish an ‘economic war council’, and within it prioritize, among other things, price rationalization by setting up a ‘price commission’ (this writer’s previous articles in this newspaper provide details on both ‘economic war council’ and ‘price commission’ in terms of its need, scope, and formulation).
The reason why Pakistan should immediately leave the current IMF programme is that the IMF pursues pro-cyclical policies, which are counter-productive to efforts aimed at bringing macroeconomic stability on any sustained basis.
Hence, there is an urgent need to exit, given the international commodity-shock induced stimulus needs, and the overall growth-curtailing pandemic situation since IMF’s procyclical demands –a reduction in the overall level of subsidies while a raise in taxes, especially at a time when the economy is suffering from low growth under the pandemic, and high imported inflation, on one hand, and on the other raise policy rate to check inflation when clearly inflation is currently mainly a supply-side phenomenon, and primarily being fed by commodity-shocks-induced imported inflation channel overwhelmingly –are totally wrong.
Given the longevity of the pandemic, it is quite unfortunate that not only is the IMF failing to understand the limiting role of macroeconomic policies and work with Pakistan and other countries to bring in greater external financial assistance, it is also asking for greater austerity, which is shocking. IMF should understand the limiting role of macroeconomic policy instruments available with countries, including Pakistan.
The treasuries of rich, advanced countries should also come around to this need of greater financial support by developing countries if they really care about a lurking international debt crisis and a further increase in absolute poverty situation, not to mention the challenge the current situation poses to the popularity of political governments in developing countries. The situation is identical but more intense than the economic and political pressures, including inflationary spirals, faced by a number of countries after the global financial crisis.
To take a more long-term view of the impact of the economic consequences of IMF programmes, one may look at the following excerpt from the writer’s (2016) Springer-published book ‘The economic impact of International Monetary Fund programmes: institutional quality, macroeconomic stabilization and economic growth’, whereby: ‘Yet, the response of IMF to deal with the supply-side related criticism has remained below satisfaction. Although according to Schadler et al. (1993) internal observations of IMF considered this response to be positive, academics/researchers like Killick (1995) criticized IMF’s underlying basis for reaching such a conclusion. In fact, an independent evaluation of ESAF [Enhanced Structural Adjustment Facility] by IMF was more critical than the earlier positive internal evaluations, but according to Botchwey et al. (1998) IMF only reluctantly and partially accepted the findings of the independent evaluators. The consequence of all this has been that overall during the last three decades or so, Fund programmes have not allowed recipient countries to achieve sustained macroeconomic stability (Evrensel 2002; Easterly 2005), and have at most been neutral for economic growth (Haque and Khan 1998; Bird 2001; Barro and Lee 2005; Bird2007; Arpac et al. 2008).’
Renowned economist Jayati Ghosh in her recent article ‘The real rot at the IMF’ highlighted in this regard the following: ‘...the real problems with the Bretton Woods institutions: the disproportionate power of the US, the IMF’s deeply procyclical approach, and G7 economies’ unwillingness to enable multilateral bodies to address global problems.’ The result of these procyclical, neoliberal demands by IMF, if implemented, could lead to lesser growth, greater unemployment, lesser exports, more devaluation, and with it further rise in already high level of debt, and on the political side may lead to grave consequences for political governments in the short-term, and over the longer-horizon, may even significantly weaken democracy.
Prime minister Imran Khan must learn from the economic history of Neoliberalism and IMF programmes. They have worked hand in hand, and the countries that have graduated from IMF programmes to sustained macroeconomic stability and growth have been far and few. Moreover, readily available IMF resources has worked as a moral hazard – allowing countries to keep postponing hard reforms.
The PM should also realize that being in an IMF programme is not a necessary condition for sending a positive signal to other development partners and foreign investors about the macroeconomic conditions of the country because, in this age of data availability and extensive reporting by media, economic indicators remain readily available and it is not difficult to get a good understanding of macroeconomic situation.
Secondly, not being in an IMF programme does not mean an end to IMF’s surveillance role because it regularly conducts Article-IV consultation and reporting after every few years of every member state. This is quite an exhaustive report, containing sectoral analysis of important sectors of the economy and covering one or more in most reports. Moreover, the PM tries to emulate China, but then China did not take the neoliberal path; it avoided the neoliberal ‘shock therapy’ by adopting a more gradual market and economic reform under a more capable, benevolent government involvement.
The PM has a great deal of respect for the Scandinavian countries for their role as welfare states. Little does he perhaps know that these countries, too, had not taken the neoliberal path. How then he is led to believe that Neoliberalism/Washington-consensus-based IMF programmes will help bring sustained economic growth? These programmes render countries vulnerable to external shocks, turning the governments into sitting ducks for exploitation by internally profit-motivated, short-sighted private sector.
The PM may study the underlying extractive ways of the so-called sound economics of the colonial times, which were thrust upon colonized China, India, and Egypt for instance. These countries were reduced to developing countries over the years of colonization. The same sound-economics was rebranded as Neoliberalism which, according to Noam Chomsky, is neither ‘new’ nor liberal. And, all those countries, colonized or otherwise, which did not practice these sound-economics, neoliberal policies, became developed countries. This is well-documented, for instance, by Paul Bairoch in his works ‘The economic development of the third world since 1900’, and ‘Economics and world history: myths and paradoxes’.
Lastly, the fact that the elusive tranches of SDRs will provide much needed support against pressures on our currency is also a myth because the small amounts of lending can also be raised by floating bonds. In any case, the price of IMF lending is too steep for the gains it brings, as discussed above.
Moreover, there is a need for becoming more active on the diplomatic front to engage multilateral and bilateral partners on matters related with much greater allocation of SDRs to deal with the ravages of the pandemic, vaccine inequality, unequal recovery between global north and south, supply-chain caused commodity prices-related shocks, and environmental challenges. All of these inflows, along with positive impact of non-neoliberal/IMF policies, along with aggressive price and institutional reforms domestically will most likely boost export-related inflows.
Taken all together, they will provide greater support to currency and current account. An aggressive and surgical import-suppression policy will also help in this regard.
(The writer holds a PhD in Economics from the University of Barcelona; he previously worked at the International Monetary Fund)
Copyright Business Recorder, 2021