Growth model and IMF conditionalities — I

In a report ‘SBP governor calls for adopting durable growth model’ published in this newspaper on November 27, pointed out that the ‘…Governor of State Bank of Pakistan (SBP) stressed the urgent need for the country to move beyond temporary stabilisation measures and adopt a more durable, sustainable, and outward-looking growth model.’ Moreover, he also reportedly supported tight monetary stance, as pointed out in the same report, ‘He outlined the key differences between the current stabilisation phase and previous cycles, emphasising that macroeconomic discipline is now supported by well-coordinated, forward-looking monetary and fiscal policies. Unlike past efforts, this approach avoids the premature easing that has historically undermined stability.’

Similarly, World Bank in its October ‘Pakistan Economic Update’ pointed towards the need to continue with fiscal consolidation policies, and liberalizing the economy for greater gains on the growth, and exports side. Both the governor and the World Bank in its report called for less protective policies and underscored the need for opening the economy to greater competition. Hence, both the governor and the World Bank emphasized ‘Washington Consensus’, or more broadly neoliberal- and austerity policies. The World Bank’s report pointed out in this regard, ‘Ensuring exchange rate flexibility will be critical to managing potential negative current account impacts, safeguarding against the reemergence of dollar shortages, and maintaining hard-won gains in restoring business confidence. Returning to a trajectory of faster and sustained growth will also require sustained implementation of priority reforms, including broadening the tax base while strengthening tax administration, simplifying regulations, continuing implementation of the National Tariff Policy, reducing the presence of the state in the economy through state-owned enterprise (SOE) divesture, addressing high electricity costs, and rationalizing the public sector.’

Here, in particular, while the World Bank rightly emphasizes the need to enhance tax base, yet it supported the objective of reaching primary surplus by indicating that ‘Strong revenue growth led to a historic primary fiscal surplus. In FY25, fiscal performance improved as revenue growth outpaced expenditure increases. Total revenues rose to 15.8 percent of GDP, supported by higher income tax rates, reduced General Sales Tax (GST) exemptions, stronger collection efforts, and a one-off transfer of substantial SBP profits.’

The problem with doing that is that while under over-board monetary austerity, interest payments took an already large chunk from expenditure, lack of expenditure, and greater taxation, along with unusually high level of SBP profits – and commercial banks more broadly – at the cost of higher cost of capital to reach primary surplus, likely, not only enhanced inequality and poverty levels – where reportedly around 45 percent of the population is below the poverty line – but also crowded out the private investment, most probably denting inclusivity aspect of growth.

The PEU report in ‘Box 3.1: Recommended Reforms to Enhance Economic Growth in the Near Term’ pointed out under ‘reform’ that ‘Demonstrate commitment through public sector austerity measures. Further right-size the government, including eliminating redundant or unproductive positions or agencies.’ Moreover, just like the governor, the World Bank threw its weight in support of International Monetary Fund’s extended fund facility (EFF) programme, which has a strong neoliberal-, and austerity basis. In this regard, the same report indicated ‘Sound macroeconomic management, IMF EFF program execution, and deep structural reforms are vital for a higher growth path. Sustaining recent stabilization gains and moving to a higher growth path hinges on deep structural reforms. These are essential to complement prudent macroeconomic management, ongoing fiscal consolidation efforts, and the completion of the IMF-EFF program. …These measures are essential to create the conditions for durable growth beyond short term stabilization.’

With Ministry of Finance, along with the SBP – the authorities – as signatories to the current and around two dozen IMF programmes, and for instance, World Bank’s support to the current EFF programme as has been reflected in its PEU October report, it is quite evident that the weight of both authorities and the major multilaterals is clearly behind a neoliberal, and austerity consensus.

Hence, they have been favouring an ultra-cautious monetary policy – at the back of (wrongly) seeing a predominant role of aggregate demand in determining inflation, and showing support to lure foreign portfolio investment (FPI) and allowing exchange rate devaluing tendencies that this neoliberal and austerity policy produced for negatively impacting imports for balance of payments gains but which also dented exports as they are heavily dependent on imports –and fiscal consolidation policies, as evidenced from the fiscal austerity objective of primary surplus; notwithstanding at the same time that significant consumption tax in the shape of general sales tax (GST) is supported that produces highly lopsided consequences for lower-to-middle income groups’ purchasing power.

Here, it needs to be pointed out that rather than enhancing social, and infrastructural expenditure that strengthens demos, or political voice which, in turn, significantly pushes ‘elite capture’ to make otherwise politically difficult reforms, like enhancing tax base over the medium-to-long-term, consumption taxes, like general sales tax (GST) is increased from time to time, which is a short-term (mostly unsustainable) revenue source gains through primarily consumption taxes is being supported by authorities and multilaterals.

To further substantiate abovementioned points in the light of deep and elaborate research over the last two decades or so, especially given significant misgivings of Neoliberalism starkly revealed in the wake of Global Financial Crisis (GFC) 2007-08, and that of austerity during the Eurozone crisis – especially in Greece – that ensued after GFC as one of the consequences of years of practice of Neoliberalism, a (2023) published book ‘A thousand cuts: social protection in the age of austerity’ made a monumental study to understand the evolution and impact of IMF conditionality.

Here, the authors in the book pointed out ‘…we draw on IMF archival documents covering the years 1980 to 2019. In total, we searched 6,100 loan-related documents to extract 65,707 conditions spread cross 132 countries. These documents consisted of IMF staff reports, national government’s Letters of Intent, and accompanying Memoranda of Economic and Financial Policies, which contain conditionality.’

The book (rightly) received a lot of fanfare. Director of Boston University’s Global Development Policy Center, Kevin P. Gallagher, for example, pointed out: ‘A Thousand Cuts is the first comprehensive, data-driven analysis of the outcomes of IMF lending policies. While the methodology is rigorous and writing style elegant, the conclusions are not pretty. Kentikelenis and Stubbs document the consistently devastating consequences of ill-conceived austerity measures by the IMF. This truly original and alarming new volume is mandatory reading for anyone interested in how to build a more progressive global economic governance based on evidence over ideology.’

The writer of this op-ed is of the view that the book should be a mandatory read for policymakers in authorities and multilaterals so as to push them to meaningfully address and respond to criticism of neoliberal, and austerity policies – especially in terms of their seriously negative consequences against sustainably reaching macroeconomic stabilisation, economic growth, resilience, and political voice – in policy prescription, and in public discourse. It would also make a strong case for economic commentators in media, who generally take the same neoliberal, and austerity-based line, and apparently, invite economic analysts/social scientists of similar bent mostly to acquaint with the opposing literature, for instance, in this book, to enhance their scope of inquiry with this much-needed information/research.

(To be continued on Sunday)

Copyright Business Recorder, 2025