Pakistan will be entering the new calendar year with inflation and interest rates in double digit; growth rates both in agriculture and manufacturing declining, in fact the large scale manufacturing is experiencing negative growth to the tune of almost seven percent and the country facing an enormous burden of debt.
Meanwhile, the IMF has released the second tranche from the three-year $6 billion Extended Fund Facility (EFF) programme signed earlier during the out-going year. Obviously, the Fund appears satisfied with the progress of the programme following its second review of the implementation of the ongoing EFF which means currently the country is right in the midst of a stringent phase of austerity.
But austerity never brings prosperity upon which rests the success or otherwise of Fund's EFF programme. It is economic growth that brings prosperity. Austerity brings hardships and depression for the masses and ultimately for the governments too. It has been established that IMF recipes in recipient countries from Latin America to Asia and Africa may discipline economies in the short run but never bring sustainable long-term economic growth and prosperity irrespective of the longevity of engagement.
According to Dr Shahzia Ghani (Egypt or Argentina: Economic Policy Management Model for Pakistan, published on 7 May, 2019 in Economic Policy), our two neighbours - China and India - never sought IMF packages, both are growing at a pace greater than 7 percent, but Argentina and Egypt both are in IMF programmes since decades and are not showing any signs of growth.
Bottom line: a bailout package from IMF (to the tune of US$ 6-8 billion) will not bring any growth and prosperity for Pakistan.
The Fund has a long history of policy mistakes. Yet, according to Jayati Ghosh
(The International Monetary Fund's bizarre belief in 'expansionary austerity' would be laughable if it were not so damaging - published in International Politics and Society newsletter on 20 August, 2019) it has learned little from them.
Consider the case of Argentina. In mid-2018, the IMF agreed to provide the country with a heavily frontloaded three-year loan worth nearly USD 57bn - the largest in the institution's history - following a series of reckless decisions by President Mauricio Macri.
One such decision, made soon after he took office in 2015, was to strike a deal with the holdout creditors who were still fighting in US courts to be repaid in full, following Argentina's 2002 debt default and subsequent restructuring. Another was Macri's subsequent borrowing spree, which caused public debt - mostly denominated in dollars - to swell by more than one-third, to USD 321bn in 2017.
By last year, Argentina's fiscal and current-account deficits exceeded 5 per cent of GDP. In the ensuing economic and financial crisis, public debt ballooned to nearly 90 per cent of GDP, capital flight caused the peso's value to collapse, and inflation soared. So, under pressure from US President Donald Trump (who had business ties with Macri), the IMF stepped in.
The loan may have been unprecedented in size, but it had all the familiar characteristics of past IMF financing programs. In exchange for the cash, Argentina was to implement massive budget cuts, in order to balance its primary budget in 2019 and significantly reduce its external deficit. Argentina complied - and the economy steadily deteriorated.
Today, inflation is running at over 55 per cent, the poverty rate has surpassed 30 per cent, and output and employment are shrinking. Argentina is nowhere near the IMF's targets for investment and GDP growth, which have already been revised twice. More downward revisions are undoubtedly coming.
Argentina, Egypt and Pakistan are some of the most suitable examples of this bitter reality. All three have had quite a long-term engagement with the Breton Wood institution established in 1944 to foster balance of payments and external sector stability, however, the three countries cited are witness to the fact that none of these has attained stability or prosperity and their economic future is even more uncertain.
Let us take the example of Egypt, a country of 104 million with GDP at US$ 300 billion. It is feeling the neck braking strain of IMF programme since 2016. Poverty is on the rise and much anticipated economic stability seems a lost dream.
A net importer of food, the country needs to grow at a rate of more than 7 percent to accommodate ever expanding youth bulge. According to IMF's own estimates, Egypt has a huge youth mass, almost 34 per cent of Egypt's population is under the age of 15 and each year around 700,000 people enter the labour market in search of jobs which are being suppressed under IMF's structural adjustment programs.
Besides poverty and unemployment, other macroeconomic fundamentals are also very depressing. Inflation is touching skies and subsidized food and fuels are being phased out by the government. Once upon a time, the fastest growing economy of the Middle East, Egypt is now struggling with stagnant exports and non-existent entrepreneurship. According to World Bank's estimates, nearly 60 percent of Egyptians are either poor or belong to the poorest groups. The World Bank further pointed out that economic decisions, such as lifting of subsidies and others, have adversely affected the middle class, which is unable to cope with increased cost of living.
According to Egyptian Ministry of Local Development, the most alarming trend is rise of poverty in upper Egyptian centers where the increase is more than 50 percent, almost double the national average elsewhere.
Though Egypt has been one of the oldest clients of IMF and is coordinating with the IMF on economic policy management since 70s, the most recent Extended Fund Facility (EFF) was inked in November 2016 when the multilateral institution offered US$ 12 billion as a tied loan to unleash the economic growth with the aim to bring down public debt, stabilise the foreign exchange market, lower the fiscal deficit, and contain the inflation. The fourth executive review was completed only in April 2019 and the Egyptian economy is still not showing any signs of turnaround.
It is worrisome that right under the direct supervision of IMF, standards of living in Egypt are deteriorating as cost of living is increasing. Middle class is shrinking and more and more people are being added to the poverty pool.
According to a recent report issued by Egypt's Central Agency for Public Mobilization and Statistics, the percentage of people living below the poverty line has risen from 28 percent to 30 percent within three years, 2015-18. Due to law and order situation, the tourism sector is not picking up and due to lower growth in the broader Middle East and other parts of the world, workers remittances have been on a decline. The cumulative effect of IMF reforms has contributed to steep inflation (officially its 24.3 percent) and phasing out of food and fuel subsidies in next budget will make the life of common Egyptian even worse. Accordingly, fuel subsidies will be reduced by 40 percent while electricity subsidy will be reduced by 75 percent in FY 2019-20. Thus cumulatively more than US $ 5 billion subsidies will be cut in coming days. The IMF prescription has devalued the Egyptian currency and led to increased cost of manufacturing which ultimately has resulted into noncompetitive export sector. IMF programme was aimed at unleashing private sector economic growth and job creation, but by the end of April 2019, none of these objectives was fulfilled.
Bottom-line: an EFF to the tune of US$ 12 billion (which is part of US$ 21 billion package in total) could not bring growth and prosperity to Egypt by the end of 4th review.
Both Pakistan and Egypt have been the oldest clients of the IMF. Pakistan has completed 30 programmes with IMF (21 programmes since 1958 and four programmes since 2000). And almost all premier global financial institutions (the IMF, WB, ADB, UNESCAP etc.) have projected lower GDP growth rates for Pakistan during the coming 5 to 6 years.
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