Since the end of World War II, the World Bank and the International Monetary Fund (IMF) have emerged as the most prominent international financial institutions (IFIs).
These international financial institutions were established to aid in the reconstruction of the war-stricken and impoverished economies and to help order the international monetary, exchange rate, and payment systems.
Their responsibilities have changed over time, and today they are seen as, among other things, controlling who gets access to development funds, keeping an eye on global economies, and advocating free-market ideas.
The historical record shows that as IMF intervention increases, global financial markets weaken and the general public suffers. Not only that, the IMF and World Bank often obligate the countries in crisis to borrow from other sources in order to avoid defaulting on their repayments.
Before lending them new loans at higher interest rates, the future lenders generally seek IMF guarantees, which it happily agrees to base on certain conditions. As a result, the entire bailout policy has a negative impact on developing countries.
These structural adjustment programmes have horrible repercussions and a terrible impact on developing countries. It is simple to comprehend why the IMF and World Bank have failed to promote human progress, but this was always going to happen as a result of their conduct. The notion that the Bretton Woods Institutions exist to help countries develop and fight poverty is ludicrous.
Instead, we must realize that these institutions exist to support capitalism’s predatory practices. Pakistan has frequently requested standby loans, adjustment facilities (adjustment financing), and economic stabilization packages from the IMF over the past 60 years.
Every time, the IMF’s loans came with a structural package that required reaching strict objectives for economic stabilization. Pakistan has obtained 21 loans from the IMF since 1958, 12 of which were bailouts.
Overall, Pakistan has borrowed more than $27 billion. We seem to be in a crucial phase of our agreement with the IMF right now. We are aware that due to our current account and budgetary deficits, maintaining our global connectivity will require maintaining rigorous monetary and fiscal discipline for another 10 to 15 years.
A cursory look at the IMF programmes in Pakistan suggests a temporary improvement in macroeconomic performance, achieved artificially because of a short-term boost in foreign exchange reserves. Whatever progress was made, this was quickly reversed after the programme ended.
Pakistan’s public debt currently stands at 71.4 percent of GDP, but the IMF believes the public debt is sustainable.
On the other hand, our own Finance Minister says that “Pakistan’s basic debts are so big that we are near bankruptcy.” Now we should ask our concerned neighbors when our country came out of this vicious cycle. Don’t we want to get rid of these lending institutions that dictate our economic policies?
The short-term solution is entering an IMF-monitored programme, which will allow us to negotiate a new debt payment schedule with significant creditors and get additional loans with favorable terms to cover current, inevitable outflows.
According to reports, the discussion with the IMF was centered on lowering federal expenditures on energy and other non-targeted subsidies; shuttering or cutting costs at state-owned businesses that are incurring losses (like the PIA, railways, and utility stores); privatizing businesses owned by the government (like steel mills, power plants, and DISCOs); and enacting additional tax measures over the next four and a half months.
There are multiple ways of doing such things without hurting the existing level of taxation. First, there are retail markets, which account for $152 billion, or 18% of GDP. Meanwhile, its contribution to the national exchequer is a meagre 3.9%. We should target this untapped sector by effectively implementing the POS system.
Secondly, we have an e-commerce market amounting to $5 billion. If we can tax this sector between 4 and 5%, we can easily generate the tax revenue of Rupees 33 to 35 billion. Thirdly, VAT should have a uniform rate and should tax the whole value chain (currently, imports and manufacturing are paying all of it), excluding consumption items for the poor.
Fourth, withholding taxes should only be levied where the transaction represents income or is a close proxy for income. Last but not least, increasing tax enforcement is the only way forward for increasing real revenues.
Technology and data are offering wonderful solutions for this problem at an affordable cost. There is no reason why a country with 85 million bank accounts has a tax-paying population of only 2 million. Creating a real-time national database is the first step towards improving compliance.
Continued borrowing from the IMF is contracting our investments, output, and employment, with all the ugly manifestations like worsening the distribution of income and wealth and increasing poverty levels, with horrendous social and political implications.
No attempt has been made over the last almost 30 years to formulate an alternative strategy. In view of the above, we should make our country independent in its economic decisions. And this could only be possible when we take the situation seriously. Although reviving the IMF programme is an unpleasant and challenging endeavor, it also presents an opportunity to clean house for the benefit and integrity of this nation.
Copyright Business Recorder, 2023