IMF and Argentina: Lessons for Pakistan

Pakistan is not yet in the same deep quagmire as Argentina is, but the strains on its economy are becoming challenging with each passing day, writes Shahid Mehmood

IMF and Argentina: Lessons for Pakistan
Running the economic affairs is arguably the most complex and critical task of states. An equally challenging task is to gain the confidence of people through clear communication of economic policies and their implementation. This is especially true of economic managers in a country like Pakistan, whose economy is passing through yet another tumultuous period.

How is the task of communicating economic policies going in the tabdeeli era? I am not sure about other mediums, but if you are a regular Twitter user, it is actually going pretty well. Two members of the government’s economic team, State Minister for Revenue Hammad Azhar and FBR Chairman Shabbar Zaidi are prominent in terms of their regular updates on the economy. But with due respect, I mostly find their tweets amusing, especially those of Azhar who has somehow taken a liking to donor agencies. He seems to take their praise as an article of faith, and immediately tweets them with the intention of gaining some brownie points and as an implication that the economy is doing well. One such recent tweet was quiet palpable, as the minister gleefully tweeted praise from an IMF representative. He should have known better!
President Fernando de la Rua fled in a helicopter, leaving behind a ruined economy with 20 percent unemployment, bank closures, social unrest and an economic contraction by almost 30 percent

It is not that I am against the recent IMF agreement with Pakistan. In fact, my personal opinion from the very start was that the government should enter into a loan agreement since there was no other viable way of addressing external obligation challenges. Yet a naïve bit of economic posturing only delayed the inevitable. In that time, the running around to Beijing and Arab capitals for short term aid only evaporated confidence in Pakistan’s economy, one result of which is the precipitous fall in the rupee’s value within a year. Now that the agreement has finally been signed, the misplaced optimism of economic mangers that it will prove to be a saviour needs to be dispelled. A light dose of history is, thus, in the offing.

Argentina serves our purpose very well, a country once dubbed a ‘star’ performer by the IMF. Its economy has been in some serious doldrums since some time now, with little or no sign of improvement. Its modern day problems can largely be traced back to the 1990s. Emboldened by IMFs generous financial support and its lavish praise, Argentina embarked upon a policy of fixed exchange rate regime (whereby the value of a nation’s currency is fixed against another currency, usually dollar) as a remedy for its internal economic challenges (high bouts of inflation being a leading challenge). IMFs requirement, meanwhile, was its standard prescription: fiscal tightening (sound familiar?).

In hindsight, the system worked pretty well for some time, as foreign investment flowed into Argentina and inflation was controlled to an extent. But as soon the South East Asian crisis of 1998 struck, which was basically a crisis perpetuated by exchange rate issues, Argentina’s fixed peg to the dollar looked out of sorts. But the devaluation option was discouraged by likes of IMF, who kept lending to make it easier for Argentina to hold to the fixed peg. Yet the generous financial support came at a price: the build-up of foreign exchange loans. And there was an even bigger problem: the much needed domestic economic reforms were never given a serious thought.

The president left the Casa Rosada as the economy collapsed

This cocktail didn’t end up well. As the investors realized that the ground realities present a very poor picture, they started to pull out their money. The next to follow was IMF, which abruptly curtailed its support to Argentina. By that time, the external payment obligations had ballooned to unsustainable levels. It all came to disastrous end in December 2001 when Argentina defaulted on its debt payment obligations. Then President Fernando de la Rua fled in a helicopter, leaving behind a ruined economy with 20 percent unemployment, bank closures, social unrest and an economic contraction by almost 30 percent.

It took almost a decade, and a heavy toll in terms of lost economic opportunities for Argentina to recover a bit, mainly through rescheduling debt obligations. But the cycle of troubles began again a few years ago, as yet another prescription of floating exchange rates coupled with austerity was foisted upon Argentina. Recently, it all came to a head when Argentina fell into serious economic trouble again, and IMF predictably stepping with another bailout package worth $57 billion.

The point of citing Argentina’s economic woes is not to paint the IMF as the villain. It does what it is supposed to do: lending. And like any creditor, it is but natural that it will keep a keen eye on the ability of the debtor to return the borrowed money (of course, to a lesser extent, it is also a relatively civilized forum for arm twisting. Pakistan, for example, had to share CPEC related information with the IMF before getting the loan). The reason that all this was brought up was that citing praise by the IMF as a certificate of economic prowess is naïve and childish. The same used to done in Argentina, and look where it has ended up.

Pakistan is not yet in the same deep quagmire as Argentina is, but the strains on its economy are becoming challenging with each passing day. What matters is not the praise coming from a donor agency, but how things are shaping up internally. The IMF, for example, may praise high interest rates and fiscal ‘consolidation,’ but the fact of the matter is that these actions will attract hot money rather than long term investments, increase the cost of borrowing (thus stalling credit for investing), and a cut back in development expenditures. For perspective, Azhar and company may want to revisit the Structural Adjustment programs of the 1990s and their predicament.

The answers to Pakistan’s economic woes lie not in donors or their praises, but in practical domestic policies whose results can be seen and felt. Let us hope that this simple point can be grasped by our economic managers.

The writer is an economist

The writer is an economist. He tweets at @ShahidMohmand79