The new government is deciding whether or not to go for another International Monetary Fund (IMF) bailout package. The IMF intervention is being discussed in Pakistan because the economy is in distress and foreign reserves have plummeted. The debate on IMF is an indication that people are conscious about economic decision-making in the country. The new finance minister has indicated that an IMF bailout package is not out of possibilities, keeping in view the financial emergency in the country.
What is IMF for? It is not merely an institution of the last resort to administer short term loans and bailout packages, it also has a great role in opening up the economy for world trade. This has a risk of fluctuations and it leads to the absence of a local model of development and less chances for the local industry to grow, to reduce imports, selling of the state-owned entities to the private sector. It also focuses on attraction of foreign investment. The purpose of IMF is to deal with deficits in the balance of payment through financial support. Its goal is “to promote international monetary cooperation, exchange rate stability…to help ease balance of payments adjustment.” Of course any such cooperation will not be without guarantees from borrowing governments, and they have to stabilise macroeconomic indicators, narrow down the trade and current account deficit and bring stability to the exchange rate.
One cannot say that the IMF has totally failed to benefit borrowing countries but these the benefits are short lived and they cannot sustain the pressure of the emerging economy. What we forget while approaching the IMF is that it is not meant for building long-term growth through infrastructure and distribution of means of production. It is just to give oxygen to a dying economy. In theory, the IMF makes short-term loans in exchange for policy reforms in recipient countries to move to the free market. This has not helped us and instead, a country like Pakistan has become addicted to IMF lending.
The objective of exchange rate stability is also debatable, as after the end of the fixed exchange rate system in 1970s, maintaining this stability is no longer part of the IMF’s mission. Nevertheless, it is continuing its same goal with the recipient countries and finding ways to become relevant each time in different economic crises in the world.
Political economists have long been very critical of IMF bailout packages as they do not appear to have helped countries in self-sustaining growth through free market reforms. A person who suffers because of the loan is not the economic pundit of the country, but the poor who cannot afford the stringent conditions of IMF’s intervention in their country. Paradoxically, rich countries are giving funds to the IMF for helping poor countries, whereas that is making developing countries poorer.
Higher borrowing from the IMF can also lead to deeper crises in the future. Investors can come to believe that if anything goes wrong, the IMF would come to the rescue of the economy. This, however, is not the case at all.
As Michael Prowse of the Financial Times commented after the Mexican bailout, “Rubin and Co. wanted to make global capitalism safe for the mutual fund investor. They actually made it far riskier.”
Bailouts, ultimately, become burdens because they are not managed properly by governments. Money goes to the same institutions that created the crises, and then the government is reluctant to enforce reforms.
Before we accept the justification that “conditionality” will encourage reforms, we must remember Pakistan’s record of dependency on the IMF, which shows that the country loses actually its credibility in international regimes. Cutting off loans makes governments more serious in introducing reforms.
The reform period becomes even more prolonged when we restart the process of financial assistance from the IMF. One thing must be clear: the IMF will never discourage loans as it gives more leverage to the Fund to keep pressure on borrowers, not only for current loans but also on previous ones. This props up IMF’s bureaucracy itself since a large part of the loan goes back to IMF through various technical assistance, experts and facilitation, which makes Fund’s the conditionality much less credible.
Today, the finance minister has the choice to go to the IMF or seek fresh loans from China.
In China’s case, we must consider that under the One Road, One Belt project, China has given loans for infrastructure projects which become another reason for balance of payment deficits. China is lending to Pakistan in US dollars, which means it gets a large surplus on repayment of the loans. Since Pakistan is not able to diversify its exports, the exchange reserve of the loans is also not benefiting. Washington is already apprehensive that the rationality of the One Belt, One Road projects is based on risk due to political, not economic decision making. Recently, the US Secretary of State Michael R. Pompeo cautioned the IMF that the Washington will not allow it to lend US dollars to Pakistan for repaying China. In that case, the IMF can have a condition for any repayment of Chinese debt from the loan money.
The Chinese option can only work if the lending is consistent with Pakistan’s economic sustainability in the future. Otherwise such loans can risk sovereign debt, particularly on infrastructure projects. Sri Lanka comes to mind as an example. Beijing took control of the Hambantota port as the Sri Lankan government was unable to pay its debts. Interest rates are particularly important in this connection.
The bottom line remains that Pakistan has been engaged with the IMF’s loan programs since 1980s. This would be the 14th time and this time Pakistan would seek the largest bailout yet: more than 12 billion dollars.
Unless corruption of policy makers and institutions is addressed, the new government will find that package will not have any incentive to change the way it has been presented to us since the 1980s. China has already pumped $1 billion and around $4 billion is expected from Saudi Arabia and Asian Development Bank will also give $2 billion. Khan’s government has to decide keeping these issues in mind. The government must also take immediate steps to deal with the critical issue of import-led growth strategy for infrastructure projects of the China Pakistan Economic Corridor (CPEC) which is the main cause of the balance of payment crises.
Another bailout package could lead Imran Khan’s government to repeat past mistakes. The bailout program is always an avenue for the IMF to continue to ensure that a country like Pakistan is always indebted.
The author is a political economist and author of Debt Dependence
What is IMF for? It is not merely an institution of the last resort to administer short term loans and bailout packages, it also has a great role in opening up the economy for world trade. This has a risk of fluctuations and it leads to the absence of a local model of development and less chances for the local industry to grow, to reduce imports, selling of the state-owned entities to the private sector. It also focuses on attraction of foreign investment. The purpose of IMF is to deal with deficits in the balance of payment through financial support. Its goal is “to promote international monetary cooperation, exchange rate stability…to help ease balance of payments adjustment.” Of course any such cooperation will not be without guarantees from borrowing governments, and they have to stabilise macroeconomic indicators, narrow down the trade and current account deficit and bring stability to the exchange rate.
One cannot say that the IMF has totally failed to benefit borrowing countries but these the benefits are short lived and they cannot sustain the pressure of the emerging economy. What we forget while approaching the IMF is that it is not meant for building long-term growth through infrastructure and distribution of means of production. It is just to give oxygen to a dying economy. In theory, the IMF makes short-term loans in exchange for policy reforms in recipient countries to move to the free market. This has not helped us and instead, a country like Pakistan has become addicted to IMF lending.
The objective of exchange rate stability is also debatable, as after the end of the fixed exchange rate system in 1970s, maintaining this stability is no longer part of the IMF’s mission. Nevertheless, it is continuing its same goal with the recipient countries and finding ways to become relevant each time in different economic crises in the world.
Political economists have long been very critical of IMF bailout packages as they do not appear to have helped countries in self-sustaining growth through free market reforms. A person who suffers because of the loan is not the economic pundit of the country, but the poor who cannot afford the stringent conditions of IMF’s intervention in their country. Paradoxically, rich countries are giving funds to the IMF for helping poor countries, whereas that is making developing countries poorer.
Higher borrowing from the IMF can also lead to deeper crises in the future. Investors can come to believe that if anything goes wrong, the IMF would come to the rescue of the economy. This, however, is not the case at all.
As Michael Prowse of the Financial Times commented after the Mexican bailout, “Rubin and Co. wanted to make global capitalism safe for the mutual fund investor. They actually made it far riskier.”
Bailouts, ultimately, become burdens because they are not managed properly by governments. Money goes to the same institutions that created the crises, and then the government is reluctant to enforce reforms.
Before we accept the justification that “conditionality” will encourage reforms, we must remember Pakistan’s record of dependency on the IMF, which shows that the country loses actually its credibility in international regimes. Cutting off loans makes governments more serious in introducing reforms.
The reform period becomes even more prolonged when we restart the process of financial assistance from the IMF. One thing must be clear: the IMF will never discourage loans as it gives more leverage to the Fund to keep pressure on borrowers, not only for current loans but also on previous ones. This props up IMF’s bureaucracy itself since a large part of the loan goes back to IMF through various technical assistance, experts and facilitation, which makes Fund’s the conditionality much less credible.
Today, the finance minister has the choice to go to the IMF or seek fresh loans from China.
In China’s case, we must consider that under the One Road, One Belt project, China has given loans for infrastructure projects which become another reason for balance of payment deficits. China is lending to Pakistan in US dollars, which means it gets a large surplus on repayment of the loans. Since Pakistan is not able to diversify its exports, the exchange reserve of the loans is also not benefiting. Washington is already apprehensive that the rationality of the One Belt, One Road projects is based on risk due to political, not economic decision making. Recently, the US Secretary of State Michael R. Pompeo cautioned the IMF that the Washington will not allow it to lend US dollars to Pakistan for repaying China. In that case, the IMF can have a condition for any repayment of Chinese debt from the loan money.
The Chinese option can only work if the lending is consistent with Pakistan’s economic sustainability in the future. Otherwise such loans can risk sovereign debt, particularly on infrastructure projects. Sri Lanka comes to mind as an example. Beijing took control of the Hambantota port as the Sri Lankan government was unable to pay its debts. Interest rates are particularly important in this connection.
The bottom line remains that Pakistan has been engaged with the IMF’s loan programs since 1980s. This would be the 14th time and this time Pakistan would seek the largest bailout yet: more than 12 billion dollars.
Unless corruption of policy makers and institutions is addressed, the new government will find that package will not have any incentive to change the way it has been presented to us since the 1980s. China has already pumped $1 billion and around $4 billion is expected from Saudi Arabia and Asian Development Bank will also give $2 billion. Khan’s government has to decide keeping these issues in mind. The government must also take immediate steps to deal with the critical issue of import-led growth strategy for infrastructure projects of the China Pakistan Economic Corridor (CPEC) which is the main cause of the balance of payment crises.
Another bailout package could lead Imran Khan’s government to repeat past mistakes. The bailout program is always an avenue for the IMF to continue to ensure that a country like Pakistan is always indebted.
The author is a political economist and author of Debt Dependence