A better question keeping the title of this article in mind would be, “Should IMF Solve Our Problems ?” And the answer is NO. We should.
If I compile the number of articles I have written over my lifetime about The International Monetary Fund, It would be a book. Same story line, same pre funding suspense, same hopes pinned to the results, same hatred towards the lender, the book would read like a family drama, a drama usually created by the recipient country and its inhabitants, never The IMF itself.
Understand one thing first, IMF is a lender and a lender has every right to protect itself. I would go as far as saying that the lender might even have an agenda, hidden or overt, and I would take it a step further by saying that it might even have a right to have an agenda. Why ?
Because it did not approach the borrower to lend the money. It did not create a fiscal mess in the borrowers’ country. It did have any role in the disciplinary chaos created in the economy of the borrower. The borrower approached the lender and approached it after driving itself to the edge of a cliff. Now standing at the cliff it wants a parachute, well, the parachute comes with a hefty price. And several conditions. All of them put together may not even serve as a parachute except giving a feeling of one. And the borrower flies off the cliff with just that “Feeling” of having a parachute, and it feels great until you start approaching the ground, fast and realize that the parachute is not opening. And that is the case in majority of the scenarios.
Before we go any further and dissect the anatomy of an IMF loan and the unrealistic expectations attached to the outcomes, let me get one thing out of the way first. I am no fan of The IMF. Having said that, let me also make it clear that, I am also no fan of the countries that go to The IMF and complain.
First understand this simple concept:
IMF is a business. A business of lending. It is not a charitable organization giving free blankets after a cold spell in some refugee camp. And a business has to generate profits plus gain market share. And gaining a market share means having more clients. Having more clients means that they are buying less of your competitors’ products and more of yours. Plus once you have gained a market share, you will do everything in your power to retain it. You, as a business, would not want your clients to not be dependent on your product, psychology or otherwise. Your revenues depend on your clients being addicted to what you sell. And this is the best way I could summarize The IMF for a novice in one paragraph.
Lets create a perfect scenario for seeking an IMF Fund facility. What makes countries go to The IMF.
A parallel economy, meaning an undocumented economy where the government is not being able to collect taxes and has no idea about the actual size of the economy. Less in taxes means less revenues and less revenues mean, problems for a country. Another problem is scarcity of Foreign Exchange which in turn means huge problems for an import dependent country and pressure on local currency. To add insult to the injury, during this scarcity of foreign exchange, imagine if there was a parallel foreign exchange market where anyone can walk in and buy as much foreign currency as one wishes to putting the last nail in the coffin of the entire system, but that last coffin is put in repeatedly and every day.
To top it all off, just imagine for a second that the foreign reserves of your country are falling at an alarming rate at the same time while most of your domestic consumption is dependent upon imports, even the raw material for your exports. No foreign reserves means the country’s GDP slowing down because of inactivity in production.
Lets take it a step further by bringing in a very high public debt into the equation. Domestic and foreign. Foreign debt is a killer in such a situation because you make the payments of such foreign loans in foreign currency. You borrow it in foreign currency and pay it back in the same. Without foreign reserves, could you payback your foreign loans ? The answer is simple; NO.
The last and the most important aspect is bad publicity during all this chaos. And bad publicity is like poison when it comes to generating investments into an economy. It kills investor confidence. To say the least.
Now, what does The IMF want in such a scenario from the borrower ?
Lets begin. The IMF may want many things but the top 5 during any “Extended Fund Facility” or the EFF, almost remain the same. The first thing in such a scenario would be a demand that the borrower let its currency float freely. Meaning, let it fall against the Dollar as much as it can. But in a country like Pakistan where we have a parallel foreign exchange market, where anyone can but as many Dollars as they want, it is nothing but a disaster. Egypt while borrowing from the IMF in 2016 did the same thing, it still has not recovered and the free floating of the currency brought no fruitful results towards its Current Account Deficit nor did it grow its exports.
Another demand of IMF will be “Fiscal Consolidation”, meaning cut in governmental spending, through its budget and developmental projects. This directly affects the economic activity. Slowing it down for a year or two before the results are seen. Something that Pakistan cannot afford at this time.
Broadening of the tax net is a very valid demand that the IMF will have. We need to do it anyway.
The IMF will definitely want deep structural reforms along with easing of business regulations to spur the economic activity. Absolutely a legitimate demand of the lender in my view. Has to be done any way.
High unemployment. Poverty reduction. Capital Markets reforms. Opening up of local markets to the foreigners.
Why haven’t we been able to come out of this IMF musical chair game for decades ?
The answer is simple. We have never worked on structural reforms. We run from pillar to post asking friendly countries for funds every time we are in trouble. Just like Egypt did. It asked Saudi Arabia and Saudi Arabia helped with injecting $25 billion dollars into the Egyptian economy between 2013 and 2016 yet Egypt had to run to the IMF in 2016. Only because it never brought structural reforms within its own economy.
Pakistan needs monetary, fiscal and structural reforms. Period.
Unless we do these three things, no matter how much does China give us or Saudis help us, we are not going to come out of this rut that we have forced ourselves into.
The only thing in my view going for Pakistan internationally is the fact that Imran Khan has an unblemished reputation globally. Investors believe in him. Locally he might face opposition but internationally, he can be a magnet for Foreign Direct Investments. But FDI without structural reforms domestically has no positive results.
And if we want to break this cycle of IMF, we need to look inwards. We need to take unpopular measures to fix our economy. We need to run this economy with an iron fist. An iron fist with a will to fix our problems not to be partisan and create more. Pakistan is a land of opportunities but if the opportunities are not availed at the right time, they go stale.
And we might just be heading in that direction with a feeling of a parachute on, jumping off a cliff.
Author: Mir Mohammad AliKhan