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Are IMF Programs A Debt-Trap For Pakistan?

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The International Monetary Fund (IMF) is an international organisation that according to its description, aims to bolster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth and reduce poverty around the world.

But, apparently, in Pakistan’s case it has proved to be otherwise and persistently failed to uplift Pakistan’s economy. It has been observed that the stringent conditions that are always attached with every IMF program have actually given rise to a destructive debt-trap for Pakistan. Moreover, Pakistan’s [political] history of bad economic governance i.e., relying heavily on excessive borrowing both from the domestic as well as the foreign financial institutions, has also proved to be a major impediment in introducing the much needed structural reforms that could stabilise Pakistan’s ailing economy. Although there has been ample research on the implications of IMF programs on the so-called ‘Third World’ i.e., the underdeveloped and developing countries, there is still an absolute need for exploring the large-scale and far-reaching implications of such loans on the struggling economy and institutional restructuring of Pakistan.

The IMF and Pakistan have a long history of give-and-take. Since, 1958 they have contracted 22 agreements for loans. The recently obtained loan is a 39-Month Extended Fund Arrangement (EFF) for about US$6 billion. It’s been reported in the newspapers that “in its latest post-program monitoring report, the IMF has also forecast that due to additional borrowings, Pakistan’s external debt would jump to $103.4 billion by June 2019”. According to the State bank of Pakistan (SBP), the country’s total external debt servicing stood at$2.09 billion during the first quarter (July-Sept) of FY18. Moreover, servicing the country’s external debt would pose a serious problem for its current expenditures. Total external debt and servicing includes $1.71 billion of principal and $383 million of interest payment. What’s more worrisome is that Pakistan is already over-stretched due to its huge external debt-servicing, which means the recently obtained loan would be of little use other than for repaying the installment of the previously obtained loan.

Simply put, it’s a vicious circle. It may be noted that “Pakistanis are facing a very challenging economic crisis, with lackluster growth, rising inflation, high indebtedness, and a weak external position”. It is an equally precarious situation that not only IMF lends loans on inflated interest rates, but also attaches stringent conditions that, according to some scholars, are detrimental to the debtor country’s political sovereignty and economic independence.

According to the critics of IMF, given new developments in the global political arena and the new world realities, the need for its institutional revamping has duly arisen. Originally, the International Monetary Fund (IMF) was tasked “to maintain exchange-rate stability and adjustment of external imbalances in member countries, and to perform as a lender for countries facing short-term balance-of-payment crises”. But, with the fall of the fixed exchange rate system, the IMF had to readjust its role in exchange rate management.

This paper provides a brief review of IMF policies from historical perspective and a critique of IMF policies over the last few decades. There is an urgent need for introspection on the part of the organization for “just one year ago, the IMF praised parts of Asia as a model for the world’s emerging markets. Now, it blames the region’s financial crash on poor domestic policies and insists on stringent, sweeping changes.

Looking at the dismal state of current economic indicators, Pakistan would again face the same economic problem in the near future; rapid depletion of foreign reserves [because of unbridled import bills, unsatisfactory exports combined with rising Us dollar value against Pakistani rupee] that could trigger a looming balance of payment crises and compel Pakistan to knock at the door of IMF for another quick bail out, one more time. After almost half a century since the Bretton Woods Conference, it is now time to organize another conference to find the right path to structural adjustment.” He further elaborates that “it should be recognised that the deficit and the surplus in the balance of payments are two sides of the same coin: the debtor countries’ structural deficits reflect the creditor countries’ structural surpluses”.

It can be inferred from the above discussion that the main factor behind Pakistan’s ever-increasing current account deficit is its high dependence on borrowing funds from external resources such as international financial institutions like the IMF, the World Bank (WB) and the Asian Development Bank (ADB), instead of concentrating on non-debt creating options such as attracting Foreign Direct Investment, increasing exports and attracting foreign remittances from the overseas Pakistanis. Having said that, the most urgent structural reforms such as; improving the management of public-sector enterprises (PSEs), strengthening national institutions, ensuring good and effective governance, continuing anti-money laundering efforts and combating the financing of terrorism efforts [as required by FATF], creating a conducive business environment, and facilitating trade & commerce activities, should be undertaken on the war-footing basis.

But, ironically, so far no Pakistani government has ever attempted to do so! On the part of the incumbent government, it would be wise to work seriously on a long-term plan to introduce and implement much-needed, long-overdue structural reforms in an effort to stabilise Pakistan’s economy by stepping out of this IMF debt trap. It would also be interesting to see how the incumbent government will tackle this precarious problem. May pragmatism prevail and intelligent economic sense be employed to steer this nation away from this state of perpetual dilemma by taking into account the country’s debt sustainability and loan dependency. Similarly, given Pakistan’s nose-diving economy and the pernicious effects of its “Dependency Syndrome”, the need for re-investigating the IMF-Pakistan relationship has become even more important!

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Naya Daur