NationalVOLUME 15 ISSUE # 02

IMF, the only answer to our economic problems?

The International Monetary Fund (IMF) is like an addiction. Many countries have taken the IMF route, only to return to it again and again. Pakistan is one of the countries which have contacted it to redress their economic problems. The IMF is no more than a temporary palliative. And the problem returns soon with all its virulence. Under an IMF programme, the basic structural issues of an economy are not addressed. Taxes are increased, subsidies are cut and utility charges are enhanced as a result of which the common people are subjected to severe hardships. But the economy as a whole remains unreformed.

IMF programmes are not about economic justice or creating an equitable society by narrowing the rich-poor gap. The Fund behaves more like a recovery manager and for the purpose indirect taxation is increased. It never insists on taxing the rich and superrich or the landed aristocracy. This is specially so in the case of Pakistan. Another feature of an IMF programme is that it seldom, if ever, talks about cutting government expenditure or eliminating its colossal waste. The issues are many and range from deficiencies in a programme’s design and conflicting objectives to a lack of understanding of the political economy. All these have not just important ramifications for the macroeconomic performance of a country, as well as serious social consequences, they also have a large bearing on the sustainability of reforms.

Pakistan is a case in point. From 2008 onwards and even earlier, there was an excessive emphasis on tax collection. But the approach was faulty as there were no accompanying efforts to reform the tax administration or rid the tax machinery of corruption and inefficiency. As a result, the burden falls heavily on those already in the tax net while those outside the net continue with their immunity. This is one of the basic reasons for the failure of IMF programmes.

There are also sectoral issues. Under IMF directions, achieving “cost-recovery” tariffs for electricity was a prime objective. The problem in the power sector (and in natural gas distribution to a large extent) is of revenue leakages that occur due to non-recovery from large consumers, and theft that occurs in collusion with the field staff of the utilities. But no coordinated drive has ever been launched to take care of this aspect of the problem: stopping power theft and recovering dues from the big guns, including government departments and bodies.

The IMF’s simplistic and counterproductive approach has been to increase electricity charges, an approach which hits the consumer hard as well as the industry whose cost of production goes up. As we all know, Pakistan has made multiple large adjustments to electricity tariffs under the IMF advice since 2008. But it had no positive impact. The net result has been that the circular debt in the power sector has increased from about Rs120 billion in 2008 to over Rs1,400b in 2019. It may be recalled here that in 1988, the World Bank made Pakistan to auction its public debt and liberalise interest rates in the belief that the price the country would have to pay for borrowing would force greater discipline in public finances. Instead, the country’s interest payments on public debt soared overnight, adding to the fiscal deficit.

The tragedy is that despite repeated failure, the IMF, the World Bank and other international agencies continue with their thickheaded policies, creating enormous difficulties for the government and people of the targeted countries. The most important task is institutional development which is not seriously tackled. In our case, institutional capacity needs to be built in tax administration (both federal as well as provincial), the energy governance chain (regulators, ministries, companies), and in key implementers, such as the Finance Ministry and the State Bank of Pakistan.

But this is easier said than done. It calls for hard work and sustained capacity building to improve the quality of governance. The time duration of the IMF programmes is also another serious issue which has not yet been addressed. Here, the IMF acts like an NGO which launches a time-bound project, completes it fully or partially and then leaves. But the IMF is not an NGO. Policy reforms and capacity building have to be a sustained process spread over several years. The IMF leaving after a limited period without evaluating the outcome of the programme objectives is the fundamental reason for its failure in country after country.

Institutional and structural reforms can never be halfway house. These have to be planned and sequenced. But the IMF staff is always in a hurry which spoils everything. The IMF steamrolls everything in utter disregard of the political exigencies of the incumbent government. It also focuses on less important policy actions, which jeopardise the larger picture. The IMF’s inability to gauge the actual burden of the price adjustments and their social effects is its ultimate undoing.