An International Monetary Fund (IMF) mission led by Harald Finger visited Islamabad from November 7-20, 2018 to initiate discussions on a financial arrangement with the IMF requested by the Pakistani authorities to support their economic reform program. Discussions will continue in the coming weeks towards reaching staff-level agreement by mid-January 2019. Despite deepening balance of payment crisis, the government claims that it is not in an urgent need of IMF funds. This is in sharp contrast given the recent visits to Saudi Arabia, China, UAE and Malaysia by the premier haven’t materialized into a significant aid package. If the government has some alternative plans that have not been made public as yet making the entire affair quite strange.
This will be the thirteenth time that Pakistan will be knocking on IMF doors. Before proceeding further, let us have a look as to why we need an IMF program again and again. Pakistan borrows foreign currency denominated loans, spends on infrastructure projects, gets some sporadic growth and waits for it to fade out only to repeat the process again. In other words, it couldn’t break out of shackles of this vicious cycle. Having said that, if a Structural Adjustment Program is inevitable, then delaying it will only swell our external financing requirements.
A lot of domestic and global factors are at play in the background. Improving tax administration, privatization of SOEs, gray listing of Pakistan by Financial Action Task Force (FATF) and China-Pakistan Economic Corridor (CPEC) & Chinese debt weigh down heavily during IMF-Pakistan talks. Expansion of tax base during next two months is quite impractical. Instead of privatization, a wealth fund is to be created to manage the affairs of SOEs in a better manner. The measures to bring back stashed money abroad has been confined to forming of a task force and pact with the Britain and UAE for the same. Perhaps, the only positive thing easing IMF concerns regarding Chinese debt comes from David Malpass, US Treasury official, who says that Pakistan is likely to pay off an International Monetary Fund bailout before its loans from China come due.
The government claims that it will be the last time they will be approaching IMF. If it really succeeds in getting a US$6 billion bailout package this time, the immediate impact will be that stock market may recover and fiscal deficit may get narrower. Taxes might increase a bit and so will inflation. One may argue that if international loans are the real panacea for all our economic woes, then Pakistan should not be approaching IMF for the thirteenth time. One thing, which needs to be understood is that “one size fits all” policy by IMF won’t work for Pakistan as its dynamics are different from that of Argentina or Nigeria. The problem is that the government often complies with some conditions of IMF and ignores others, using the leverage of international political environment to push through only policies that benefit domestic elites and lobbies.
If the new government wants to break this cycle and make a sincere attempt at reforming Pakistan into some sort of an egalitarian, prosperous nation, it needs to start by looking at political power and the political institutions, which rise from them, as they are the real constraints to our growth. Even if it can make marginal changes on the economic front, they would not unlock the kind of transformative shift we need for widespread prosperity.