IMF CONDITIONALITIES & COMMON MAN

NUSRAT KHURSHEDI
(feedback@pgeconomist.com)

Feb 20 - 26, 20
12

The International Monetary Fund (IMF) released a report in the first week of February warned that Pakistan's economy remains highly vulnerable to both internal and external shocks. No doubt, due to poor governance, global recession (2007-2009), national insecurity and floods over the last three years, Pakistan's yearly growth rate has come down from a long-term average of five per cent to around two per cent.

The rupee is devalued and exchange reserves are going upward. However, the problem is that all the loans received by the government so far form IMF, along with their conditionalities, continue to increase the debt burden of the country, and have brought no significant improvement in the economy and miseries of a common man.

More tough time is headed for the common man, as by July government must pay a total of $1.3 billion to the IMF as partial payment for an emergency loan it contracted in the wake of its 2008's financial crisis.

Pakistan is one of the 'prolonged users' of the IMF resources; it remained under the IMF support program for over 25 years - almost continuously during 1988 and 2004. The earlier Poverty Reduction and Growth Facility Arrangement had ended in December 2004 with proclamation by the authorities that they had broken the 'beggar's-bowl' and that their policies had brought the economy to a position where IMF support would no more be required.

After a four-year gap, Pakistan has once again come under the IMF support arrangement by concluding a 23 month Stand-By Arrangement (SBA) of SDR5.17 billion ($7.6 billion) on 24 November, 2008.

Since 1988, in Pakistan, IMF tried to fulfil its primary purpose that to ensure the stability of the international monetary system - the system of exchange rates and international payments that enable countries (and their citizens) to buy goods and services from each other. To maintain stability and prevent crises in the international monetary system, it gives time-to-time advices to the government to adopt policies that foster economic stability, reduce vulnerability to economic and financial crises, and raise living standards of the general public.

In the case of Pakistan, it seems that IMF failed to fulfil its main targets. It has been proved that after adopting IMF policies weaker are getting weakest.

Pakistan's economy has been performing at a level, which is far below its assumed potential, or that its neighbours and other countries in the region are doing better, is a fact which has been acknowledged by serious economists for some years now. Even Bangladesh and Sri Lanka have better economic growth rates compared to Pakistan, and more importantly, unlike Pakistan's roller-coaster economy, countries in the region are locking in to steady states of economic growth.

After that, blame goes to both the government's inefficiency and anti-poor policies of IMF. When the IMF gives loans, it imposes conditionalities on the borrowing countries including structural adjustment programs.

Conditionalities, which are the economic performance targets established as a precondition for IMF loans, it is claimed, retard social stability and hence inhibit the stated goals of the IMF, while its structural adjustment programs lead to an increase in poverty in recipient countries. Even, IMF does not make sure where the actual funds are going.

The borrowing countries like Pakistan are often not baled to come out of the crisis and they fall in to a crazy cycle of debt and interest payments. The corrupt politicians then burden the general public with high taxes to ensure repayments of their debts.

Misery of a common man started when currency devolution was recommended by the IMF to the government, despite knowing the fact that these policies are destructive to economic prosperity. Since 2008, IMF common starting point is the adjustment in the area of foreign exchange, beginning with currency devaluation in order to deal with normally overvalued currencies. This led to an automatic increase in the price of imports, followed by that of domestic prices and inflationary trends, especially the food inflation, which was particularly hard hit.

At present, most of the vegetables are sold around Rs100/kg. Meat is sold above Rs600/kg, beef (without bone) at Rs340, chicken (meat) at Rs270/kg and eggs around Rs85/dozen.

The IMF sometimes advocates 'austerity programmes', increasing taxes even when the economy is weak, in order to generate government revenue and balance budget deficits. Last year government fulfilled the commitments to IMF to increase taxes or reduce the subsidies that affected the common people thereby adding to their misery and reducing their consumption, which in turn would slow overall economic growth.

The policies of IMF are counterproductive for economic growth, as well as for national security. According to the finance ministry, we need Rs800bn for debt-servicing each year. This means half of our taxes collected go to debt repayment, especially in a situation when the government collects only Rs1,600 billion taxes and only 1.7 million out of 180 million people are paying taxes.

IMF also pressurises the government to cut its spending without realising that drastic cuts in government spending also reduce or eliminate government services and subsidies on education, health and other sectors that contribute to the social developments and economic betterment of, particularly, low income groups. Another aspect of the reduction of the government's role in the economy is the process of privatization of public firms. Although privatization might serve the important function of reducing the domestic deficit and eliminating inefficient and even corrupt activities in the public sector, it has also played a significant role in the imposition of the market over welfare and human development criteria in the functioning of the economy.

Time to time, IMF is asking the government to raise sales taxes and eliminate subsidies. This strategy will certainly reduce the fiscal gap. However, it may not reduce inflation since sales taxes and withdrawal of subsidies on utilities, petrol and food can be inflationary. To repay the loan instalments to the IMF, the government increases electricity tariffs by two percent every month. Subsequently, a common man will not be able to afford electricity and either resort to electricity theft or return to the lantern age.

Today more than 40 percent of the country's population live below the poverty level, most of them in rural Sindh, Southern Punjab and Balochistan. Unemployment and underemployment are the most crucial problems faced by Pakistani youth. Education is the primary tool for reasonable employment, and contributes to socioeconomic development of families. So far, the state has been unable to provide proper educational facilities to masses, creating a vacuum that is being filled by fundamentalist madrassas.

Previously, state jobs were considered more secure and individuals from ordinary educational backgrounds could find jobs in the public sector. IMF policies, especially in few years, have downsized government departments, wiping out hundreds of job opportunities and making hundreds of government employees redundant.

The present wave of privatization has also heightened unemployment. The poverty reduction and growth facility arrangements cited by the IMF to bring in foreign investment to reduce poverty are proving difficult to put into practice. The majority of those educated in government-run schools does not have access to the quality education required by multinational corporations and domestic private companies and are so far unable to benefit from any multinational investment. The decreasing middle class has pushed more people into absolute poverty. The elite, on the other hand, are multiplying their wealth.

One can say that from IMF proposal eleven of the 16 conditions accepted by the government with slight changes like devaluation of rupee, ending subsidy on gas and electricity, increase in discount rate, has a direct impact on common man.

While considerable demands are made in successive IMF agreements to increase tariffs on utilities and fuel and withdraw food subsidies, we have never seen an IMF conditionality demanding a 100 per cent increase in the health or social action programme budgets in Pakistan.

The bulk of the impact of IMF policies in Pakistan has been largely felt by the common people because of an immediate significant increase in the cost of utilities, higher fuel costs and withdrawal of food subsidies.

It is hardly surprising to see that the privileged traders and industrialists are able to cushion these impacts by transferring the burden to the consumers through price hikes. The feudal agriculturists and landlords are also protected with inexplicable exemptions from income tax, whereas the ruling elite and bureaucrats are largely provided facilities of free utilities and fuel by the state. There is thus little to no empathy on the part of the policy makers and power brokers as to the impact of these policy changes on common people.

Time is ripe to understand the complex net of IMF and consider some options to get rid of their policies if we want to see Pakistan developed. Pakistan can learn lessons from other South East Asian states. After their nightmarish experiences with the fund in 1997-1998, Asian countries began to pile up huge international foreign exchange reserves - partly so they would never have to go begging to the IMF again.

Argentina suffered through a terrible four-year depression, beginning in 1998. A country that had recently ranked among the highest for living standards in Latin America soon had the majority of the country falling below the poverty line. Many Argentines blamed the IMF, which had played a major role in designing the policies that led to the collapse, and seemed to prescribe just the wrong medicine during the crisis: high interest rates, budget tightening and maintaining the Argentine peso's unsustainable link to the U.S. dollar.

In December 2001, the government defaulted on $100 billion of debt, the largest sovereign debt default in history. The currency and the banking system collapsed, and the country sank further into depression - but only for about three more months. Then, to most people's surprise, the economy began to recover. The recovery began and continued without any help from the IMF.

Overall, the IMF success record is perceived as limited. While it was created to help stabilize the global economy, since 1980 critics claim over 100 countries have experienced a banking collapse that they claim have reduced GDP by four per cent or more, far more than at any time in post-depression history.

If the IMF and the World Bank are serious in financing and supporting economic change for human development in Pakistan then they must also face up to their responsibility of ensuring that the brunt of the burden of these structural adjustments are not borne by the impoverished and voiceless masses.