Is Pakistan on the way to living without the IMF?

1 December by Abdul Khaliq

Pakistani prime minister Imran Khan

Pakistan is perhaps the only country in South Asia with a history of repeated engagements with the IMF – 21 loan agreements since 1959. The last one was concluded in September 2016. Despite that, Pakistan’s economic woes have not been resolved. Its economy is still in bad shape, with soaring debt, a widening current-account deficit and foreign exchange reserves falling to just around $9 billion, not enough to cover two-months’ imports.

In the outgoing fiscal year, Pakistan’s current account deficit has swelled to an all-time high of $18 billion, while the budget deficit edged up to around 6.6% of GDP GDP
Gross Domestic Product
Gross Domestic Product is an aggregate measure of total production within a given territory equal to the sum of the gross values added. The measure is notoriously incomplete; for example it does not take into account any activity that does not enter into a commercial exchange. The GDP takes into account both the production of goods and the production of services. Economic growth is defined as the variation of the GDP from one period to another.
. Pakistan requires approximately $12 billion for balance of payments Balance of payments A country’s balance of current payments is the result of its commercial transactions (i.e. imported and exported goods and services) and its financial exchanges with foreign countries. The balance of payments is a measure of the financial position of a country vis-à-vis the rest of the world. A country with a surplus in its current payments is a lending country for the rest of the world. On the other hand, if a country’s balance is in the red, that country will have to turn to the international lenders to meet its funding needs. support by the end of June next year. The new Pakistan Tehrik-e-Insaaf (PTI) government of Prime Minister Imran Khan is desperately seeking financial support from all corners to fill this alarming gap. Though it has been successful to some extent, by securing a $6 billion deal from Saudi Arabia and almost the same amount from China and the UAE together, but it is still not out of the woods.

Cognizant of the looming financial woes, the government decided to knock on IMF IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.
doors for a bailout package of around $6-$7 billion. It is pertinent to mention that this is the third consecutive civilian government seeking IMF support at the very onset of its tenure. In 2008, the Pakistan Peoples Party (PPP) government went to IMF. In 2013 the Pakistan Muslim League (PML-N) government approached IMF and now in 2018, the PTI is going to do the same at the start of its five-year term.

An IMF delegation led by Herald Finger, has just been on a two week-long visit for talks on a financial package at the request of the Pakistani government seeking help with its balance Balance End of year statement of a company’s assets (what the company possesses) and liabilities (what it owes). In other words, the assets provide information about how the funds collected by the company have been used; and the liabilities, about the origins of those funds. of payment issues. However, the visit remained inconclusive, with the announcement of another round of talks in January 2019. It is highly important to note that Pakistan, this time, has refused to cave in and accept the tough conditions imposed by the IMF. Nevertheless, the question is – how long it may be able to resist? Will Pakistan be able to divorce from the IMF?

The conditions reportedly included; increased energy tariffs from 20 to 22%, imposition of more taxes and sharing details related to Chinese financial assistance. The mission also asked for further devaluation Devaluation A lowering of the exchange rate of one currency as regards others. of the Pakistani rupee, already depreciated more than 27% since the start of this year and 15% in the last five months alone. As far as the contractual agreements with China are concerned, this is something Pakistan does not want to share Share A unit of ownership interest in a corporation or financial asset, representing one part of the total capital stock. Its owner (a shareholder) is entitled to receive an equal distribution of any profits distributed (a dividend) and to attend shareholder meetings. with the IMF citing financial or national security reasons. China has pledged some $60 billion in financing for ports, railways and roads under the China Pakistan Economic Corridor (CPEC) agreements.

The general perception is that the government has done the right thing by refusing to cave in to the IMF’s strict demands. None of the mainstream political parties have criticized avoiding the IMF. Economists are of the view that Pakistan can still avoid the IMF. It is not dying for the bailout at this stage and can capitalize on the available cushion. The PTI government assumes itself to be in a comfortable position after the availability of $6 billion from Saudi Arabia and the assurance of similar amounts from friends like China and UAE.

The pro-people economic experts are convinced that the government’s decision to resist the IMF is the right decision. They believe that none of the IMF programs in the past have worked, otherwise Pakistan’s economy would be in a better state today. Most of the measures called for by the IMF in the latest discussions, were not in the interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. of the people of Pakistan.

A number of studies, carried out by Pakistani economists confirm that during the 1988-1999 structural adjustment Structural Adjustment Economic policies imposed by the IMF in exchange of new loans or the rescheduling of old loans.

Structural Adjustments policies were enforced in the early 1980 to qualify countries for new loans or for debt rescheduling by the IMF and the World Bank. The requested kind of adjustment aims at ensuring that the country can again service its external debt. Structural adjustment usually combines the following elements : devaluation of the national currency (in order to bring down the prices of exported goods and attract strong currencies), rise in interest rates (in order to attract international capital), reduction of public expenditure (’streamlining’ of public services staff, reduction of budgets devoted to education and the health sector, etc.), massive privatisations, reduction of public subsidies to some companies or products, freezing of salaries (to avoid inflation as a consequence of deflation). These SAPs have not only substantially contributed to higher and higher levels of indebtedness in the affected countries ; they have simultaneously led to higher prices (because of a high VAT rate and of the free market prices) and to a dramatic fall in the income of local populations (as a consequence of rising unemployment and of the dismantling of public services, among other factors).

period, the levels of inequality and poverty increased. The decade 1992-2002 witnessed a decrease of per capita income and per capita GDP, worsening the gap between the rich and the poor. Similarly, the data between 1981-2001 confirms many of the above-mentioned observations. This includes the increase of the unemployment rate from an average of 3.5 % in the 1980s to 5.7% in the 1990s and to 6.7% in 2000-01 due to the bitter structural adjustment pills of the IMF.

The strict austerity measures demanded this time by the IMF are bound to devastate the living conditions of working people and the poor. Tough fiscal measures such as imposition of more and higher taxes, withdrawal of tax exemptions, increases in energy tariffs, elimination of energy tariff subsidies and privatization of public sector enterprises would strongly hurt the poverty-stricken people of Pakistan, who would have to brace themselves for greater hardship in the coming years. In a nutshell, any new engagement with the IMF will have negative implications for the people of Pakistan. Pakistan’s external debt may jump to $103.4 billion by the end of current financial year, pushing it close to 70% of GDP by 2023.

As the Pakistani public is well aware of by now, crisis interventions by outside donors are no more than a stopgap solution to what has become a chronic problem. What Pakistan needs at this juncture is debt restructuring from all creditors in order to give its ailing economy a breathing space for a fresh start. One of the economists and member of the Economic Advisory Council, Dr. Ashfaq Ahmed has advised the government that Pakistan must learn to live and survive without the IMF.

For a sustainable solution, besides a crackdown on corruption and implementing a progressive taxation system, the most important thing is the accountability of the previous loans. If the new government is able to reduce corruption, plug leakages and improve the taxation system of the country, it is hoped, Pakistan will be able to divorce debt dependency in the coming years. This is only possible if the new leadership of PTI dares not only to express, but implement the political will that it has been declaring before coming to power. The people of Pakistan have high hopes in Prime Minister Imran Khan.

Parallel to that, an independent parliamentary debt audit commission, is needed to determine what loans were used for, whether the people of Pakistan have benefited and to help ensure that any future loans be used responsibly.

Abdul Khaliq

CADTM Pakistan



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