IMF deja vu
SINCE its creation, Pakistan has passed through multiple financial crises. The main contributing factors have been the lousy management of public finances and unabated corruption in the ruling elite. The present situation is unprecedented. Without foreign monetary aid, we will default on our loans, interest and the import of essential items. Some sitting ministers claim the country has already defaulted.
Being in the 23rd IMF program, the loans from the IMF and friendly countries have been piling up perennially over the years. Without any cohesive financial policy and prudence in spending the borrowed money, we always went back to knocking at the doors of international donors, specifically the IMF. The cycle kept on repeating with the passing years; each new loan tranche was attached with stringent IMF conditions. As the easy money continued rolling in, when it was needed by the GOP, our ruling elite didn’t bother to tighten their belts. None of the governments that came into power would enact reforms and pass legislation to broaden the tax base, raise the revenues and cut down the expenditure. They were cherishing the easy way out of financial disasters riding on the back of the IMF.
Whenever we are left with a few dollars in our reserves, enough to buy a few imported candies, reel at defaulting to pay back our due loans and struggle to meet our domestic expenses, we turn to the IMF. Then the IMF appears as a savior. Or does it? Government officials and independent economic proponents predict that all our financial woes will evaporate once the IMF tranche flies in. The dollar rate will slide down, inflation will deflate, petrol, electricity and gas prices will be slashed, industries will start humming again and the country will race down a fast track to prosperity. Experts opposing it predict catastrophic consequences that include unbridled inflation and cutthroat price hikes in petroleum products, electricity and gas. So what is the reality?
As said, we have passed this way too many times before. But never like this. The IMF used to put harsh conditions before as well. And these were mainly to streamline our economy and the capability to make us stand on our feet and put an end to perpetual reliance on others. In the past, our government would accept the IMF conditions on paper only. Once the loan got transferred, the GOP unabashedly threw these conditions into the waste basket. This time around, however, the IMF, well aware of the past shenanigans, demanded that the government not only accept all the conditions but implement them verbatim before even the approval of the loan tranche. The IMF did not budge from its demands and the GOP was left with no option but to surrender to the IMF on its terms. Further to add to the woes of the GOP, friendly countries like Saudi Arabia and China, that would normally extend their monetary aid whenever Pakistan landed in dire straits, have tied up their lending with the approval of the IMF. What happens next, the GOP, as always, is clueless. However, it has been taken for granted that for good or bad, the IMF will be there to pull the country out of default.
One thing to understand is that many textbook economic formulae and measures the IMF imposes on Pakistan, won’t work here. For example, with the devaluation of the local currency, the economic postulate dictates that the country’s exports should rise. In our case, the exports have drastically fallen. The reason is that imports of raw material on which our industry relies heavily have become expensive due to the increase in the dollar rate. With the drastic escalation in electricity and gas prices, their manufactured products become much more costly to compete at the international level and unaffordable for the local population. The soaring imports and the falling exports will further widen the current account deficit. The borrowed dollars can temporarily fill this gap before the state bank runs out of them. After that, we will be back, banging at the doors of international donors. And so it will go on.
Another phenomenon that goes against common economic wisdom is the interest rate. The IMF has demanded to raise the interest rate to 20% from the already high of 17%. The prevailing logic is that by increasing the interest rate, the economy slows down, which will cut down inflation. This might not happen in our case because borrowing at a high-interest rate will make the manufactured and traded products costlier, slowing down the demand. As per the textbook lesson, this will lessen the demand that brings down the prices. However, again, other factors like petrol, electricity, gas, transportation and labour govern the production costs. And since prices of these essentials have already been quite hiked, the manufacturing cost will jump further. A supplier will not sell his products below his cost. Therefore, the low demand will not impact reducing the prices; rather, it will further aggravate the manufacturing of unpurchasable goods. That will significantly increase the risk of the gradual shutdown of the factories and businesses, as we have already started witnessing. Another condition of the IMF is to withdraw all subsidies extended to the industries which will add fuel to this phenomenon.
By agreeing to the IMF conditions, we are signing our death warrant. According to Dr. Hafiz Pasha, two crore more people will go below the poverty line. About twenty lac workers will be rendered jobless. Inflation will reach 35%, and the dollar rate will exceed Rs 300. To make the life of an ordinary man further miserable, the general sales tax will also be raised. So we can justifiably ask, is this IMF deal a rescuer or a death warrant?
Unfortunately, it seems that the elite ruling class has no qualms about the state of the poor and the economic apocalypse the country will pass through. The measures that can rescue a country from economic calamity are not being adopted to avoid this IMF or in the future. Like instead of curtailing government spending, it’s been increased. One area is a vast cabinet with numerous additional benefits. Recent import of 2200 luxury cars for officials when the poor are struggling to feed their mouths. Continued sprouting of international food franchises and shopping malls are flooded with imported clothing, chocolates, condiments, pet foods, make-up and electronic gadgets. There’s no firm commitment or planning to implement austerity policies and measures. Our country is endowed with many resources to survive without the IMF. What we need to do is shrewd planning, diligent utilization of resources and most of all, seizure of corruption and theft in the top governing circles.
