The IMF’s executive board on Wednesday approved the $US3 billion stand-by agreement for Pakistan to help overcome its current financial challenges.
Prime Minister Shehbaz Sharif has rightly said the deal inked with International Monetary Fund (IMF) was a moment for Pakistan to reevaluate its policies towards attaining the goals of financial self-reliance.
The IMF agreement is not a moment of rejoicing. We need to assess the state of affairs as to how the country has become dependent on loans and foreign grants.
For decades, Pakistan has depended on the International Monetary Fund (IMF) to fill economic gaps as crises erupt. Will this persistent dependency continue or will a self-‐reliant growth model emerge?
Pakistan’s relationship with the International Monetary Fund (IMF) dates back to the 1950s. The IMF manages the international monetary system by assisting member countries address their balance of payment issues.
This assistance comes mainly through either short-‐term loans under its Standby Agreement (SBA) or medium-‐to-‐long-‐term loans under its Extended Fund Facility (EFF). Both packages come with conditionalities.
Pakistan, over the years, has relied on IMF assistance to paper over economic dips that have followed cyclical growth spurts. Two factors are largely responsible for Islamabad’s requests to the IMF for financial assistance i.e. current account deficits and fiscal mismanagement.
Persistent current account deficit is the cause of Pakistan’s balance of payment problems. Every time dwindling reserves follow a yawning deficit, Pakistan seeks IMF assistance to replenish reserves.
Pakistan relies on imports for growth or finances its development through debt. Our dear homeland does not back these measures by sustained export promotion and foreign direct investment.
The second factor driving Pakistan’s IMF reliance is poor fiscal management. Pakistan has grappled with fiscal problems given limited revenue-‐generation capacity, ailing energy sector, and recurrent spending-‐side issues.
Public revenue generation hinges on taxation. Pakistan’s tax-‐GDP ratio remains below the percentage needed to maintain an adequate level of investment and public services.
Moreover, given a large informal sector, the predominance of cash-‐based transactions, and tax evasion, we cannot widen the tax base. Another driver of large fiscal deficits is our bloated state-‐owned enterprises (SOEs) and an ailing energy sector.
SOEs, such as Pakistan International Airlines, Pakistan Steel Mills, and Pakistan Railways, operating at major losses, have undermined fiscal strength. In fact, the net losses of SOEs were quite large. The energy sector, despite countless reforms, has deepened fiscal deficits given high subsidies and increasing debt.
Government expenditure has also been inefficient and mismanaged. A big percentage of expenditure goes to service debt repayments. Inefficient allocation of resources, which accommodates the interests of the political elites, has also widened fiscal deficits, suffocating growth.
Unless these problems surrounding fiscal mismanagement are addressed, Pakistan’s economy will cycle between booms and busts with dependence on the IMF that arrives with thorny conditions.
These factors explain why Pakistan has repeatedly turned to the IMF and why the IMF countenance recurring appeals from Pakistan. Pakistan’s strategic and geopolitical value has also played a role.
Dependency on the IMF is an integral part of the Pakistani growth story. Despite assistance from China and Saudi Arabia vis-‐à-‐vis balance of payment issues, their support cannot substitute IMF assistance. The IMF and Pakistan will remain tied unless the latter refocuses on exports and generates sufficient tax revenue.
The fiscal deficit has widened due to low tax revenues and trade balance has worsened as exports fell. Thus, Islamabad is likely to use the IMF’s assistance to manage and overcome immediate economic struggles.
There is a need for comprehensive long-‐term structural reforms to weed out systemic weaknesses and reinstate robust institutional frameworks to facilitate industrialization and export growth. Otherwise, debt and balance of payments crises will rear in the short-to-medium term.
