Socio-Political Impact of International
Monetary Fund (IMF) on Pakistan from
2008-2022
Damiya Saghir*
Abstract
The International Monetary Fund (IMF) is an international worldwide
organisation that assists countries with financial stability and monetary
cooperation through economic surveillance, financial aid, and capacitybuilding
support. Pakistan has benefited from IMF-supported programmes, but these have
also negatively impacted its socio-political structure. This study aims to
examine the socio-political impacts of IMF policies on Pakistan from 2008 to
2022, including positive and negative effects and future trends. The study
focuses on the economic well-being and social and political stability of
Pakistan, using the "Theory of Dependency" as a framework. IMF
policies have played a role in shaping Pakistan's economic policies, and
reforms such as privatisation and liberalisation. The deregulation has resulted
in job losses, inflation, and reduced public spending on healthcare and
education. The study concludes that the effects of the IMF on Pakistan’s
socio-political structure are mixed (both positive and negative). To end
Pakistan's dependence on the IMF, it is recommended to implement comprehensive
economic reforms addressing the root causes of its fiscal problems, for which
the research proposes developing a 'Five-Year Six Points Plan.
Keywords: International Monetary Fund,
Socio-Political, Economic Reforms
* Damiya
Saghir is a research associate at the Maritime Centre of Excellence, Pakistan
Navy War College, Lahore
@2023 by the Islamabad Policy Research Institute. IPRI Journal n XXIII (2): 83-110 https://doi.org/10.31945/iprij.230204
Introduction development, which has resulted in social change and prosperity. istorically, democratic states have prioritised economic
Capital
migration from one sector to another is one of the significant aspects of
growing economic development. Economic progress in sectors provides an
opportunity for people to understand how society's restructuring affects local
social structures, including employment patterns, income, population,
agriculture, health, and other public sector departments. A country's social
development plays a crucial role in protecting its economic stability at an
international level. According to various experts, local social changes are
integral to the external processes of economic development, demonstrating the
intertwined nature of social change and economic development for a country's
progress.[1]
The International Monetary Fund (IMF) is a global
organisation consisting of 189 countries that collaborate on monetary
cooperation and international financial stability. It aids member countries in
three key ways. Firstly, the IMF conducts economic surveillance by carefully
observing and assessing the economic and financial policies of its member
countries. Secondly, it provides financial aid and loans to member countries
that are experiencing varying degrees of economic difficulties. Finally, the
IMF offers capacity-building support, which involves the modernisation of
economic policies and institutions of its member countries as well as training
their people to enhance their skills and abilities.[1]
Pakistan has obtained a total of 22 loans, with four of
them provided under the Poverty Reduction Growth Trust (PRGT). It is
specifically aimed at reducing poverty and boosting economic growth. However,
despite the intended focus on poverty reduction, each programme was primarily
dedicated to enhancing economic growth, as poverty rates tripled during this
period.[2]
From 1980 to 1995, Pakistan was involved in seven programmes, with all but one lasting between one and two years. Between 1997 and 2013, six programmes were implemented, with the last loan
Umair,
Jamal, “The PTIs struggle to govern Pakistan,” South Asian Voices, June 4, 2019,
https://southasianvoices.org/the-ptis-struggle-to-govern-pakistan/.
[1]
Hisham Sajid, “Pakistan’s 60 years of history with IMF in one chart,” Samaa, May 16, 2019, https://www.samaa.tv/money/2019/05/pakistans-60year-history-with-imf-in-onechart-hs/.
[1] Umair Jamal, “The PTIs struggle to govern
Pakistan,” South Asian Voices, June
4, 2019, https://southasianvoices.org/the-ptis-struggle-to-govern-pakistan/.
of $6.4 billion borrowed by the
PML-N government. Except for one programme, which lasted for an extended
period, all the other programmes lasted for approximately three years.
The IMF-supported programmes in Pakistan have helped the
country manage the widening fiscal deficit, but they have also had a
significant negative impact on the country's socio-political situation. To
assess the effect of IMF policies on the country's socio-political fabric,
various indicators will be analysed. These include employment and poverty
levels, national sovereignty, public infrastructure, quality of life,
government and institutional performance, provincial development, human
development index, and public satisfaction. These indicators will be used as
variables to evaluate the economic policies of Pakistan under the IMF.[1]
When examining the social
consequences, it is crucial to consider the stability, quality of life, living
standards, and facilities provided by the state. Pakistan's human development
index ranking in 2022 was 161, the lowest in South Asia, tied with Afghanistan.
Although both countries have been accused of having sanctuaries for terrorist
organisations, this does not justify Pakistan's low ranking. Moreover,
sustained economic growth is a critical driver of poverty reduction, and
despite the IMF loans, Pakistan has not experienced stable economic growth,
which will be further investigated in the research.
This research focuses on why
Pakistan continues to go to IMF time and again. The other most important
question it caters to answering is what impact IMF and its conditions have had
on developing the social and political structure of Pakistan? The paper focuses
on a brief historical background, rationale and research questions along with
literature reviews on the subject that helps streamline the research to achieve
its desired goal. The paper is based on both primary and secondary data used in
order to reach advisable recommendations.
Historical Background
IMF programmes have become a recurring cycle for Pakistan, with the country repeatedly seeking assistance from the IMF. This dependency on the IMF has developed over the course of more than six decades, with both military and democratic regimes in Pakistan turning to the organisation for
[1] Stephanie Flamenbaum,
“Peace Brief,” USIP, May 24, 2012,https://www.usip.org/sites/
default/files/resources/PB-127.pdf.
support. However, before delving
into the pros and cons of this relationship, it is important to understand how
and when it began.
Pakistan's association with the
IMF dates back to 1958 when General Ayub Khan signed a standby agreement for
SDR $25 million. Subsequent leaders followed this precedent, with Zulfiqar Ali
Bhutto seeking IMF assistance three times, withdrawing SDR $314 million out of
an agreed SDR of $330 million.
From 1988 to 1997, Pakistan
visited the IMF eight times, withdrawing a total of SDR $1.64 billion. General
Pervez Musharraf’s government secured SDR $1.33 billion in two attempts from
the IMF during his nineyear tenure.
In 2008, the PPP government
obtained the largest bailout package of SDR $4.94 billion. The implementations
of the macroeconomic policies involved enhancing tax administration, eliminating
tax exemptions, and introducing an interest rate corridor to achieve a stable
economy with a 7 per cent GDP growth rate.
The PML-N government sought IMF
assistance in 2013, and obtained a loan of SDR $4.399 billion, which had a
positive impact on the macroeconomic situation. The PTI government, led by
Imran Khan, returned to the IMF for assistance and has taken on the highest
amount of external borrowing, totalling $52 billion, with $36.05 billion
repaid.
The country has yet to experience significant structural development. It has faced criticism for the three-year reforms that were not successful.[1] The PTI government has borrowed the most, amounting to $52 billion over three years and eight months, with $36.05 billion already repaid. The PML-N government is in second place with $49.761 billion in external borrowing over five years, retiring $27.071 billion in debt. The PPP borrowed $25.008 billion over five years, retiring $14 billion, putting them in third place for borrowing among the last four administrations. Despite
[1] Sarfaraz Abbasi, “22 Loans
in 61 years-Pakistan’s unwavering habit of going to IMF,”
The
Express Tribune, April 29, 2019,
https://tribune.com.pk/article/81864/22-loans-in61-years-pakistans-unwavering-habit-of-going-to-the-imf.
[1] Sarfaraz Abbasi, “22 Loans in
61 years-Pakistan’s unwavering habit of going to IMF,”
The
Express Tribune, April 29, 2019,
https://tribune.com.pk/article/81864/22-loans-in61-years-pakistans-unwavering-habit-of-going-to-the-imf.
numerous loans from the IMF, Pakistan's struggling economy
has not significantly improved the living standards for its people
significantly. This research aims to investigate the effectiveness of IMF loans
in promoting social development and improving the quality of life in the
country.[1]
It is, therefore, vital to
explore the socio-political impact of the IMF on Pakistan from 2008-2022. It is
equally vital to comprehend the sociopolitical consequences rather than purely
economic implications. Though economic aspects are crucial, the socio-political
impact, including its effects on governance, public sentiment, political
stability, and social cohesion, is equally significant. By delving into the
socio-political realm, this research can provide insights into how IMF
interventions influence political decision-making, governance structures,
public trust in institutions, and societal stability, which are often
overlooked. They are, however, integral for a comprehensive understanding of
the real-world impact of international financial institutions on a nation's
well-being.
Hence, a deep-rooted analysis of
the history curated by the socio-political impact with its both negative and
positive implications is quintessential to understand the relationship between
the international financial agencies and the recipients. Similarly, it is
crucial to study the policies and strategies devised/implemented so far by
Pakistan to address the sociopolitical influence of the loans so far. The study
is also aimed at determining the possible trends while recommending the policy
options to counter the negative influence caused by the perpetual reliance on
the IMF.
Theoretical Framework
Though there are several theories
applicable to the study of the sociopolitical impact of IMF on Pakistan from
2008-2022, the ‘Dependency Theory’ has been aptly chosen to substantiate the
argument.
Dependency Theory is a critical perspective in the field of international relations and economics. It seeks to explain underdevelopment and economic disparities between developed and
[1] Tahir Amin, “PTI govt.
procured $52bn; $36.05bn was repaid,” Business
Recorder, May 16, 2022, https://www.brecorder.com/news/40173274.
underdeveloped countries. It
emphasises the role of historical, economic, and political relationships in
perpetuating global inequality.
There are three prominent schools
of thought within the Dependency Theory. The first school of thought is
commonly known as ‘Dependencia’ surrounded by the works of Andre Gunder Frank.
Frank's core-periphery model posits that the world is divided into a core of
dominant, industrialised nations and a periphery of underdeveloped nations. The
core exploits the periphery through economic relationships, including trade and
investment, which perpetuate underdevelopment and economic inequality. This
exploitation, according to Frank, has historical roots in colonialism and
continues through neo-colonial economic practices.[1]
Second is the Global historical
materialism or the Unequal Exchange Theory by Samir Amin. Amin's theory argues
that underdeveloped countries are subject to unfavourable terms of trade, which
result in the systematic transfer of value from the periphery to the core. This
unequal exchange, combined with the core's economic domination, contributes to
the underdevelopment of the periphery. Amin emphasises that global
economic structures perpetuate this unequal exchange.[2]
Immanuel Wallerstein and his World Systems Theory expands
on Dependency Theory by framing the global economy as a world system divided
into core, semi-periphery, and periphery regions. Core nations are economically
dominant, semi-periphery nations are intermediaries, and periphery nations are
exploited. Wallerstein argues that the capitalist world system perpetuates the
exploitation of periphery nations through historical processes like colonialism
and ongoing economic relationships.[3]
These three schools of thought within Dependency Theory share the common belief that global economic relationships are rooted in historical exploitation and maintained by contemporary
[1] Mathew Rose, “Andre Gunder
Frank & Dependency Theory,” ourPolitics.net,
September 9, 2016, https://ourpolitics.net/andre-gunder-frank-dependency-theory/.
[2] Kufakurinani et al,
“Dialogues on development Volume 1: On Dependency,” (2017), 1218.
[3] Kufakurinani et al, “Dialogues on development.”
structures. They emphasise on the
underdevelopment of peripheral nations and highlight the role of external
forces. The unequal power dynamics shape the socio-economic conditions of the
underdeveloped countries, offer critical perspectives on global inequality and
development.
In the context of Pakistan's
relationship with the IMF, Dependency Theory is used to analyse how Pakistan's
economic and political dependence on the IMF has affected its socio-political
landscape. This includes the analysis of the conditions stitched with the IMF
loans and their implications on Pakistan's economic policies, social welfare
programmes, and political stability.
Literature review
Even though borrowing countries
have had a wide range of multidimensional impacts of IMF loans and have been
extensively retraced, the issue still lacks in consensus and needs further
investigations. The discourse from all the scholars is split between different
schools of thought. The available literature witnesses both supportive as well
as conflicting findings in terms of maintaining economic equilibrium in the
borrower states.
Reichman and Stillson (1978) and
Killick (1984) discovered that Fund programmes had no impact on the balance of
payments, whereas Connor (1979) observed an improvement in both current account
and balance of payments in his research. Despite their findings on the negative
impact of these programmes on economic growth, deficits, and inflation, all of
these studies shared a commonality.
Khan and Haque (1998) employed a
"before-after" approach to examine the performance of a country's
economy before and after participating in an IMF programme. The
"with-without" method was also utilised to compare the economic
outcomes of countries with and without IMF assistance.
Another approach, the "target against actual" format, compares the programmes' intended objectives with the actual performance of the country. In addition, the simulated performance of programme’s policies is evaluated against each other. Despite using the "before-after" analysis, there is no consensus on the impact of the Fund agreement on the Balance of Payments (BOP) and Current Account (CA).
According to Looney (2002), the
changing of governments during the 1990s was a factor that contributed to
Pakistan seeking IMF assistance on multiple occasions. Pakistan was ruled by
two political parties during this time, both of which were removed from power
due to corruption allegations.[1]
This lack of trust in the competence and expertise of successive governments
led each new government to seek a new agreement with the IMF. In addition, the
Asian financial crisis and international community sanctions resulting from
nuclear tests in 1998 exacerbated Pakistan's economic problems, resulting in
seven agreements with the IMF in that decade. These frequent agreements damaged
Pakistan's reputation and credibility, forcing international institutions to
impose harsh terms for subsequent loans.
According to the findings of
Dreher (2004), countries with greater debtservicing requirements, lower levels
of democracy, and smaller short-term debt are more likely to seek financial
assistance from the IMF.[2]
Following a military coup in 1999, Pakistan saw a significant improvement in
the social and macroeconomic indicators due to timely reforms, trade
liberalisation, good governance, and foreign aid resulting from cooperation in
the United States War on Terror (WoT) after 9/11. By 2007, Pakistan had a
robust and healthy economy. However, subsequent increase in militancy,
compounded with the global recession of 2007, and domestic energy crisis, led
to the economy's decline.
According to Zaidi (2005),
Pakistan has a population of 184.4 million and is classified as a lower-middle
income country, ranking 6th in the world in terms of population. The country's
total GDP is Rs22.9 trillion
[1] Ishrat Hussain, “Pakistan
and the IMF 1988-2002: A Case Study,” A paper presented at the International
Expert Workshop organised by the German Foundation for Development (DSE) at
Berlin on July 1 – 2, 2002. https://ishrathusain.iba.edu.pk
/speeches/economicManagementPolicies/2-Jul-02.pdf
[2] Dreher, Axel, “IMF and Economic Growth: The Effects of Programs, Loans and Compliance with Conditionality,” Conference Paper, ECON STOR, https://www.econstor.eu/bitstream/10419/19804/1/Dreher.pdf
(approximately $240 billion),
with a per capita income of $1,368.[1]
The agriculture, industry, and services sector contributes 21.4%, 20.9%, and
57.7% to the GDP, respectively.[2]
Pakistan is a major global producer of agriculture commodities such as cotton,
wheat, rice, sugarcane, and milk, and the textile sector is the country's largest
industrial sector, accounting for 53% of total exports.14 Pakistan's
economy experienced 6% growth in the first four decades after its independence
in 1947, making it a role model for the developing world in the 1960s.[3]
However, economic growth was hampered by costly confrontations with India in
1965 and 1971, and the detachment of Bangladesh in 1971.
Haque (2018) asserts that
Pakistan has approached the IMF 22 times in the past 30 years, and each time,
there has been a disappointed effort. He argues that IMF bailout programmes are
just for show, and no Pakistani government has ever truly wanted to reform the
country's economy. He suggests that these programmes have undermined Pakistan's
productivity and growth potential by eroding governance and state capacity
while creating conditions for rent-seeking and corruption. Haque provides an
example of how funding for public services was cut to the bone after the bus
service was ended in 1990, resulting in a severe erosion of state capacity. He
also criticises PTI’s IMF programme, which he believes will lead to postponed
reforms, the dying down of industries, underfunded education, and frequent
energy and water shortages. He argues that the IMF prioritises achieving stable
macroeconomic indicators in the short term, even if it accelerates social and
political decay.[4]
[1] Dr. Dirk Linowski and
Stefan Lukas, “The China-Pakistan Economic Corridor (CPEC) and Its Implications
for Security Cooperation in the Region,” Policy
Brief, No. 67,
January
2021, Norwegian Institute of International Affairs, https://www.ssoar.info
/ssoar/bitstream/handle/document/78384/ssoar-2021-linowski_et_al-The_ChinaPakistan_Economic_Coridor_CPEC.pdf?sequence=1&isAllowed=y&lnkname=ssoar2021-linowsk
[2] “Pakistan at a Glance,”
Food and Agriculture Organisation of the United Nations.
https://www.fao.org/pakistan/our-office/pakistan-at-a-glance/en/ 14
“Pakistan at a Glance,” FAO.
[3] Ishrat Hussain,
“Pakistan’s Growth Experience 1947-2007,” Speeches,
ishrathusain.iba.edu.pk/speeches/Pakistan_s_Growth_Experience_1947-2007.pdf
[4] Nadeem ul Haq, “Pakistan’s
IMF Problem,” Project Syndicate, 31
July, 2018.
https://www.project-syndicate.org/commentary/pakistan-misguided-imf-programs-bynadeem-ul-haque-2018-07?barrier=accesspaylog
In Shahid's (2019) discussion of
the economic situation in Pakistan, he highlights the impact of rising prices
and taxation on local industries, which led to a nationwide strike organised by
the All Pakistan Anjumane-Tajran. The working class in Pakistan is becoming
increasingly vocal against the IMF, viewing it as an “Imperialistic Takeover.”[1]
It is putting pressure on the people and burdening their lives with no viable
means to pay taxes. Furthermore, Shahid blames the partisanship or unfair
appointments of the individuals to oversee the implementation of programme
conditionalities, resulting in job losses. He also posits that the IMF is
pursuing geopolitical interests rather than economic help to
Pakistan, as part of a US agenda to influence the country's
politics.[2]
In their 2020 study, Iqbal, Tabussam, Asad and Hussain
examined the impact of the conditions imposed by IMF programmes on the
Pakistan’s economy, which has been a long-standing recipient of IMF resources.
The study analysed data from FY1970 to FY2020 and found that while IMF
programmes had a significant impact on financial sector reform, trade
liberalisation, privatisation, and deregulation had a little effect on key macroeconomic
variables. Unfortunately, these programmes did not improve Pakistan's finances
or lead to better GDP growth rates or more sustainable external accounts.
Interestingly, the programme implementation was better during military rule and
poorer during the civilian rule.[3]
Most studies suggest that Fund
arrangements had a positive impact on current account, showing improvement.
However, the studies conducted for Pakistan do not explain why programmes have
not led to an improvement in the economy, despite prolonged engagement, nor do
they answer why policy programmes often fail in Pakistan.
[1] Umair Javed (LUMS), Sher
Afghan Asad (LUMS), Hamid Ateeq Sarwar (REMIT), “Understanding Informality in
the Wholesale, Retail and Real Estate Sectors,” Report,
Pakistan
Business Council. https://cdpr.org.pk/wp-content/uploads/2023/05/
Understanding-
Informality-in-the-Wholesale-Retail-Real-Estate-Sectors.pdf
[2] Umair Javed (LUMS), Sher
Afghan Asad (LUMS), Hamid Ateeq Sarwar (REMIT),
“Understanding Informality in the
Wholesale, Retail and Real Estate Sectors.”
[3] Iqbal, Tabassum and
Hussain, Asad, “Impact of IMF
Conditionality on Pakistan,” MPRA
Paper, (2020), mpra.ub.uni-muenchen.de/112870/
Socio-Political Impact of IMF on Pakistan
Given the long history of IMF and
Pakistan, the question, however, remains unanswered. Why, despite several programmes, Pakistan has
not been able to develop itself? While
many believe that Pakistan does have the potential to be self-sufficient, it is
still unclear why the IMF remains one of the most favourite doors to knock at each
time a regime changes. Ever since Pakistan came into existence, it has
perpetually faced economic turbulence.
Time has proven that social and
political problems stem out of the fragmented and sometimes inefficient
government set-ups. The inability to
produce a comprehensive legal structure adds to deficiencies. Nonetheless, it
is important to shed some light on the problems that have been accumulating
ever since. An effort is made to discuss and analyse some pertinent points. Whether
or not IMF and their conditionalities have affected the socio-political setup
of Pakistan is the scope of the discussion.
Historically, in 1980s Pakistan’s
per capita income was 40 to 60 % higher than its neighbouring countries.
Unfortunately, the tables have turned, and situation has worsened over the
years (Abbasi, 2019). The rating has
dropped 14 times as compared to 2008 when Pakistan’s ranking was 147. This has
proved that the social conditions of people, the living standards, and
education and health opportunities have declined even further. This year’s
index shows that Pakistan’s expected schooling years are up to
eight and gross per capita income to $4,624.[1]
Standard, September 9, 2022, https://www.business-standard.com/article/ international /pakistan-drops-7-places-to-161st-rank-in-human-development-index.
there is a need to maintain economic growth of around 6 to
7 per cent. This will help alleviate about 30 per cent of the population living
under poverty.21
On the other hand, the gap between haves and have-nots in
the society can also be conspicuously identified. For instance, though Pakistan
has a huge potential as an agrarian society, there is still almost a lot that
is being imported on macro and micro level. Similarly, the obsession that
Pakistanis’ have sprawling of
land, complemented housing schemes. It accommodates the elite culture more
comfortably.
For loans to work and economies to flourish, countries have
to present their best policymaking options. In 2008, the PPP government
protected the country from going in default.
However, after acquiring the SBA agreement worth $11.3 billion from IMF,
the policy matter was not followed to reduce public debt.22
According to Economic Survey of Pakistan 2010-2011 by the
State Bank of Pakistan, Pakistan’s debt profile reveals that Pakistan had a
better debt profile in the tenures of Benazir Bhutto and Nawaz Sharif. Even the
debt profile was fairly under control during the military regime of General
Pervez Musharraf.23 In 2013, PML-N worsened the social indicators by
their weak policy decisions. The country was pushed into a deep debt-trap as
every single Pakistani owed almost above Rs.66000.24 During the same
period, the income inequality increased. The biggest failing decision that
21 Afzal et
al, “Poverty trends in Pakistan: A glimpse from last two decades,” PIDE, 2021. 22 “Pakistan Economic Survey
2021-2022,” Finance Division, Government of Pakistan.
https://www.finance.gov.pk/survey/chapter_22/Economic%20Survey%202021-22.pdf
23 Abdul
Khaliq, “Pakistan: Debt spiral under PPP govt,” CADTM, November 2, 2012, http://cadtm.org/Pakistan-Debt-spiral-under-PPP.
24 Ghulam
Abbas, “ PMLN’s performance review contrary to claims,” Pakistan
Today,
May 18,
2018, https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=
&ved=2ahUKEwi6gpTZibv7AhVn7rsIHXc6A9AQFnoECBMQAQ&url=https%3A%2F
%2Fprofit.pakistantoday.com.pk%2F2018%2F05%2F30%2Fpml-ns-performancereviews-contrary-to-claims%2F&usg=AOvVaw0-qtR1PM0E5NQoOgeAFG.
the government took was regarding the failing foreign reserves which the government could not maintain. To maintain reserves, the PML-N government took another IMF loan that ended in September 2016. The foreign reserves that increased because of the IMF loan plummeted very soon. Imports grew by 21 per cent whereas the exports fell by a whopping
20 per cent.[1]
Dependency Theory posits that
underdeveloped countries like Pakistan are economically and politically
dependent on more developed countries and institutions like the IMF. In this
framework, the IMF is seen as a tool of developed countries to maintain their
dominant position in the global economy and to control the economic policies of
the developing countries.
The IMF programmes have
reinforced Pakistan's economic dependence on the developed countries and
international institutions. The conditions attached to these programmes have
constrained Pakistan's economic policy autonomy and limited its ability to
pursue policies that are in its best interest.
IMF And the Asian Financial Crisis
During the period of 1992-1995,
the economies of Asia showed an exceptional transformation and recorded an
average GDP growth of over 9 per cent. This growth was mainly driven by China,
which had doubledigit growth rates, but other countries like Indonesia,
Malaysia, and Thailand also showed significant growth of over 7 per cent. These
countries also reported notable advancements in living standards. Hence, the
term "Asian Miracle" became commonly used to describe the region's
economic success.26
[1] Ghulam Abbas, “ PMLN’s
performance review contrary to claims,” Pakistan Today,
May 18,
2018, https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=
&ved=2ahUKEwi6gpTZibv7AhVn7rsIHXc6A9AQFnoECBMQAQ&url=https%3A%2F %2Fprofit.pakistantoday.com.pk%2F2018%2F05%2F30%2Fpml-ns-performancereviews-contrary-to-claims%2F&usg=AOvVaw0-qtR1PM0E5NQoOgeAFG. 26 Donghyun Park and Jungsoo Park, “Drivers of Developing Asia’s Growth: Past and Future,” ADB Economics Working Paper Series, https://www.adb.org/sites/default/ files/publication/28279/economics-wp235.pdf
with words like outstanding,
superlative, and admirable, the IMF does not consider it a miracle since it was
due to good policies. However, some
people viewed certain accomplishments, such as prudent macroeconomic policies
and investments in human capital, as miraculous. Until the crisis happened,
Asia attracted a significant amount of capital inflows, averaging more than $60
billion per year from 1990 to 1996.[1]
The IMF attributed the crisis to domestic policies, which were deemed as the
main culprit for the crisis, similar to the case of Mexico. The shortcomings
and inconsistencies in domestic macroeconomic and exchange rate policies were
identified as the two problems that led to the crisis.
In some countries, the prolonged
maintenance of pegged exchange rates encouraged external borrowing, which led
to an excessive exposure to foreign exchange risks in the financial and
corporate sectors, and increased vulnerability to sudden changes in the market
sentiment. The IMF attributed the severity of the crisis to domestic
authorities and policy choices. In the case of Mexico, the government ignored
IMF advice and faced problems. The same situation applied to Asia during the
1997-98 crisis, where Thailand was warned about an impending crisis but delayed
appropriate responses. The IMF was criticised for mismanaging the Asian crisis,
and three criticisms were famously levelled against it.
Firstly, the IMF suggested the
wrong solutions; secondly, it interfered with national sovereignty, and
thirdly, it nurtured moral hazards. The criticisms aimed at the IMF included
imposing an austerity programme, monetary and fiscal retrenchment on countries
experiencing a liquidity crisis, which worsened the economic slowdown and
caused undue suffering to the population. Instead of demanding that countries
raise their interest rates to defend their currencies, the IMF should have
suggested keeping interest rates low to help the economy recover. The measures
suggested by the IMF were reportedly condemned by the Malaysian Prime Minister
and Thailand's Deputy Prime Minister for worsening the economic situation.
[1] Manuela Moschella, Governing risk; The IMF and Global Financial Crisis, (Palgrave Macmillan, 2010) 155-169.
have a significant influence on
the policies and decisions of the organisation.
However, at the same time, IMF and its performance have been praised by
many.
IMF just has an ability to
recommend policy changes. Borrowing countries have the ultimate decision-making
power when it comes to accepting or rejecting the IMF loans and the policy
conditions attached to them. This means that they have the ability to negotiate
with the IMF and ensure that the conditions are aligned with their own economic
policies and priorities.
Similarly, the IMF provides
technical assistance and advice to borrowing countries, which can help them to
implement sound economic policies and strengthen their economic institutions.
This assistance is voluntary and does not infringe on a country's economic
sovereignty.[1]
IMF and South Asia
South Asian countries have had
mixed experiences of their interactions with the IMF. Some countries have
experienced significant economic growth following their engagement with the
IMF, while others have struggled to see sustained economic progress. However,
it is necessary to remember that IMF is not the only criteria to measure
economic or sociopolitical growth. It is clear that sustained economic growth
requires a combination of sound economic policies, effective implementation,
and good governance. The responsibility solely relies on individual governments
and not the IMF. IMF’s support is more temporary leaving long-term progress on
broader economic and institutional reforms.
Between 1947 and 1991, India had
one of the most protected economies globally, characterised by high fiscal
deficits, low foreign exchange reserves, and non-competitive exports. India had
to seek external support from the IMF three times, due to balance of payments
crises. In 1966, India was going through a tough time facing famine and drought
in many parts of the country. At the same time, there was a great pressure on
the country for having devalued Indian rupee and to seeking funds from IMF.
[1] Manuela Moschella, “Governing risk; The IMF and Global Financial Crisis,” (Palgrave Macmillan, 2010) 155-169.
It was seen as India succumbing to Western pressure.[1]
Despite political pressures and
public disagreements, the Indian leadership hailed the decision to devalue the
currency on agreement with IMF. The devaluation of India's currency appears to
have had a positive impact on the country's trade balance. Although there was a
slight decrease in export volume during the two years following the
devaluation, this was largely due to a drought. After accounting for this
factor, exports actually showed a mild improvement. The reduction in imports
was also significant, falling by 19 per cent. Though there was a sharp increase
in the prices due to drought, there was no evidence to suggest that the
devaluation caused inflation.
Similarly, the balance of payment
(BOP) situation underwent a dramatic change in 1979-1980, as agricultural
growth suffered and industrial bottlenecks arose due to shortages of power,
coal, cement, and deteriorating labour relations, as well as issues with ports
and railway transportation. The IMF simply required the plan's implementation
and the necessary discipline to be maintained by the Indian authorities. The
IMF's conditionalities, if taken with a non-partisan point of view, reinforce
good governance.
The Indian government's primary
strategy for restoring BOP viability in the coming years involved increasing
domestic production of petroleum and petroleum products, fertilizers, steel,
edible oils, and non-ferrous metals, which accounted for almost 60 per cent of
the total imports. The IMF programmes for India eventually helped overcome
periods of high inflation and difficult BOP situations faced at that time, and
they were successful in bringing economic reforms to the economy.
Other than India, the other South
Asian countries have had more than three bailouts from the IMF. However,
despite the larger number of takeout, it still is less than and more effective
than the amount of times Pakistan has been to the IMF. For instance, even Sri
Lanka has seen significant economic growth in recent years, following a
successful IMF programme. The government of Sri Lanka implemented significant
economic reforms and has seen improvements in areas such as fiscal management
and debt sustainability.
[1] V.Srinivas, “India’s IMF Programmes-1966 and 1982: An Analytical Review,” Indian Journal of Public Administration, (2018).
Similarly, Bangladesh has had a
success by implementing economic reforms, leading to sustained economic growth
and poverty reduction. The country has not had to rely on IMF support in recent
years, and instead has pursued its own economic development strategies up until
2023.[1]
Figure
1
[1] “Bangladesh: history of lending commitments,” IMF, June 30, 2015, https://www.imf.org/external/np/fin/tad/extarr2.aspx?memberKey1=55&date1key=2015 -06-30.
.png)
Source: World Bank 2020
Over the past few decades, there has been an improvement in
education outcomes in all South Asian countries. Adult literacy rates have
doubled or tripled in Bangladesh, India, Nepal, and Pakistan since the 1980s.
Currently, Sri Lanka and Maldives have literacy rates above 90 per cent, while
other countries have rates lower than the world's average.[1]
[1] “South Asia,” IMF, accessed April 18, 2023, https://www.imf.org/external /datamapper/profile/SAQ.
.png)
Source: World Bank 2020
Despite some advancements, the educational achievements of
most South Asian nations lag behind those of their peers in the emerging
economies. The educational performance of South Asian countries varies greatly.
Only Maldives and Sri Lanka are near to reaching a SDG4 index of 100,
surpassing the median index of 87.4 for emerging economies. However, Pakistan
and Afghanistan fall below the median index of 54 for lowincome developing
countries. India's score of 80.2 is lower than the median index for emerging
economies, which could be attributed to the relatively large size of classes
and disparities in pre-primary and tertiary enrolment.[1]
Figure
3
Education Index of South Asia
.png)
Source: World Bank 2020
The employment rate in South Asia
has seen significant variations among countries. Overall, the region has
experienced an increase in employment rates in recent years, but there is still
much room for improvement.
Sri Lanka and Maldives have the
highest employment rates in the region, with rates above 95 and 98 per cent,
respectively. Bangladesh and Nepal have also made notable progress in
increasing their employment rates, with rates around 60 and 75 per cent, respectively.
India, as the largest country in
the region, has an employment rate of around 55 per cent. While this is higher
than Pakistan's employment rate of around 44 per cent, both countries still
face significant challenges in creating enough jobs to meet the needs of their
rapidly growing population.[1]
Figure
4
Employment Rate of South Asian Countries (In
Percentage)
[1] Salgado et al, “South Asia’s Path to Resilient Growth,” (Washington, IMF, 2023).
.png)
Source: World Bank 2020
Pakistan has the lowest employment rate in the region, which is a major concern, given the country's large population and the need for job creation. The lack of job opportunities has contributed to high levels of poverty and inequality in the country.
[1] Salgado et al, “South Asia’s Path to Resilient Growth,” (Washington, IMF, 2023).
The employment rate in South Asia
remains a challenge for most countries in the region. While progress has been
made, there is still a long way to go in creating enough jobs to meet the needs
of the growing
population and reducing poverty and inequality.[1]
Can
Pakistan Survive Without IMF?
It is difficult to say definitively whether Pakistan can
survive without the IMF, as it depends on various economic factors and policies
implemented by the government. Without IMF support, Pakistan may face
difficulties in accessing international credit and may struggle to meet its
external debt obligations.[2]
It is worth noting that despite the challenging conditions imposed by the IMF
in previous bailout programmes, Pakistan was able to achieve a commendable
growth rate of 5.80 per cent under the Nawaz government's IMF programme.
Additionally, inflation and interest rates remained historically low during
this time, and the Pakistani rupee was stable, valued at Rs104 per US dollar.
These factors helped restore investor’s confidence in Pakistan. [3]
A brief review of IMF programmes in Pakistan suggests that
the improvement in macroeconomic performance is temporary, as it is achieved
artificially due to a short-term increase in foreign exchange reserves. Any
progress made is quickly reversed after the programme ends. Reportedly, the
discussion with the IMF has focused on reducing federal spending on energy and
other non-targeted subsidies, cutting costs at state-owned businesses that are
suffering losses (such as PIA, railways, and utility stores), privatising
government-owned businesses (including steel mills, power plants, and DISCOs),
and implementing additional tax measures.[4]
[1] Ashfaq Tola, “Surviving
Without IMF,” The News International,
December 2021, https://www.thenews.com.pk/magazine/money-matters/914296-surviving-without-imf.
[2] Ashfaq Tola, “Surviving
Without IMF,” The News International,
December 2021, https://www.thenews.com.pk/magazine/money-matters/914296-surviving-without-imf.
[3] Muhammad Sheroz Khan
Lodhi, “Surviving Without the IMF,” Business
Recorder, February 12, 2023, https://www.brecorder.com/news/40225747.
[4] Vaqar Ahmed, “Pakistan must end damaging dependency on IMF,” Nikkei Asia, February 26, 2019, https://asia.nikkei.com/Opinion/Pakistan-must-end-damagingdependency-on-IMF.
There are several ways to achieve
these objectives without harming existing taxation levels. Firstly, the retail
market, which accounts for 18% of GDP ($152 billion), contributes only 3.9% to
the national exchequer. We should focus on this untapped sector and effectively
implement the POS system.
Secondly, the E-commerce market, valued at $5 billion, can
generate tax revenue of PKR 33 to 35 billion if taxed between 4 per cent and 5
per cent. Thirdly, VAT should be uniformly applied and tax the entire value
chain (excluding consumption items for the poor), instead of just imports and
manufacturing. Thirdly, withholding taxes should only be levied on transactions
representing income or a close proxy for income. Finally, increasing tax
enforcement is the only way to increase real revenues, and technology and data
offer affordable solutions for this problem. A realtime national database is
the first step towards improving compliance in a country with 85 million bank
accounts but only 2 million taxpayers.[1]
Continued borrowing from the IMF
is contracting investments, output, and employment, resulting in worsening
income and wealth distribution, increasing poverty levels, and terrible social
and political implications. IMF is a safety net for Pakistan. Every time the
country faced economic instability or turbulence, the IMF remained its best
bet.
There have been fears of Pakistan
defaulting in 2023, since it did not have sufficient money to pay off its
debts. This leaves a huge impact on a state. Institutions and countries find it
difficult to provide loans to a state having inability to payback. Similarly,
the exports and imports of a country are restricted and it becomes difficult to
get through markets for their existing commodities. Markets are unwilling to
buy or sell the commodities as they fear that the payments will not come
through.
[1] Dohadwala et al, “Pakistan and the IMF: Debts, Deficit and dependency,” ISAS Insights, September 30, 2020, https://www.isas.nus.edu.sg/papers/pakistan-and-the-imf-debtsdeficits-anddependency/#:~:text=Dependency%20on%20the%20IMF%20is, Pakistan's% 20burgeoning%20debt%20to%20China.
restored only in the case of
confidence re-established by the IMF. When foreign currency inflow is revived,
the defaulted state is able to pay off its debt. Even though IMF sometimes
looks exploitative, but if planned strategically, IMF could be used to help
upscale a state’s economy.[1]
In view of the concept observed, following two reasons determine Pakistan’s
dependency on the IMF:
• Persistent
Current Account Deficit
• Fiscal
Management
Persistent current account
deficits have caused problems for Pakistan's balance of payment, with each
deficit leading to dwindling reserves and IMF assistance. Despite import-driven
growth and debt financing, sustained export promotion and Foreign Direct
Investments (FDI) are necessary to prevent recurring crises. From 2000 to 2018,
imports increased significantly more than exports, primarily due to domestic
consumption, an overvalued rupee, and the China-Pakistan Economic Corridor. The
sluggishness of exports stems from a failure to diversify, reliance on
low-value commodities, low labour productivity, and overvaluing the rupee, which
has led to sustained trade deficits and depletion of foreign reserves.
Secondly, Pakistan's fiscal
problems are due to limited revenue-generation capacity, ailing energy sector,
and recurrent spending-side issues. The country's tax-GDP ratio is below the
required level, and the tax base cannot be expanded due to a large informal
sector, predominance of cashbased transactions, and tax evasion. Bloated
state-owned enterprises and ailing energy sector have also contributed to the
fiscal deficits. Inefficient and mismanaged government expenditure has widened
fiscal deficits, as resources are allocated to accommodate the interests of the
military and political elites. These problems have led Pakistan to repeatedly
seek IMF assistance, which has been allowed due to the country's strategic and
geopolitical value.[2]
[1] Momina Ashraf, “If Not
IMF, Then Who?” PT Profit, March 24,
2023, https://profit. pakistantoday.com.pk/2023/03/24/if-not-imf-then-what/.
[2] Dohadwala et al, “Pakistan and the IMF: Debts, Deficit and dependency,” ISAS Insights, September 30, 2020, https://www.isas.nus.edu.sg/papers/pakistan-and-the-imf-debtsdeficits-anddependency/#:~:text=Dependency%20on%20the%20IMF%20is ,Pakistan's%20burgeoning%20debt%20to%20China.
Conclusion
While historically, the IMF
programmes have helped the recipient countries to achieve commendable economic
growth rates, there is evidence to suggest that such improvements are only
temporary and that the IMF's bailout policies can have a detrimental effect on
developing countries.
In case of Pakistan, the
socio-political impact of the IMF during 20082022, had both positive and
negative impacts. On the one hand, at some point, the IMF programmes have
helped Pakistan to stabilise its economy, restore investor’s confidence, and
boost economic growth. Yet, on the other hand, the IMF programmes have also led
to austerity measures, increased inflation, high unemployment rates, and
immeasurable poverty. They have affected other social indicators as well while
hitting the people the hardest.
Pakistan’s economic policy was
essentially shaped by the IMF. Its role had always been crucial since it
provided loans to Pakistan on the condition that it implements economic
reforms, such as privatisation, liberalisation, and deregulation. Pakistan’s
political decisions also got influenced as a result.
Often the IMF loans were stitched
with the conditions that required the government to implement structural
reforms. Such reforms have been invariably unpopular and difficult for the
political governments to comply with. Besides, the IMF programmes have also had
a significant impact on Pakistan's social welfare. The austerity measures often
suggested, have led to decrease in public spending on social welfare, such as
healthcare and education. The poor suffered the most as a consequence.
Moreover, the programmes significantly increased inequality as the rich largely
remained unaffected.
Since international financial
institutions are often aligned with their individual interests, it leaves
little room for the recipient countries to make independent decisions with
respect to their foreign relations. For instance, it had always been difficult
for Pakistan to make unconstrained relations throughout its dependency on the
IMF. Being major contributor to the IMF funds, the West-centric dictates
remained the root cause while making Pakistan’s foreign policy. As a result, it
remained devoid of balance and independence.
Internally, this dependency is
keeping the country delicately underdeveloped and with an inability to break
free from foreign economic aid. The situation is reinforced with each IMF
tranche.
Politically, the international
financial institutions remain oblivious of the public sentiments. The policy
dictates, in the absence of inclusivity and public participation, added more to
the public’s dissatisfaction and mistrust in the governments.
Way Forward
To end its dependence on the IMF,
Pakistan needs to implement comprehensive economic reforms that address the
root causes of its fiscal problems. For that to happen Pakistan needs to
develop a ‘Five-Year, Six Points Plan,’ since political instability remains the
main component of the solution for every problem.
• Increase
Tax Revenue: Pakistan needs to broaden its tax base and improve tax collection
systems to increase revenue generation. This can be done by improving tax
compliance, reducing tax exemptions, and expanding the formal economy.
• Energy
Sector Reforms: The energy sector needs to be reformed by reducing subsidies
and improving efficiency to reduce the burden on the budget.
• State-Owned
Enterprise Reforms: The government needs to restructure state-owned enterprises
and reduce their losses by improving their management and governance.
• Rationalise
Expenditures: The government needs to rationalise its expenditures, prioritise
spending on development and social services, and reduce wasteful spending.
• Attract
Foreign Investment: Pakistan needs to attract foreign investment by improving
the business environment, reducing bureaucratic hurdles, and providing
incentives to investors.
• Diversify
Exports: Pakistan should focus on diversifying its export base to reduce
dependence on a few sectors, and also promote value-added exports.n
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