The latest IMF Package: a Déjà vu for Pakistan?

Pakistan’s dependence on IMF support has a long legacy. How might the country make this latest IMF package its last?

In the Naya (new) Pakistan of PTI government, what is not very new is the country’s relationship with the IMF. There have been 21 arrangements of support via the IMF’s Extended Fund Facility (EFF), since Pakistan became a member in July 1950. As the 69th anniversary of Pakistan-IMF friendship approaches, the IMF Executive Board approved the latest 39 months EFF Arrangement for Pakistan, amounting to US$6 billion. Similar to the previous arrangements (or bailouts) the domestic politics is the same; both in terms of the stance of both the opposition and the government. However, political parties have swapped seats. The opposition has been criticising the program by calling it something of a trap from the New East India Company and the leader of the opposition is urging the government to withdraw the IMF’s dictated budget. The government (like its processor) has declared that the program is the only way forward in order to tackle the gigantic current account deficit crisis and to balance the exchequer’s books.

While the domestic politics of the IMF’s program may be primarily focused on political point scoring, economic policy and structural reforms will determine whether Pakistan will benefit on this 22nd occasion, or whether this latest program will amount to just another episode within perpetually recurring IMF packages which the country has been addicted to for decades. Contrary to the Stand-by Arrangement (SBA) or concessional instruments tailored for low-income countries, the Extended Fund Facility (EFF) arrangements which have been approved for Pakistan are a medium to long term arrangement which is accompanied by structural reforms.

As the former Greek Finance Minister Yanis Varoufaki put it, ‘reform’ is a beautiful word, but reforms are often synonymous with harsh austerity measures. It is fair to say that in Pakistan, neither democracy nor economic reforms have been implemented in a way that can be a matter of pride, hitherto! A comparison with the arrangements such as those made between the Troika (The European Commission, the European Central Bank and the International Monetary Fund) and GIIPS (Greece, Italy, Ireland, Portugal & Spain) would not be fair as they got bailout packages amounting to hundreds of billions of US$ dollars, whereas under the implemented austerity, countries like Greece lost a quarter of their GDP. In the case of Pakistan, the most recent arrangement is a mere US$2 billion a year (which is less than one percent -0.63% to be precise- of its annual GDP). Yes sir/madam, that’s not a typing error that’s what it is, for the sixth largest country in the world with a population over 200 million. One may argue that being in an IMF program opens other windows of opportunity and credit lines but there is not much to this argument as it is not a precondition for international capital markets and capital flows.

So, was it worth going to IMF or is it much ado about nothing? Perhaps. This reminds us of the research paper, Pakistan, the United States and the IMF: Great game or a curious case of Dutch Disease without the oil?  in which the paper argues that it has been in the interest of the Pakistani authorities, the IMF and the USA to maintain this addiction for their own reasons. While this may or may not be so, given that the latest package has just been approved, the main challenge for a benevolent government of change as PTI claims it is would be how to make it the last dose of IMF support?

In order to make this IMF package the last one, we need to remember two things, a) what brought us here and b) why the previous arrangements did not work. The manifestation of the current crisis is prima facie evident in Pakistan’s Net Foreign Asset (NFA) position (Net foreign assets are the sum of foreign assets held by monetary authorities and deposit money banks, less their foreign liabilities). There has been sharp deterioration in Pakistan’s NFA position where it declined to – 0.4 trillion (-396 billions) PKR in 2018. This was the lowest NFA point since records began in 1960.

Pakistan’s Net Foreign Assets (NFA & Current Account Balance (% of GDP): Source World Bank

The twin deficit (i.e. budget and current account deficit or imbalance) are due to structural weaknesses in the Pakistani economy which have brought it to this point. Putting it even more clearly, the causes of imbalance are fiscal indiscipline, sluggish growth in productivity and lack of competitiveness. Furthermore, the GDP deflator or implicit price deflator for GDP (which is a measure of the level of prices of all new, domestically produced final goods and services in an economy) suggests a three-fold increase between 2007 and 2018. This, coupled with the increase in real effective exchange rate has been eroding the already very modest competitiveness of the Pakistani economy over the last decade. According to the Global Competitiveness Index 2018, Pakistan is ranked 107 in the list of 140 countries. That means it finds its position between Ghana ranked 106 and Rwanda ranked 108. With that level of competitiveness, these imbalances should not surprise us!

Internationally, the evidence on the success of the IMF’s bailout is mixed and there are successes and failures. Unfortunately, Pakistan falls in the category of failure and the latest Extended Fund Facility (EFF) is prima facie evidence of the fact that reforms have not been implemented properly so far. Concomitantly, for the PTI government to make sure that it is the last IMF package, it will have to do something differently this time. It will have to show fiscal discipline and pay attention to increasing the productivity of all the sectors, including agriculture, industry and services. The government will have to focus on long-term price stability which requires fiscal and monetary discipline. Energy security and uninterrupted supply to productive sectors are extremely important. The public sector enterprises are also a challenge which requires liberalisation of these sectors. So far, not much has been done by the current administration about energy and public sector enterprises.

The depreciation and trade policy stance did bring some improvements in the current account balance and pennies to the Exchequer accompanied with a big hit to inflation. However, unless productivity is improved, depreciation will not help. If structural reforms are carried out appropriately, exchange rate will adjust and with a current account surplus, the pressure would be towards appreciation. But, to break the dawn of that day, these structural reforms and points raised in this paragraph are the only way. This would obviously be politically painful in short-term, however, without such a bitter pill, IMF arrangements will be just a Déjà vu for Naya Pakistan!