Dismay on IMF lending: a ‘bailout’
package or debt restructuring plan?
‘Free trade’ and ‘liberalisation’ should not be oversold as an anti-
poverty strategy because it then results in fiscal imbalances and foreign exchange depletion, and there will be no concrete result in the long-term.
Such policies often result in significance social costs

By Dr Noor Fatima

Economists now seem to be on consensus as the International Monetary Fund (IMF) has to step in again, as we now have ran out of time to think if the country should consider continuing with IMF or not. We are at the doorsteps of IMF and that’s the reality. Nevertheless IMF economic prescriptions and its modus operandi would remain the biggest question when it comes to the implementation of reforms and end up in much disagreement as record shows. What makes the bailout programme apprehensive for implementation? How much should we be sceptical of such programmes?  Is it about bailing out lenders or borrowers; are the emerging questions in the present scenario.

It was expected and predicted long ago by the economic analysts that if the proper measures to reduce trade deficit, inflation and depletion of foreign reserves, are not taken; the country can’t escape reaching out to IMF with the begging-bowl again. What comes now as a major concern is the apprehension of IMF prescribed ‘standard medicine’ for fiscal balance as a ‘bailout package’, keeping in view the implementation experience of 1990s reforms almost in similar conditions. Now there is dismay that IMF will impose same austerity measures, for instance, budget cuts, high discount rates, raising taxes, reducing subsidies and cuts in spending on the social sector.  Such bailout programme is heavily criticised and of course we hear all kind of reasons that why such programmes are so unpopular in this country. For many years the poverty ratio has been increasing, which is contrary to both IMF and World Bank’s claim that they will restructure the economy resulting in reduction in poverty. These institutions (IFIs) through their favourite ideology of neoliberalism, and by the “Washington Consensus” have in fact infected the system, lowering the standards of living in developing countries. Further, the economy shows that due to such package and its previous implementation in 1990s the country is also labelled as one ‘tranche state’. Resultantly, Pakistan’s track record shows that for the last 15 years 10 adjustment programs, which mostly ended without any tangible results. The claim that we made headway in reviving the economy in the last few years with high GDP (gross domestic product) syndrome poses a big question of such neo-liberal agenda of Bretten Woods Institution. The adjustment ‘therapy’ has been asymmetrical in taking a country on way of economic sustainability as just a ‘gate keeper’ function. Consequently, we turned into just a facilitator of multinational companies through foreign investment and into a consumer society mainly based on consumer financing. Therefore, increased money supply with low productive ability as well as more demand than full capacity production brought unprecedented inflation.

Heavy oil import bill was also a factor but it was more burdened with import of consumer items particularly automobile and electronic items which led increase in trade deficit and foreign exchange depletion. This is already an outcome of ‘liberalisation’ since 1990s. Now the ‘second coming’ with ‘hard’ conditionalities, without restructuring plan will be critical as it will include adjustment policies for currency devaluation, increased interest rates, elimination of subsidies such as food subsidies. So this financial assistance will lead to actually implementing a neo-liberal economic ideology as a precondition to be qualified for such assistance.

Therefore, such measures are assumed as inappropriate for a debt ridden and a country closer to default. Irrespective of this perception, the fact remains that support for IMF bailout packages is very low because of the wake in the ‘East Asian crises’, adjustment program, Latin American and other development countries. It is argued widely that IMF has deviated from its basics. This brings us to the controversial part of its mandate. As an agent of global financial system IMF’s original mandate was to act as an adjustment agency providing advice on balance of payments policies, financing agency providing short-term liquidity to countries encountering balance of payment problems. This role was shifted in 1970, in which IMF’s role was changed, as private capital became the major source of balance of payment purpose.

Resultantly, most of the countries had an IMF agenda of adjustments and was marginalised and got into the ‘Poverty Reduction’ and Growth Facility’ programs. These two tasks require lending of long term loans which was not in the mandate of IMF but of development agencies like the World Bank. Over all impoverish of economy requires a tax-net increase which the IMF program was not going to attract as it is not a ‘bailout’ program but a ‘Debt restructuring plan’ which has the potential for a constructive role for the IMF to give investor confidence in our economy. Otherwise, whenever the investor will invest in a risky situation, chances are they will face moral hazards.

This is also the time for IMF to learn, that it should focus on averting the financial crises through limiting the bailout program. They should adopt their strategies to respond to demands of changing circumstances of the economy, keeping in view the past experience of lending. It would lead them to a collective action and ownership of the program by donor and recipient country.  The tax burden through risky investment will be increased on the tax payers, less important will be the ownership of the bailout program in the recipient country. More, apprehensions generate from the funds continued enthusiasm for ‘liberalisation policies’ and more private inflow in such a risky time creates financial vulnerability for the persistent economic crises. The neo-liberal economic model embraced by IMF and other donors assumes that countries benefit from the maximisation of free trade and it is the only efficient for the improvement of the economy but one need to be sceptical as it does not work as an engine of growth.

The World Bank and IMF should support the policies with institutional advice and lending should widen the ability to craft out our own development paths through a restructuring plan. The ‘free trade’ and ‘liberalisation’ should not be oversold as an anti-poverty strategy because it then results in again fiscal imbalances and foreign exchange depletion and there will be no concrete result in the long term and such policies often results in significance social costs. No doubt the present situation will give an opportunity to both lenders and borrowers to rethink, if they are on the right track.