The approval of a US$6.6 billion loan this month by the IMF for Pakistan may be a cash lifeline for the cash-strapped country for the time being, but it could prove to have serious repercussions for the country’s economy in the long term.
Pakistan was forced to seek the loan to avert a balance of payments crisis. The country had but no choice. The funds will reduce the country’s budget deficit, which was about 8.8 per cent of GDP last year, and allow for reforms in the energy sector to help resolve severe power cuts that have sapped growth. In its latest report, the IMF has revised its growth projection for Pakistan down to 2.5 per cent, from the 3.5 per cent earlier forecast.
However, after approval of the loan on September 5, the IMF warned that Pakistan’s economy was at a high risk of plunging into crisis because the strict austerity measures built into the deal might lead to lower growth than had been expected next year.
The new government led by the prime minister Nawaz Sharif has promised to follow the IMF’s performance criteria. The global lender also warned of the risk that government-promised reforms might not be implemented. Given Pakistan’s poor track record, the IMF has predicted the programme to be a high-risk arrangement.
Although a clean chit from the Washington-based lender opens doors to inflows from other international financial institutions, the austere IMF policies aggravate public frustrations with the government, and threaten a political crisis. IMF conditions can gradually lead a country’s economy to a stage where it virtually lives on cash injections from international lenders.
In 2008, Pakistan agreed to an $11.3bn loan from the IMF to avert a balance of payments crisis. It received $7.6bn but failed to get the remaining $3.7bn because of its slippages in meeting the performance criteria. That led to the suspension of the programme in May 2010. The programme was extended in December 2010 for nine months, but disbursements were not resumed because of the country’s failure to take fiscal measures as demanded by the IMF.
Ironically, Pakistan has availed itself of the new $6.6bn loan to repay the old loan to the IMF of which about half – some $4bn – is outstanding.
The country’s previous experience with the IMF was not been a good one. Its entry into the IMF programme in 2008 did not revive economic growth but instead only increased the country’s foreign-debt pile. The programme caused a significant economic slowdown and the government at the time faced a major challenge in managing a slowing economy.
Pakistan’s economy has grown 3 per cent on average during the past five years, but it would have required 7 per cent growth to lift the country out of poverty and fully absorb the growing labour force.
Under IMF conditions, the central bank raised its benchmark interest rate to 15 per cent in November 2008. Despite high interest rates, core inflation remained on the high side. Tight monetary policy stagnated growth and the consequent closure of industries dried up government revenue.
The economy has been in a state of stagflation, with low economic growth and high inflation (which has been at double digits over the past five years).
The former government faced the political fallout of IMF-dictated policies in terms of public protests, which often turned violent, over skyrocketing commodity prices, unemployment and prolonged electricity blackouts.
Given that – if beggars could be choosers – who would choose to go to the IMF?
Critics have accused the IMF of toeing Washington’s political line in order to keep up the pressure on Pakistan with regards to US policy in Afghanistan. Pointedly, the IMF in its latest report warned that Pakistan’s insurgency problems in the regions bordering Afghanistan could intensify after the withdrawal of Nato forces next year, posing serious risks to an already flagging economy.
– Syed Fazl-E-Haider (www.syedfazlehaider.com) is a development analyst in Pakistan. He is the author of many books, including The Economic Development of Balochistan, published in May 2004