The IMF: buyers beware

Shahrukh Rafi Khan

THIS short essay makes four points. First, the IMF serves global capital (finance and multinational corporations (MNCs)) by creating opportunities for it. Second, stemming from this is a so-called market ideology that is anti-development. Third, this ideology results in prior actions and conditions in IMF programmes that are mutually contradictory. Fourth, these prior actions and conditions set the stage for the next crisis and bailout package.

Low and low- middle-income countries (L/LMICs), like Pakistan, seek IMF assistance due to balance-of-payment deficits and declining foreign currency reserves. Trade deficits are often the result of aggressive import liberalisation pushed by the World Trade Organisation agreements. The IMF is an enforcer of this liberalisation on countries unfortunate enough to need a bailout. It has pushed import liberalisation far in excess of the commitments Pakistan made to the WTO. Pakistan was turned into a consumer society before it learnt to truly produce. Production has been hampered by the crony capitalism introduced in the 1960s, a problem that still needs to be addressed.

The IMF insists on market-determined interest rates. No interest rate in any country is entirely market-determined; the central bank plays a major role in determining it. One prior action for Pakistan’s current bailout package is a much higher interest rate. This guarantees that the debt crisis will worsen since the government will borrow domestically at high interest rates to address the fiscal deficit problem. As the debt mounts the interest cost will make IMF fiscal targets difficult to meet.

Another reason fiscal targets are difficult to meet is because import liberalisation means lower tariff revenue. As one might expect, in Pakistan’s case, there has been a steady decline in tariff revenue as a percentage of total government revenue. High interest rates in LICs, however, create opportunities for global finance.

Pakistan was turned into a consumer society before it learnt to truly produce.

The balance-of-payment deficits resulting from import liberalisation also results in a vulnerable currency. Governments think the public will correctly regard currency devaluation as economic failure so they use up foreign currency reserves to bolster it. An overvalued currency is subject to speculative attacks, partly in the form of capital outflows (another IMF condition though recently somewhat relaxed). The IMF has required a large devaluation as a prior action to address the overvaluation.

The ostensible justification for the devaluation is that it will encourage exports because it will be cheaper for the rest of the world to buy from Pakistan. However, many factors, other than domestic prices (such as world income, business networking, and political alliances) determine exports. While import liberalisation results in increased imports, higher local business costs due to higher interest rates, utility, taxes, and other input costs impede exports. The devaluation causes import costs of machinery and intermediate goods to rise in local currency terms. The devaluation is also potentially inflationary (undermining IMF’s inflation target) due to a rise in import costs. Finally, the devaluation increases the costs of repaying the foreign debt. The devaluation does, however, create an opportunity for MNCs to buy local assets, which are now cheaper in foreign currency terms.

The net effect for the local economy of IMF prior actions and conditions is setting the stage for another balance-of-payment, fiscal and monetary crisis, another bailout package, and a continued IMF straitjacket. A more important reason to be wary of IMF and its partner organisations (like the World Bank and Asian Development Bank) is that they serve the interests of their high-income country paymasters. In turn, HIC governments are captured by global capital.

Another priority for the IMF is repayment, which is why it has pushed for privatising even public utilities, such as Wapda, if it deems they are a drain on the budget. Economists view public utilities as natural monopolies and hence part of public provision because the market power that accompanies monopolies results in higher prices for the consumer. Efficiency reforms and finding better ways to subsidise low-income consumers is the standard recommendation. Privatisation, however, creates opportunities for MNCs.

Another focus of the IMF and its partner organisations are reforms of tax administration. There is little doubt that efficient tax administration and broadening the tax base serve the national interest. However, higher tax rates, even while Pakistan is reeling from a declining per capita income in dollar terms, ensures repayment to the IMF and partner organisations.

After decades of social criticism, the very sophisticated IMF public relations campaign has tried to persuade critics that they have changed and that, in particular, they are poverty sensitive. A comparison of prior actions and conditions from three decades ago and recent programmes for Pakistan indicates no intrinsic change. There is no real diagnosis since the conditions are based on ideology. Handouts for poverty alleviation will not make up for the decline in living standards, resulting from higher indirect taxes and inflation, which will follow Pakistan’s current IMF bailout.

IMF programmes negate authentic development based on undoing crony capitalism, equity reforms and ecologically sensitive economic diversification. Smart industrial policies can be part of this mix and they have been successfully used by countries like South Korea and Taiwan. Indeed, they are being used by the US and the EU. That notwithstanding, Pakistan has been warned against using industrial policies in past IMF bailouts. Thus, Pakistan’s only course to initiate development is building foreign currency reserves to avoid the IMF.

The IMF has been structurally adjusting Pakistan’s economy with 22 programmes since 1959 and will continue to do so if given the opportunity. The Nawaz Sharif administration solicited a bailout package five years ago and it blamed the past administration for having to do so. History is in this case repeating itself. One possible measure of the success of an administration would be that the next elected government does not have to solicit an IMF bailout, for reasons indicated in this brief essay. By this yardstick, the Nawaz Sharif administration failed miserably. Let us see if the current administration can do any better.