IMF Bailouts: Road to Stability or Recipes for Disaster: A case study of Pakistan

1. IMF Bailouts: Roads to
Stability or Recipes for
Disaster; A case stud of
Pakistan.
Basit Ali

2. Introduction:
 Pakistan reaching out to IMF for a bailout deal has become a permanent
feature of its Economic history since 1988.
 This urge to seek IMF help every time a balance of payments crisis arises
indicates the systemic flaws, under resourcefulness and incapacitated
production structure of its economy.
 It indicates that the twenty-third largest economy with a GDP of around $305
billion cannot produce enough exports to sustain the consumption needs of a
whopping 210 million population.
 It is indicative the fact that the economic structure of production and
consumption is skewed and unsustainable.
 Domestic production hardly caters to the needs of the economy and has to be
augmented by foreign import to plug the demand.

3. Issues with Economy of Pakistan
 This state of affairs indicates that economy of Pakistan is facing grave
existential challenges at internal and external fronts.
 On the internal front the major issues faced by the economy are a narrow
production base:
fewer export sectors, greater dependence on cheaper imports,
high cost of fuel and energy, high interest rates,
poorly trained labor force, low return on investments,
lack of technology transfers,
low tax-to-GDP ratio and inability to generate enough revenue to avoid
domestic debts.
These economic issues have erode the capacity of the economy to
produce efficiently for a large population and have indirectly resulted in
generating the external economic crisis.
 On the external front, there is a severe balance of payments crisis due to
high import and low export difference which has once again pushed the
country into the arms of IMF to broker an unsavory and tough economic
rehabilitation and revival deal.

4.  Problem of De-industrialization
 The government tried to boost foreign reserves by contracting soft loan deals
through friendly countries. Like Saudi Arabia, China and UAE
 The seeds of almost all IMF deals have been rooted in the weak economic
structure of Pakistan.
 This weak economic structure of the country is the result of a narrow industrial
base, low exports, high fuel and energy prices, inconsistent trade policies, and
de-industrialization.
 Flagging Exports of Pakistan
 Low exports have been responsible for the poor economic performance of the
country. When exports are lesser than imports trade deficit is created.
 Trade deficit also creates current account deficit in which a country has a deficit
in its external foreign account.
 This creates a balance of payment crisis which severely constrains several
policy instruments and leads to an economic disruption.

5. IMF deal Objectives:
 Alleviate Balance of Payment (BOP) crisis and Current account
deficit:
 The foremost objective of the IMF deal is to avert the balance of payments
crisis of Pakistan economy.
 In the wake of a large trade deficit- imports exceeding exports the payments to
be made for the imports would strain the foreign reserves of the country available
with the State Bank of Pakistan.
 The $6bm credit facility which would be provided in 39 tranches would help in
boosting the foreign exchange reserves.
 Management of budget deficit and current account deficit:
 The second objective of the IMF deal is to plug the fiscal deficit gap by increase
in tax revenues and cutting of excess expenditure.
 The fiscal deficit is not only a case of low revenue generation.
 The deal also caters to rationalization of expenditure whereby reforms are
introduced in loss making PSEs to make them profitable.

6.  Increase in tax revenues and cutting expenditure:
 The third objective of the IMF is to overhaul the tax bureaucracy to generate
more revenue for the state and avoid budget deficit.
 As per the IMF deal, government has to introduce reforms in the tax structure
which would lead Federal Board of Revenue (FBR) to achieve its annual revenue
target.
 Moreover, expansion of the narrow tax base is recommended to expand the
pool of taxpayer and broaden the tax net.
 Control of circular debt through reforms in power and tax bureaucracy:
 The fourth objective of the IMF deal is to introduce power sector reforms and
eliminate circular debt in the power sector.
 Power sector reforms entail the deregulation of tariff for electricity consumption
and to make tariff flexible as per recovery and electricity utilization rate.
 Reforms in loss making Public Sector Enterprises (PSEs):
 The fifth objective of the IMF deal is to reduce the expenditure on account of
bailout and dole outs offered to loss making PSEs.
 Expenditure is a key component of the budget deficit. The deal has proposed
privatization and divestment of government shares to reduce expenditure of the
government.

7. IMF Plan in action through following
policy instruments:
 The recent IMF plan contracted by the government envisages a sustainable
and balanced growth for the economy to increase its annual GDP growth rate.
 It also plans to reduce liable of the economy
 It focuses seriously on generation of revenue via Federal Board of Revenue
achieve ambitious revenue targets to avoid budget deficits and fiscal deficits.
 Recovery of losses in power sector is given key importance.
 The Plan also recommends removal of any subsidies provided by the
government to power consumers.
 IMF deal to allow Pakistan a credit facility of $6bn comes with a set of
conditions and policy instruments that the government of Pakistan has to follow.
 They are of the firm opinion that these conditions are prescribed by IMF as a
best hedge to protect a country from defaulting further and to enable it to repay
the loan borrowed.

8. Issue with IMF deal:
 The problem with the IMF plan in letter and spirit is that it recommends the
same solution to different ailments of an economy without taking into
consideration the limitations and established issues unique to different
economies.
 Import based economy to suffer from rupee devaluation:
 IMF recommends making imports costlier to reduce domestic demand and
reduce current account deficit.
 Reduced import, domestic economy would contract which would lead to
decrease in domestic revenue generation and employment.
 Market determined exchange rate to increase cost of imports,
production and inflation:
 A market determined exchange rate as prescribed by the IMF would temporarily
grant relief to the current account and control balance of payments crisis. But it
would make imported products costlier and lead to price inflation.

9.  Reduction in subsides to power and energy sector to increase cost of
production:
 Removal of subsidies in the power sector can further increase inflation for the
lowest segments of the country's already deprived social layer. It would
increase the prices of fuel and electricity consumption for them and strain their
monthly expenditure.
 Benefits of IMF deal:
 There are a few benefits of the IMF deal. As per international agencies,
Pakistan's credit rating would improve and the country could further
contract loans.
The country would get much desired relief from the BOP crisis.
Uncertainty from the economy would be removed and foreign direct
investment could pick up.
Fiscal and budget deficits would be controlled and the structural loopholes
in the economy would be taken care of.

10. Choice for Pakistan: A deal or not
 Pakistan economy is on the acumination of a new economic transformation.
Regardless of the economic challenges faced by it, IMF deal is a necessary evil.
 It has to be accepted with its flaws. However, it would be a terrible mistake to rely on
IMF deal to revive the economy.
 The deal is only for small duration to sustain the external account and BOP crisis.
Systemic flaws in the economy such as narrow export base, competitive
manufactured goods and services would have to be addressed through rapid
industrialization and capacity building of the masses.
 A well-articulated and planned policy framework needs to be devised that integrates
various sectors of the economy.
 Critical planning to generate more revenues, a reform package for a crippling
energy sector, and a plan to prevent wasteful spending on loss making public sector
enterprises (PSs), is desired.
 In the absence of broad guiding principles to uplift the economy, there are few
chances of an economic revival.