IMF program: is there an alternative?

Islamabad:

The review of the IMF’s stand-by arrangement (SBA) has been completed, and Pakistan is now seeking another IMF program aimed at “definitively addressing its weaknesses in fiscal and external sustainability, enhancing economic recovery, and laying the foundations for a strong , sustainable and inclusive growth”. This is expected to be the 25th program of the IMF.

Can an IMF program “permanently” solve our financial problems? Is there an alternative to this? And if there is an alternative, what would it be? As Dr. Nadeemul Haque and others have rightly expressed, an IMF program should be seen as an ICU (Intensive Care Unit). A patient cannot be kept permanently in ICU and must graduate to a regular ward and be discharged to a healthy life.

No patient should be happy staying in ICU permanently and no medical professional will allow it.

Countries face a balance of payments crisis, which is often, but not exclusively, rooted in fiscal policies. If Pakistan as an economic patient again asks to be admitted to the ICU, as the Prime Minister has already announced, one thing is certain: we do not take our prescription drugs seriously. But let’s also consider the other possibility: the doctor is not a professional. The patient requests admission to the ICU with the same diagnosis, for the 25th time!

This highlights the IMF press release as the key objectives of the expected 25th program: strengthening public finances, sustainability of the energy sector, return of inflation to targets, flexible foreign exchange market, private sector-led activity, reforms of state-owned enterprises, and investment in human resource.

This is a known list. One conclusion should be clear: previous treatments have failed.

IMF programs have not led to an efficient public financial system despite legislation, a sustainable energy market despite significant tariff escalation, inflation containment despite increases in discount rates, a fixed exchange rate despite ensuring central bank autonomy , privatization rather than planning and an educated and healthy workforce rather than spending more resources through decentralization.

If history is any guide, another IMF program will not solve our problems by itself. Now, we come to the next question: is there an alternative to the next IMF program? If it’s just about filling external funding gaps, my short answer would be yes.

Reading “Bigger IMF program could lead to debt trap”

Pakistan’s external situation is vulnerable but not catastrophic. The IMF, after its first review of the SBA, lowered its projections of external financing requirements to about $25 billion, although later estimates also put it at $27 billion. While this is the total requirement, the gap was estimated at $6.5 billion during this fiscal year and is likely to be in the same range next year as well.

This gap can be bridged by non-debt inflows such as increased exports, remittances and foreign direct investment. Roshan digital accounts can also help. We don’t need debt-creating inflows, including the IMF. On the other hand, if the question is raised again and someone asks, does our government have an alternative reform program, the answer will be negative. There have been some efforts by other institutions, such as the PIDE Reform Manifesto and the PRIME Economy Charter.

Our lenders, including the IMF, should understand this simple rule: a government that seeks external loans only as a fiscal support measure and not for financially viable projects has failed to put its own house in order.

Providing more loans to such a government simply gives it a negative incentive to avoid reform. It creates moral hazard. Therefore, loans provided in the guise of institutional reforms should be stopped. The FBR and the government of Pakistan owe an explanation to the taxpayers of the country: what is the result of a $700 million loan, considering both the World Bank and the Asian Development Bank, that was taken out in the name of FBR reforms? Why do these institutions keep lending to us?

Fiscal prudence is at the heart of the IMF’s program. Excessive government spending requires borrowing, which not only increases inflation but also crowds out the private sector.

When we have already committed to moving towards a balanced budget in our constitution, why do we need to sign on to a new IMF program? We have the Fiscal Responsibility and Debt Limitation Act of 2005 and the Public Financial Management Act of 2019 as well as the State Bank Autonomy Act of 2021.

This statutory framework is sufficient to set the federal government’s fiscal limits, further imposed by the NFC Award, which must be met.

With a comfortable majority in parliament and the support of the military establishment, Prime Minister Shehbaz Sharif has a golden opportunity to say no to a new IMF program and launch a domestic and political “National Reform and Development Programme”.

This, however, should not be decided by internal committees and should not be done in haste. A national and open dialogue is needed, with extensive participation of all stakeholders.

After all, it is the parliament that must take responsibility and lead our country to a prosperous future.

The author is founder and executive director of PRIME, an independent economic policy think tank in Islamabad

Published in The Express Tribune, March 25^u2024.

Like Businesses on Facebook, follow @TribuneBiz on Twitter to stay updated and join the conversation.