IMF addict

Pakistan, after all, is an IMF ad­dict. The country has already spent several years in a dozen dif­ferent IMF bailout programs. As the former IMF advisers Ehtisham Ahmad and Azizali Mohammed ex­plained in a 2012 working paper for the Asia Research Center that no American, IMF, or Pakistani of­ficial has any incentive to reform Pakistan’s structural economic problems and so the cycle of bail­outs continues.

Unfortunately, few in Pakistan have ever read Ahmad and Mo­hammed’s paper or debated its sig­nificance. If they had, they would know that the IMF’s approach to the country has been a failure. For decades, IMF programs have been undercutting Pakistan’s productiv­ity and growth potential by erod­ing governance and state capaci­ty and creating conditions for ever more rent seeking and corruption.

Successive IMF programs have required that Pakistan adopt more withholding taxes (never to be re­funded), surcharges, and levies on essential goods such as oil and electricity, even though these mea­sures hurt employment and invest­ment growth. And when the gov­ernment misses its fiscal targets, the Fund and Pakistan’s finance ministry agree on quarterly mini budgets, which often include new taxes on school fees, bank transac­tions, Internet access, and so forth. Moreover, alongside distortionary tax policies, the IMF has forced the finance ministry into unplanned spending cuts without any real re­forms, despite the obvious nega­tive effect this has on growth.

In other words, Pakistan has been the subject of a long-running exper­iment in austerity. Hastily designed spending cuts have undermined growth, and thus the government’s fiscal position, forcing it to kill off public services and infrastructure projects. The result has been a se­vere erosion of state capacity. Every new IMF funding will no doubt lead every government to repeat past mistakes. It will cling to artificial exchange rates, while avoiding re­forms that could actually plug leak­ages in state-owned enterprises.

The short-term focus of these programs ensures that reforms will be postponed, and that obsolete in­dustries will not be allowed to die. Meanwhile, education goes under­funded, energy and water shortag­es grow more frequent and severe, economic imbalances worsen, and the government’s policymaking ca­pacity continues to erode.

It is precisely the rush to meet IMF-dictated fiscal numbers that leads to bad policies. In the absence of due process such as parliamen­tary or cabinet scrutiny, ministeri­al and expert review and domestic consultation; the finance ministry accrues more power, and gover­nance declines. That is what hap­pened under the previous govern­ment which used an IMF program to push through vanity projects and Pakistanis are now paying the price.

Those criteria can be met only through extensive, well-considered reforms over the long term. The question is whether the IMF will encourage that, or have Pakistan keep doing the same thing while expecting different results.

SHAFI AHMED KHOWAJA,

Hyderabad.

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