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.



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