Pakistan in the IMF Debt Trap: A Story of 23 Bailout Packages

IMF and Pakistan since 1950

The current government of Pakistan is trying to revive the loan program agreed upon with the International Monetary Fund (IMF) in 2019. In other words, the IMF is demanding the end of the subsidy given on petroleum products and a hike in electricity rates. It is also demanding a huge increase in the tax on the salaried class and industry in order to achieve tax targets. These austerity measures will only multiply poverty in Pakistan.

Pakistan has received $3 billion out of a total of $6 billion, while the current government is negotiating with the IMF for the remaining three billion dollars.

From Ayub Khan to Imran Khan

During President Ayub Khan’s tenure, Pakistan had three programs from the IMF. Under the government of the Pakistan People’s Party headed by Prime Minister Zulfiqar Ali Bhutto, Pakistan received four programs from the IMF.

Pakistan participated in two IMF programs during the military president, General Ziaul Haq’s, tenure. During the Prime Ministership of Benazir Bhutto in the second PPP government, Pakistan joined two IMF programs. Pakistan joined an IMF program in the first government of former Prime Minister Nawaz Sharif.

During the second term of Benazir Bhutto’s prime ministership, Pakistan joined three IMF programs, while during Nawaz Sharif’s second prime ministership, Pakistan joined two IMF programs. There were two IMF programs during the tenure of former military president Pervez Musharraf. Another program was signed under the PPP government from 2008 to 2013.

The Nawaz-led government from 2013 to 2018 also had to go to the IMF to bridge the fiscal deficit. The PTI government under Imran Khan joined an IMF program, which was continued by the Nawaz League-led coalition government.

23 IMF Bailout Packages

According to Federal Finance Minister Miftah Ismail, the agreement with the IMF has been agreed upon. This is not Pakistan’s first program from the IMF, nor has Pakistan entered the IMF program for the first time. Since 1950, Pakistan has reached out to the IMF on 23 occasions, most by any other country.

Regarding Pakistan’s involvement in IMF programs, the country’s economists have given different reactions regarding the impact of IMF programs.

Pakistan and Neocolonialism of the IMF

According to some, the IMF programs helped Pakistan fill the fiscal deficit, while others argue these IMF programs were a debt trap. Richard Peet in his ”Unholy Trinity: The IMF, World Bank, and WTO” (2003), John Perkins’ ”Confessions of an Economic Hit Man” (2004), and many other economists also term global financial institutions such as the IMF, World Bank, and World Trade Organization as tools for neo-colonialism.

Dr. Ashfaq Hasan, an economist and former director general of the Debt Office of the Ministry of Finance, says that after 1988, every government’s slogan was “Let’s go IMF.” No government tried to reduce elite privileges or tried to increase exports.

The recent UNDP report shows that elite privilege consumes $17.4bn of Pakistan’s economy

UNDP

He believes there are two issues that necessitate the IMF bailout. Firstly, every outgoing government leaves the economic situation so bad for the incoming government that the country has no option other than the IMF. In the last few months before the elections, governments start giving out-of-the-way subsidies to people, which quickly consume SBP’s reserves, and the risk of default looms.

America Wants Pakistan to always Remain Dependent on IMF

He says the other reason for this IMF dependence is the American factor. The IMF is under the influence of America, and to keep Pakistan under American influence, it wants Pakistan to be in a debt trap.

For instance, to get the bailout package of $1.2 billion, the COAS, General Qamar Javed Bajwa called the US Deputy Secretary of State, Wendy Sherman. With no IMF dependence, there is a possibility that Pakistan might fully become a part of the China-Russia axis. The fact that no country can get an IMF bailout package without the consent of the U.S.

To get an IMF bailout package, a country needs a total of 85% of positive votes, while the U.S. has a voting power of 17.43%. If the big boss, the U.S., votes against and all other countries vote in favor, the votes will be around 83%, less than the minimum 85% required, and the country will not be able to get an IMF deal.

IMF has an Economic as well as Political Agenda

Abbas Mousavi, a research fellow at the Pakistan Institute of Developing Economics and an economist, says that after the 1980s, the IMF program emphasized three things in Pakistan: Privatization, deregulation, and the promotion of the free market.

He also believes the IMF is under the influence of America and, therefore, it has an economic as well as a political agenda, as is reflected in the IMF programs in Pakistan.

Salman Shah, Pakistan’s former financial adviser and who has negotiated with the IMF in the past, says that the need to go to the IMF arises when Pakistan faces a fiscal imbalance crisis. If Pakistan’s imports were higher than imports, which is happening even now, the country would face a balance of payment problem, and there is no option other than the IMF.

Fiscal Imbalance Leads to IMF Dependence

Today, Pakistan’s exports are around $32 billion, while imports are touching $84 billion. It means there is a trade deficit of over $48 billion. Imports have surged from $62.7 billion to $84.2 billion, a hefty increase of almost $19 billion. The $32 billion from overseas Pakistanis (about the same size as total exports).

Brazil, for instance, owed $72 billion in total in 1980 but it had to pay $146 billion on debt service up until 1998. Brazil ends up with $231 billion in debt in 1998 despite significant debt service. Argentina and Mexico have the same narrative as Brazil.

The story of Argentine is more complex and intriguing. Argentina was recommended to privatize government entities by international financial institutions in order to pay off its debt. It acted upon the recommendations. Disaster ensued because debt continued to grow despite the sale of the assets.

IMF is Pakistan’s Opium

However, Salman Shah does not blame the IMF but rather the governments that failed to increase exports. To him, if Pakistan keeps going to the IMF, the IMF cannot be blamed because Pakistan keeps facing a fiscal imbalance crisis and it needs a bailout. Instead of building and strengthening small and medium enterprises, Pakistan gets a bailout, consumes, and then again goes to the IMF.

Then, the IMF asks Pakistan to reduce public development spending, impose heavy taxes on local businesses, and end all subsidies. These austerity measures not only affect the purchasing power of the people and increase poverty but also lead to the closure of many small and medium-sized enterprises. In some cases, the entrepreneurs start shifting businesses to neighboring countries.

In other words, the austerity measures along with the poor governance do not let the local industry flourish, and Pakistan keeps knocking on the IMF’s door. Therefore, I believe the IMF has become Pakistan’s opium.

Reforms Needed at the Micro Level

Dr. Salman Shah believes that under the IMF program, we have made reforms at the macro level, but these reforms have not been done at the micro level. He says that if the IMF reforms were implemented in letter and spirit, the economy would have been more developed with an export-oriented economy. There would have been a revolution in the industrial and IT sectors, development in agriculture, and others.

Economist Dr. Alia Hashmi says that Pakistan’s expenses kept increasing, but we could not increase the income. In other words, non-development expenditures kept increasing, which increased the budget deficit, and with it, the country fell into a debt trap.

He said that the country has no other option but to go to the IMF and friendly countries such as China, Saudi Arabia, and the United Arab Emirates.

Pakistan can Survive Without IMF Bailout Packages

On the other hand, according to Abbas Mousavi, Pakistan did not need to go to the IMF and should have made reforms on its own. He says that before the 1980s, the IMF had no long-term conditions for programs with Pakistan, but after that, many conditions were imposed by the IMF in the name of structural reforms and fiscal discipline. Instead of helping Pakistan, these structural reforms had adverse effects on Pakistan’s economy.

The situation became worse when Pakistan reached out to IMF even when there was no risk of default. For instance, in 2013, Pakistan had no economic urgency. At that time, the country’s external deficit was 2.50 billion dollars, which could be met through other sources such as foreign direct investment.

IMF Programs Hurt Pakistan in the long run for Temporary Gains

Dr. Ashfaq Hasan argues that IMF bailout packages hurt Pakistan’s economy in the long run for short-term gains. He has described the IMF programs as harmful to Pakistan. To him, the IMF programs are designed in such a way that they put Pakistan in a vicious circle of debt. Moreover, IMF programs are based on austerity measures that multiply poverty.

Along with this, IMF programs always choke industrial development in the country as the IMF asks for keeping the exchange rate low and raising interest rates. Due to these conditions, credit for industry becomes expensive and de-industrialization begins.

According to Dr. Salman Shah, the working class is most affected by the IMF program because the IMF does not want Pakistan to artificially control the currency. When a currency depreciates, it increases inflation, and inflation is an integral part of the IMF program.

When a country borrows, there is a negative impact on the country’s income due to the increase in inflation.

Dr. Salman Shah

Pakistan is in Debt Trap

According to Dr. Alia, the IMF programs have caused potential losses in the long run because they have put Pakistan in a debt trap. Finance Minister Miftah Ismail has said Pakistan needs at least $41 billion in the next 12 months and nearly 80% of the money will go to the IMF in the form of interest.

It means Pakistan is required to earn a lot and pay back to China instead in the form of public development. In simple terms, this is exactly what the IMF wants from Pakistan. Pakistan is badly stuck in the IMF debt trap.

According to Dr. Ashfaq Hasan, the IMF wants a weak and fragile economy so that Pakistan keeps borrowing. He says if the IMF wants a strong economy, it should never ask Pakistan for interest rate hikes. The country’s debt has crossed 50 trillion rupees, so when the IMF talks about an increase in the interest rate, it is harmful to the country’s economy in the long run.

The biggest of all the long-term losses is that Pakistan has lost autonomy. Our identity has become an IMF bailout, unlike India, which has become a global tech center, or Bangladesh, which has emerged as a brand in the garment industry. We have lost our way.

How to Rid of IMF

Pakistan must first stop spending any money on non-developmental activities. Spending on formalities, security, meetings, refreshments, etc., should be avoided. As mentioned earlier, Pakistan exorbitantly spends over $17 billion on elite privileges. Politicians, institutions, and the government must learn how to spend their own money.

Second, Pakistan has to invest in the economic sectors that produce goods and services, such as agriculture, manufacturing, and tourism. These industries will boost the economy and open the door for sustainable growth. A rare opportunity exists for Pakistan in the form of the China-Pakistan Economic Corridor (CPEC). 

Thirdly, Pakistan must rebalance its attention between the private sector and state-owned businesses (SOEs). We must leave the private sector utopia behind and focus on the revitalization of SOEs using business logic.

Further, Pakistan needs strong accountability to curb corruption. The Panama papers show that the army, political elite, judiciary, media, and all other stakeholders are involved in rampant corruption. The former chairman of Wapda, Lt. General Muzammil Hussain, has been accused of over $750 million in irregularities in the Tarbela Hydropower Project-IV. On the other hand, Pakistan is paying through the nose to get an IMF tranche of $1 billion. Therefore, across-the-board accountability is the only way to improve governance and increase exports.

Last but not least, all politicians and members of the ruling class must return their assets to Pakistan in order to solve the foreign reserve situation. It should be established as a prerequisite for running for office in Pakistan or serving as a state or government officer. Pakistan needs these steps since it is going through unprecedented circumstances. Otherwise, we will keep falling into the IMF’s trap and eventually lose our sovereignty.

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