IMF and Pakistan Making the ends meet
Posted on April 26, 2009
Hamza Ali, After World War II, economists and politicians created the International Monetary Fund (IMF) to help keep the international financial system stable. From the outset, the Fund’s specific roles were to promote balanced growth of international trade, provide funding to countries in economic distress, and safeguard income levels necessary for people to purchase essential goods and services. The IMF provides credit to countries facing a balance of payment (BoP) crisis. Under a stand-by arrangement, an IMF member country is provided a specified amount during a given period, usually in trenches, subject to the borrower’s compliance with performance criteria and other conditions embodied in the agreement. Typically, IMF conditionality regime stipulates reducing fiscal deficit, devaluation of the domestic currency, a flexible exchange rate, liberalization of trade and investment regime, privatization of state-owned enterprises, tightening of the monetary policy and overall de-regulation of the economy. To achieve their targets, at times, compels governments to cutbacks in public spending on health, education, and other vital services which causes poor services and thus complaints from people who frequently use government support and supported institutions.
It does not really matter that IMF in fact is trying to help; the fact is that being an institution it looks at other countries’ problems with a western view of approaching economic problems. Let’s be honest – the Fund is not a charity institution, regardless of its noble claims of strengthening the economies of countries, the money lending had to come with some stringent measures attached to it.
The loans may be meant to stir up the economy, but history has shown us the failures of this policy. One can not blame the IMF for the Pakistan’s government own ineffectiveness. Borrowing to develop, and then borrowing again to finance the previous borrowing, is a policy that can now be called a failure, as we have no development, but only borrowings to show for it.
There is only one reason for Pakistan’s failed policies, be it related to development, trade or investment and that is over reliance on external sources of financing.
External finance has been a major constituent in development. No doubt there. However Pakistan has been over enthusiastic about it. It can not be the sole mode of survival. Pakistan needs to survive on its own, and then use the best economics to interact with the rest of the world. External finance should be an opportunity for growth, not a necessity for survival.
One of the aspects which need to be kept in focus is pushing the situation to ever getting into default. Somehow, Pakistan always managed to keep ‘default’ at bay even in worst economic scenarios. Presently, the building of debt is trade deficit, which can be put right by stricter control on imports.
The other serious situation usually develops when there are rumours of depreciation and flight of capital begins. This results in rising inflation and creates lack of confidence in government’s ability to manage the economy. However, by re aligning monetary policy this situation may be brought under control.
The world recession already means decreasing investment globally. This discourages FDIs on a large scale. Security and strength of safety nets is what investors look for before investing and screen the place to invest. In Pakistan, the investment in the past few years was mostly in FMCGs {Fast Moving Consumer Goods} sector. This was not big but it helped.
Pakistan’s economy needs good savings trend, low inflation, local and foreign investors, exports to overtake imports, foreign reserves to keep rising and dollar-rupee parity to be maintained. Another important area to monitor is spending in consumer goods to be normalised and unsecured loans to be brought to minimum or even zero.
Remembering the tough times in May 1998, the government had gone to the extent of freezing private foreign currency accounts. There should be an attempt to regain the confidence of private investors and savers and guarantee should be provided for ‘safe’ foreign currency accounts. The common man should be empowered. Income disparity is one of the biggest menaces, which should be minimized.
Resolving some of the above mentioned issues would help to bring back peoples confidence in the government and provide relief to common man. A beginning has to be made and the end results will become visible. This will to remove the unrest that we see in the country.
