Pakistan has decided to go to International Monetary Fund (IMF) for the thirteenth time to ask for financial assistance to run its day to day business. Like many other countries, Pakistan is fighting circular debt and it has taken 12 bailouts since 1980, the last one being in 2013, when IMF provided Pakistan with $6.6 billion to stabilise the economy. By the end of September 2018, the foreign exchange reserves recorded by the State Bank of Pakistan fell below $10 billion to $8.6 billion. The finance ministry was concerned that the country is incapable of paying for exports and debt servicing.
IMF was established after the Bretton Woods conference in 1944, and after World War II. At the time of its inception, the main objective of this public institution was to provide collective help to the economies facing financial crisis. The British Economist John Maynard Keynes, was one of the participants of the Bretton Wood meeting, he was the pioneer of the Keynesian school of thought which propagated government intervention and criticised the existing classical models that led to The Great Depression of 1929. IMF gets funds from taxes paid by citizens all over the world who belong to the 189 member countries, according to the quota which is decided by the size of the said economy. Pakistan’s quota is a mere 0.43 percent of the total funds that IMF collects. The major power lies with the biggest economy which contributes the most towards IMF and that is US which has a quota of 16.52 percent. Hence, making it the only country that holds the veto power in IMF. The idea of establishing this institution was to help economies in need, by providing them financial assistance and offering them economic counsel in order to maintain economic stability at the global level, and also to avoid another great depression. Unfortunately, a lot has changed since its inception and now the IMF’s assistance aka “IMF Bailout” is provided on certain set of conditions. Normally, IMF asks the subject country to initiate an austerity drive by reforming the tax system, cutting public expenditure and privatization.
The major power lies with the biggest economy which contributes the most towards IMF and that is US which has a quota of 16.52 percent. Hence, making it the only country that holds the veto power in IMF. The idea of establishing this institution was to help economies in need, by providing them financial assistance and offering them economic counsel in order to maintain economic stability at the global level, and also to avoid another great depression
However, the newly elected was reluctant to go to IMF for another bailout, mainly due to the promises they made as the opposition party and during their election campaign. In line with this, Prime Minister Imran Khan himself visited Saudi Arabia to ask for help, but his request was turned down, they instead made a deal to become partners in CPEC. Saudi Arabia will invest in an oil refinery at the Gwadar port that is being developed by China. Reportedly, Islamabad also asked its iron brother China, therefore, it approved $ 2 billion last month to support Pakistan’s crumbling economy. After being unsuccessful in achieving the desired assistance from its allies, Islamabad reconsidered an IMF bailout option, which they previously severely criticized on numerous occasions. On October 8, 2018, the Finance Minister Asad Umar, announced that they will open talks with IMF to negotiate a deal. Experts say that Pakistan will need around $ 12 billion to deal with the mounting balance of payment deficit.
The new government’s concern to avoid the IMF bailout was theoretically valid but it was not well-grounded. They didn’t have any alternative plan other than begging other countries for help, whereas, the smart choice would have been to internally manage the crisis by financial and economic engineering. This kind of strategy requires time which the government in power had before getting elected, but now it looks like they didn’t have a clear vision and agenda. Islamabad is facing a self-imposed deadline, which they promised will bring a radical change during their election campaign. Now that once again we are going to the IMF, the question is how will the government handle the negotiation, and how will they use this austerity package to restore and restructure the economy. Recently, researchers have accused the IMF of designing bailout plans without taking into consideration the individual conditions of the country such as the business environment, the culture, and the standard of living. Therefore, most of the times these bailouts result in unfavourable outcomes. Instead of boosting the economy, the bailout program results in currency depreciation, unemployment and poor business activities. Now the task of the current Finance Minister is to negotiate a package that would not further harm the already wounded economy because the knowledge and the vision of the leadership, will decide the fate of our economy for the coming years.
The writer is a doctoral candidate in the University of Bremen, Germany. She can be reached at [email protected]
Published in Daily Times, October 13th 2018.