Bashing the IMF

I HAVE never seen an IMF programme take such a relentless beating before. At least not in Pakistan. The Fund has had its fair share of critics in the past, but this time something is unusual.

The current programme is getting battered from all directions. From former State Bank governors to former government advisers to ex-IMF staffers, all have joined in a large and growing chorus against this particular programme.

Some are decrying the programme for strangulating the economy, while others are saying the programme is far too soft, and yet others are raising the flag of ‘defensive lending’, meaning the Fund is loaning us more money only to stave off a default.

This is a departure from how it works in many other countries. The Fund’s no stranger to criticism, and has faced fierce storms of controversy.

Most famously, it was accused of looking out only for the interests of Western banks and other lenders during the Asian financial crisis, and sacrificing growth in those countries in order to preserve their creditworthiness.

In the mid-1980s, in the wake of the Latin American debt crisis, it was similarly accused of looking out only for the interests of Western investors and creditors, and forcing the opening up of Latin American economies to the needs of American capital.

In both cases, the thrust of the critique was that the Fund operates to safeguard the interests of Western capital to the detriment of the borrowing country. The number of people joining this chorus grew very large in the aftermath of the Asian crisis, with some Nobel Prize winners joining the fray.

The last global crisis, in 2008, is unusual in this regard. It saw a large number of countries line up at the Fund’s doorstep, but no major critique of the Fund and its role in the whole affair emerged.

Most of the ire has been focused on the large bailouts engineered by Western governments to rescue their financial systems from imminent collapse, and there was little to no major scrutiny of the Fund’s role.

In response to the new challenges presented by the financial crisis in 2008, the Fund has even introduced some fundamental changes in its thinking, most importantly its acknowledgement that in some circumstances fiscal deficits can be necessary.

Of course, this history has little to do with us. All major critiques of the Fund over the decades have drawn on the experience of countries outside our region — mostly Latin America, East Asia and some in Africa.

In each region, and in each time, there have been important differences in the role the Fund has played, and the nature of critique that has emerged in the aftermath of each crisis to which the Fund responded has also been different.

In our part of the world, none of these critiques really apply, and the temptation to cherry-pick themes from these critiques and assemble one for our own experience should be resisted. The Fund has had a long involvement with Pakistan, but this involvement hasn’t yet been studied in any meaningful way.

One thing we know, though, is that protecting Western creditors’ interests couldn’t have been all that important as a driving force, except maybe in small instances here and there, because there haven’t been any large-scale Western credits at stake in Pakistan, certainly nothing like in East Asia in 1997.

There was an episode in the mid-1980s, but the sums involved were very small.

Then there was the Fund’s insistence that Pakistan first seek a rescheduling of its Eurobonds in 1999 before applying for another Fund loan, primarily because it didn’t want to be perceived as bailing out private creditors. (Most of those Eurobonds were held by local investors in any case, so rescheduling could be safely called for.)

Likewise, no major Western investor has been battering down the protectionist walls of our economy for the past three decades, as in Brazil or Chile. Opening up our economy has hardly been a strategic economic priority for the great powers.

Another theory goes that our long engagement with the Fund has geopolitical roots and that the Fund is a surrogate aid dispensary in return for ensuring Pakistan’s participation in superpower geopolitical priorities.

This approach has some merit to it, and certainly explains the contrast between the tough approach the Fund took towards Pakistan throughout the 1990s when the country was in the superpower’s doghouse, versus the soft approach it took in the years of Gen Musharraf.

But still, there were crucial years like 1985 to 1987 — high-water mark in the geopolitical game — when Pakistan tried but couldn’t get anything from the Fund, unless that absence of support was itself dictated by the superpower, saying “their reserves are adequate, no need for anymore money at this point”.

Within South Asia, the Fund’s involvement has been anything but comparable. Pakistan and Bangladesh have spent many years inside a Fund programme over the past 30 years, whereas India and Sri Lanka have not.

Bangladesh has had a decent track record on tax reforms, whereas ours has been better at privatisation. There’s little uniformity to suggest a regional experience with adjustment, and likewise hardly any regional critique.

So the Pakistan-Fund story with the Fund is a bit of a blank slate, with flashes of insight here and there that light up different aspects in patches. There’s an element of truth to what the various voices are saying. Yes, the programmes strangulate growth, but can Pakistan really afford growth without reforms? Yes, geopolitics is a factor, but there’s a lot of room for play within the limits set by the Great Game.

This time it’s clear the Fund has a role to play in the geopolitical situation, but part of the reason it’s attracting such disdain might have to do with the miserly disbursement schedule. How the reviews go once the troops leave will reveal all, but who will care by then?