Will IMF Bailout Hurt Average Pakistanis?

The International Monetary Fund (IMF) has approved a 23-month, US $7.6 billion loan to Pakistan in November to avert a severe current accounts deficit and Pakistan's debt default. On November 27, the IMF released to Islamabad a first installment of $3.1 billion, in it first "bailout" of an Asian country during the current world financial crisis.

Prior to this news, Pakistan's President Asif Ali Zardari knocked on many doors and begged unsuccessfully for billions of dollars in assistance for months from "Friends of Pakistan" (FOP), a group of countries including China, Saudi Arabia and the United States. This was part of an effort by Pakistan's new president to avoid going to the International Monetary Fund (IMF).

Why did the FOP decline to help? Why was Mr. Zardari trying to avoid an IMF bailout? Let's try and examine the answers to these two important questions being asked.

Friends of Pakistan:

Being friends, the FOP know a lot about Pakistan and Mr. Zardari. They have been watching Pakistani economy's return to the bad old days. While each of the friends genuinely wants to help in stabilizing Pakistan's economy, they have major concerns about the need for transparency and fiscal discipline before committing their money to help their friend. Given Mr. Zardari's reputation as Mr. Ten Percent, they are reluctant to write checks with no strings attached. In other words, they want to trust but verify, an objective that seems achievable if the IMF is involved in closely supervising Pakistan's budget, spending and economy.

Avoiding IMF:

Mr. Zardari has tried to avoid borrowing from the IMF for several reasons. For example, he does not want any one watching over his shoulders as he transacts business as usual. Another reason is that the IMF imposes tough conditions and budgetary restrictions that are usually unpopular and hurt the democratic government's chances of staying in power. The IMF makes the system of political patronage in a feudal society more difficult, if not impossible. Pakistanis have bitter memories of the IMF austerity programs implemented by the PPP and Pakistan Muslim League (Nawaz) governments in the late 1980s and 1990s. Fearing a hostile public reaction and not wanting to accept a further loss of Pakistani "sovereignty" under conditions where the US is routinely carrying out military operations within Pakistan, the PPP-led government long hesitated in seeking a loan from the IMF. Earlier, President Musharraf's government had ended Pakistan's dependence on IMF by economic reforms that created confidence in Pakistan's economy and brought significant foreign investments to Pakistan. That confidence has disappeared after Musharraf's departure from the scene.

IMF's Tough Conditions:

1. Pakistan's central bank must tighten money supply. In order to pave the way for the IMF loan, Pakistan's central bank raised its bank lending rate in early November by 2 percentage points to 15 percent and the state bank has let it be known that a further 1.5 percentage point hike will be implemented in January. The justification for such high interest rates is the high inflation rate in excess of 20% in Pakistan, mainly due to high food and energy prices. Removal of subsidies is making it worse, in spite of declining world oil prices. Tighter money supply will almost certainly hurt businesses, consumers and overall employment, forcing a major recession. According to an Asia Times Online report, Anjum Nisar, the president of the Karachi Chamber of Commerce and Industry, has said, "Pakistan's industrial landscape may soon be marked with dead and sick units and there will be massive unemployment because of the devastating impact on businesses of the higher cost of bank loans arising from the interest rate increase." The liquidity crunch resulting from IMF's tough conditions will turn the already precarious situation of Pakistan's poor daily wage earners into a disaster. Increase in hunger and poverty will hurt Pakistani government's ability to fight Islamist insurgency and maintain peace and stability.

2. Pakistan government must cut spending and raise taxes. The IMF economic stabilization package calls for the government's annual budget deficit to "be reduced from 7.4 percent of GDP in 2007/2008 (July-June) to 4.2 percent in 2008/2009 and 3.3 percent in 2009/2010." The IMF added, "This fiscal adjustment will be achieved primarily by phasing out energy subsidies, better prioritizing development spending, and implementing strong tax policy and administration measures." This condition will also lead to a deep and prolonged recession in Pakistan.

3. The IMF wants Pakistan to raise tax revenue from the present 10 percent of gross domestic product (GDP) to 15 percent by 2013. Neighboring India's total tax revenue, including levies on income, imports and sales, also amounts to less than 10 percent of GDP now. In China, the figure is 20 percent, and among the members of the Organization for Economic Cooperation and Development it averaged 37 percent in 2001. As part of a plan to increase tax revenue, the IMF is pressing Pakistan for the introduction of a tax on agricultural income. Pakistan's large landowners have tenaciously resisted such proposals in the past. Should Islamabad ultimately impose a tax on agricultural income, it will only be after a bitter struggle within the Pakistani feudal ruling class over how to design it to be regressive to make small producers bear a disproportionate share of the tax burden.

4. IMF does not require defense spending cuts, further exacerbating the economic impact on ordinary citizens. The IMF, which is controlled by the US and other western powers, made no demands for cuts to Pakistan's massive military budget. Juan Carlos Di Tata, IMF senior special adviser for the Middle East and Central Asia, expressed concern about the rise in Pakistan's defense spending, but then added that the question of Pakistan's military expenditure had been excluded from the bank's negotiations with the country's Pakistan People's Party-led coalition government. "The issue of defense spending was not discussed during the program negotiations," said Di Tata. "Defense spending is basically an item that was determined by the government and included in the budget projections for this fiscal year. There was no discussion of this topic."

What's Next:

According to the IMF, even after last month's IMF loan, Pakistan will need another $20 billion "to get control over its imbalances." The FOP are scheduled to meet January 13-16 to decide on additional non-IMF assistance to Pakistan. Most likely, they will want IMF to continue supervising Pakistan's economy as a condition for their assistance.

While the US economic revival is planned with multiple stimulus packages, near-zero interest rates and tax cuts to increase liquidity for government, business and consumer spending, it seems the IMF prescription for Pakistan is quite the reverse. It is a basic economic fact that raising taxes does not increase revenue during a slowdown. Rather than close the budget gap, attempts to raise revenue cause a downward economic spiral. Instead of softening the impact on businesses and consumers, the austerity measures will clearly hurt the average and poor Pakistanis disproportionately and cause a great deal of suffering leading to greater political instability in the country. An unstable Pakistan is in no one's interest. But,what is good for the goose is apparently not good for the gander, according to the IMF's perverse logic.


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