IMF is like an addiction. Many countries
have taken the IMF route, only to return
to it again and again. Pakistan is one of
those countries which have done so. IMF
is no more than a temporary palliative.
And the problem returns soon with all
its virulence. Under an IMF programme
the basic structural issues of an economy
are not addressed. Taxes are increased,
subsidies are cut and utility charges
are enhanced as a result of which the
common people are subjected to severe
hardships. But the economy as a whole
remains unreformed.
IMF programmes are not about
economic justice or creating an equitable
society by narrowing the rich-poor gap.
The Fund behaves more like a recovery
manager and for this purpose indirect
taxation is increased. It never insists
on taxing the rich and super rich or
the landed aristocracy. This is specially
so in the case of Pakistan. Another
feature pf an IN IMF programme is that
it seldom, if ever, talks about cutting
government expenditure or eliminating
colossal waste in government. The issues
are many and range from deficiencies
in programme design and conflicting
Muhammad Jahangir
economic problems?
the answer to our
Is IMF
36 September 2024
objectives to a lack of understanding
of the political economy. All these
have not just important ramifications
for the macroeconomic performance
of a country, as well as serious social
consequences, they also have a large
bearing on the sustainability of reforms.
Pakistan is a case in point. From 2008
onwards and even earlier, there was an
excessive emphasis on tax collection
from day one. But the approach was
faulty as there were no accompanying
effort to reform the tax administration
or rid the tax machinery of corruption
and inefficiency. As a result, the burden
falls heavily on those already in the tax
net while those outside the net continue
with their immunity. This is one of the
basic reasons for the failure of IMF
programmes.
There are also sectoral issues. Under
IMF direction, achieving ‘cost-recovery’
tariffs for electricity was a prime
objective. The problem in the power
sector (and in natural gas distribution
to a large extent) is of revenue leakages
that occur due to non-recovery from
large consumers, and theft that occurs
in collusion with the field staff of the
utilities. But no coordinated drive has
ever been launched to take care of
this aspect of the problem : stopping
power theft and recovering dues from
the big guns, including government
departments and bodies.
IMF’s simplistic and counterproductive
approach has been to increase electricity
charges, an approach which hits the
consumer hard as well as the industry
whose cost of production goes up. As we
all know, Pakistan has made multiple
large adjustments to electricity tariffs
under IMF advice since 2008. But this
has had no positive impact. The net
result has been that the circular debt
in the power sector has increased from
about Rs120 billion in 2008 to over
Rs1,400bn in 2019.
It may be recalled here that in 1988,
the World Bank got Pakistan to auction
its public debt and liberalise interest
rates in the belief that the price the
country would have to pay for borrowing
would force greater discipline in public
finances. Instead, overnight, the
country’s interest payments on public
debt soared, adding to the fiscal deficit.
The tragedy is that despite repeated
failure, the IMF, World Bank and
other international agencies continue
with their thick headed policies,
creating enormous difficulties for the
government and people of the target
countries. The most important task
is institutional development which
is not seriously tackled. In our case,
institutional capacity needs to be built
in tax administration (both federal
as well as provincial), the energy
governance chain (regulators, ministries,
companies), and in key implementers
such as the finance ministry and the
central bank.
But this is easier said than done. It calls
for hard work and sustained capacity
building to improve the quality of
governance. Time duration of IMF
programmes is also another serious issue
which has not yet been addressed. Here
IMF acts like an NGO which launches a
time-bound project, completes it fully
or partially and then leaves. But IMF is
not an NGO. Policy reforms and capacity
building have to be a sustained process
spread over several years.
IMF leaving after a limited period
without evaluating the outcome of
the programme objectives is the
fundamental reason for its failure in
country after country.
Institutional and structural reforms
can never be half way house. These have
to be planned and sequenced. But the
IMF staff is always in a hurry which
spoils everything. The IMF steamrollers
everything in utter disregard of the
political exigencies of the incumbent
government. It also focuses on less
important policy actions, which
jeopardises the larger picture. IMF’s
inability to gauge the actual burden of
the price adjustments and their social
effects is its ultimate undoing.