After 25 years of a push and pull relationship with the IMF, Pakistan has decided it would no longer seek IMF's assistance-well, until it does, or has to. For most countries, IMF is a fall-back plan, the last resort, a financing arrangement that comes with many chains but for Pakistan, IMF has been the gift horse that keeps on giving. Despite failed reforms and many unmet with numerous waivers and downward revision in benchmarks; a new loan was granted year after year, government term after government term. Going as far back as the 50s, Pakistan's economy has suffered from recurring balance of payment (BOP) crisis seeking IMF to bail it out. The macroeconomic stability measures proposed by IMF however, remained largely devoid of any successful overhaul as Pakistan continued to suffer from the maladies of these issues long past.
Many of the programs were prematurely terminated either by Pakistan for finding the reforms too cumbersome or by the IMF because Pakistan did not meet the objectives. After annual or quarterly reviews for most programs, targets for GDP growth, inflation, budget deficit, fiscal deficit, reserves and other indicators were revised down, so it was many a times IMF catching up to what Pakistan could realistically achieve. On the part of the IMF, this meant many of the benchmark conditions were found to be overestimated; more often than not critical structural reforms by Pakistan were not implemented.
Here we review the 16 programs Pakistan signed with the IMF; whether they failed; how and why they did, and in what areas the programs may have helped Pakistan, if at all.
Why the IMF loan?
Major reasons other than resolving BOP problems was to be able to seek funds from other international donors with IMF granting a "seal of approval" to Pakistan; getting export credit facilities easily and in later years to get debt relief and rescheduling. But more often than not, politics was at the epicentre of most arrangements, and it is the constant political turmoil, uncertainly and frequent changes that ultimately resulted in so many agreements discontinued, terminated or failing to bear any fruit. There was also the matter of IMF's skepticism in Pakistan to handle economic mismanagement and political corruption, and their unwillingness to see any reforms through.
<B>What's politics got to do with it?</B>
Everything, the ugly truth is that whether it was a one-year program or three, the immediate and really, the only concern was short-term injection of funds to avert a BOP crisis and pump up reserves. Long term structural reforms were never the primary concern because they entailed making un-populous decisions which no political leader had the gumption to make. As Ishrat Husain puts it: "The vested interest groups which were likely to lose out from these reforms, had strong political and economic hold on the decision making process under every elected government. They were therefore instrumental in ensuring that only some cosmetic changes were made to obtain IMF and other external financing and then go ahead with business as usual". Other analysts even argue that some of the reforms undertaken under IMF programs may have actually added to Pakistan's current woes for instance, opening up its capital account in the mid-1990s which led to a massive flight of illegal capital to the Gulf nations which continues to this day.
Pre-1988 arrangements:
Since1958 and through the 1970s, Pakistan signed six year-long Stand-by Arrangement (SBA) to give temporary balance of payment support, while the longer facilities came in the 1980s. All SBAs except the first one during Ayub Khan's era were entirely disbursed but they did not succeed in correcting the imbalances.
During the 1970s, the fund itself was just there to help countries with quick injection of funds so they don't end up defaulting. However, the fund's ambitions evolved since the debt crisis that hit the world in the 70s from just providing assistance to now also helping countries to revive their economies with a set of policy reforms. These revolved broadly around contractionary fiscal and monetary policies, inflation targeting regimes, financial deregulation and increased openness to international capital flows, trade liberalisation (including reduction of tariff and non-tariff barriers) and privatization of public-sector enterprises. The 7th program under Zia Ul Haq, a 3-year EFF was the first long term facility and had to be taken because the currency had been appreciating. Even after the currency was devalued in 1981, in absence of proper reforms, the program was declared off-track.
<B>1988-99 arrangements: failed regimes, off-track targets, failed programs</B>
After 1988, the programs had more specific reforms for Pakistan but fundamentally similar conditionality.
The year 1988 was a whirlwind: Zia-ul Haq had just died and Benazir Bhutto came into power amidst massive political turmoil. By 1989, the country was handling a huge refugee crisis with an influx of over 3.8 million Afghan refugees crossing the border into Pakistan. The economy was in bad shape. A three-year Structural Adjustment Facility (SAF) was signed by Bhutto, along with an SBA. These and subsequent programs were focused on reducing fiscal and current deficits, and called for GST reforms, raising public utility prices, reducing subsidies, privatization of state owned enterprises (SOEs) and devaluation of rupee. Most of the macroeconomic targets were unachieved.
Six more agreements were signed on by several governments during this time period; three of which between 1993 and 1994 were prematurely terminated due to political uncertainty. It was when Nawaz Sharif came into power in 1997 and the program during his time started to show some semblance of upward movement. The comprehensive program of macroeconomic adjustment and structural reforms in early 1997 yielded some positive results: economic growth accelerated and inflation was brought down to single-digit levels against a backdrop of tight macroeconomic policies.
However, this improvement was short-lived. Relations with international community, investors and donors specially the US suffered immensely when Pakistan tested its nuclear weapons in May 1998 and much of the progress made during the IMF program were derailed as sanctions were imposed, capital flows dwindled and reserves declined. The government took several measures to contain the impact on the BOP and to sustain domestic economic activity like fiscal and exchange rate measures in addition to exchange restrictions, but economy remained vulnerable.
For the programs between 1997 and 1999, some of the reforms that were supposed to be undertaken by the government during this period were: rationalising the public sector, shifting primary productive role to the private sector, strengthen local institutional capacity; domestic tax base to be broadened; tax administration strengthened; government expenditure shifted towards the social services and human capital formation; and key public enterprises restructured. The privatization program included industrial units and important public assets in the transportation, power and gas, and telecommunications sectors. The government also planned to enhance the authority and the ability of the State Bank of Pakistan to regulate and supervise banks; improve the legal and judiciary process for enforcing financial contracts; privatise the state-owned banks and financial institutions; and develop the capital market.
The long term outcome of many of the reforms undertaken during these years, studies argue, contributed to increasing poverty and inequality during 1988 to 1999. To reduce budget deficit, the government froze public sector employment that brought public expenditure down. Real wage declined which on the flip side contributed to poverty levels going up and unemployment rising-latter rose from 3.1 percent in 1990 to 6.4 in 1999.
During this period, there were cuts in education and health expenditure which is argued, contributed more to poverty since public education and health spending is concentrated toward the poor strata of the society. Reduction of subsidies has been another reform measure that resulted in subsidy cuts from 1.5 percent of GDP to 0.48 percent of GDP between 1988 and 1999 where the impact of production subsidies was borne by the poorest population. Subsides were eliminated from wheat, fertilisers and edible oil affected the agricultural sector while prices of electricity and gas went up as global prices rose that all combined increased the burden on the poor.
GST was introduced to help document the economy and raise revenues. While necessary food items were exempted; others such as vegetable ghee, gas cylinder, cooking oils, kerosene oil, fans, air coolers, bicycles, and TVs, were subjected to this tax which further added to the burden on the low income households. Poverty levels rose from 24 percent to 30 percent as more people were brought under poverty. Meanwhile, tax to GDP could not be increased because the system was riddled with exemptions and documentation became unlikely.
Whereas trade liberalisation measures were welcomed, it only worsened the current account deficit since exports did not increase as much as imports did, and because of currency devaluation, imports also became more expensive.
On the greater autonomy of the SBP to manage reserves without any political influence, no headway was made as the government did not want to relinquish controls on setting currency, managing reserves and borrowing.
Despite failed reforms, the IMF kept giving Pakistan the thumbs up while acknowledging that the macroeconomic situation had not changed much. The program urged Pakistan to broaden tax base, resolve the outstanding issues with IPPs and complete the restructuring of the power sector without delay. The Fund would continue to push for these reforms for another four programs to no avail.
Arrangements post 2000s: 3 of 4 programs successful, but many structural reforms pending till date
By now Pakistan is known as a prolonged user of IMF funds; a frequent flyer with virtually no benefits except a steady supply of funds when needed.
Pakistan entered four programs with the IMF post 2000, successfully completing three; two of which as ironic as it would seem, were under General Pervez Musharraf, and the last one during the current PML-N government successfully transitioning from the past elected government. A common factor is political stability and better security conditions within the country. Yet, as with previous programs, the Fund gave lot of clemency in meeting targets, often revising them down after a review.
The first successful Musharraf program had some issues: there was a drought that severely hurt the economy. Estimates were revised, and areas where the country fell short - such as revenue collection, delays in tax reforms, SBP asset limit - were granted waivers. Other areas had some successes: a key element of the program was the transition to the flexible exchange rate regime, and this was done. Privatisation of PTCL, UBL, and offloading government shares in various oilfields such as SSGC also happened in a timely manner.
Musharraf capitalised on the completion of its first programme and decided to immediately entered a Poverty Reduction and Growth Facility, approved just months after 9/11, and the Fund's estimates relating to trade, revenue collection (from lower imports), and GDP growth were all initially revised down.
Ironically enough, for a loan titled "Poverty Reduction and Growth Facility," poverty reduction was nowhere a priority at any time during the three years, neither for the IMF nor for the government. The arrangement did not contain any structural or performance criteria regarding social- and poverty-related expenditures. An indicative target for social- and poverty-related expenditure was, however, given (5.7 percent of GDP by FY05), but the government came up short of it, albeit marginally. Adding insult to injury was the fact that the IMF concluded, in the final review: "Poverty remains widespread and intermediate outcome indicators do not (yet) show significant improvements. Analysis of poverty trends is made difficult by the lack of reliable data."
The Fund's agenda was privatization of HBL and major enterprises in the oil and gas sector, the dismantling of WAPDA, reducing tax exemptions, and a more open economy in terms of trade and exchange rates. This three-year review, like its predecessor, is also replete with waiver after waiver for numerous missed PCs and SCs for, inter alia, revenue collection, privatization delays, and taxation.
There were some positive developments over the period: Pakistan's three-year drought spell finally came to an end in 2003, enabling better hydrological electricity production and agricultural growth. Trade didn't take as big a hit as initially anticipated and generous Coalition Support Fund (CSF) inflows (in exchange for Pakistan's support in the War on Terror) were coming in from the US Inflation was largely contained. The programme was successfully completed. As a gesture of strength, General now President Musharraf concluded the arrangement prematurely, refusing the final instalment (around 17 percent of the total), saying that Pakistan would no longer need the IMF.
The independence was short-lived; soon after coming into power, the PPP approached the IMF in November 2008 for what is the largest amount ever asked from the Fund by Pakistan, around $11.35 billion, which is 700 percent of its quota. In the backdrop of the global financial crisis; depleting reserves, all-time high oil prices, adverse security developments, multi-year high inflation, and the transition to a democratically elected civilian government, Pakistan was struggling. Initially, the two-year agreement was for $8.11 billion, but Gilani and co. in August 2009 obtained approval for upping the loan and extended the date till end-June 2010, citing delays in multi-lateral donor disbursements and unforeseen security expenditures.
As far as successful reviews go, however, the third time was not the charm. The budget deficit target was constantly missed due to unforeseen security expenditures, while the state mechanism for revenue collection remained weak and there were delays in implementation of programmed tax reforms, not to mention excessive spending by the provinces as well.
A large part of this SBA was based on tax reforms. Under the agreement, the government was to increase tax revenue and reduce non-interest current expenditure through the elimination of oil and electricity subsidies. A key step was the replacement of the GST with a broad-based VAT; it was estimated that the additional revenue generated from the VAT could reach 3 percent of GDP per annum over the medium term. Much of this would be generated by removing domestic zero-rating and reducing exemptions to expand the tax base. Sales, excise, and income tax laws were to be reviewed to minimise exemptions and zero-ratings.
Although the targets were being missed, the Fund was nevertheless granting waiver upon waiver of non-performance for the various criteria. The budget deficit and government borrowing from the central bank were breached, and the tax reforms (particularly the VAT by July 2010) were nowhere to be seen, due to their unpopularity in Parliament, making the bill difficult to pass. After granting a nine-month extension to Pakistan in the wake of the worst-ever floods in 2010, the IMF eventually terminated the programme in late 2011. It is also worth noting that the IMF provided an unrelated $450 million to Pakistan for flood relief in September 2010.
Finally, we have the most recent programme. Following in PPP's footsteps, the PML-N entered into the three-year EFF of $6.64 billion that the country just recently graduated from. Like all its predecessors, the programme is replete with instances of obtaining waiver upon waiver of non-performance and restructurings, as targets such as budget deficit, reserves, and borrowing from SBP, among others, were initially missed. However, the falling of commodity prices and the oil glut circa June 2014 came as a gift to the PML-N. By the final review, says the IMF, "All indicative targets and structural benchmarks were met, except for the delayed notification of multi-year tariffs for three power distribution companies."
With the latest review being the most recent in memory, one is still left wondering, where are the reforms and restructurings of the 31 state-owned enterprises? Where is the privatisation of PIA and the Steel Mill, or the laundry list of DISCOs? The IMF listed some of its broad policies for the 2013 programme as follows: "Liberalizing the trade regime and reforming public sector enterprises through restructuring and/or privatization; improving the business climate; strengthening the tax system; protecting the most vulnerable from the direct and indirect impacts of reform measures; a phase-out of all existing statutory regulatory orders (SROs) and other measures which grant special rates and tax exemptions."
It is no secret that Pakistan lags far behind in any concrete implementation of the above measures. True, inflation and the current account were helped a great deal by falling oil prices, and the tax revenue has increased via more/higher taxes, but the tax base isn't really expanding. Exports to GDP has actually been falling which the government blames the global commodity prices for, though no substantial long term export strategy is in place to boost exports in the long run. The PSEs are not being reformed, and the SRO culture, despite what the Finance Minister says, is still as prevalent.
<B>In short:</B>
One common factor amongst the four successful programs was political stability. For all the crucial reforms that were not implemented, improved political and security conditions did make the country better placed for growth.
But despite a successful program, are Pakistan's economic problems solved now? The obvious answer is no. Many structural reforms are still needed: The big reason why Pakistan kept going back to the IMF was because of lack of revenue mobilisation. In the last three years, the total increase in the country's foreign reserves match the increase in total external debt. Exports are coming down fast, and not just because of a slowdown in global commodity prices, which are on the rebound now. The SBP does not intend on depreciating the currency while exports to GDP stood at decades-low of 8 percent in the outgoing fiscal. Tax to GDP stands at 10 percent; and majority of taxes are indirect in nature, which does virtually no favours to the tax base. Meanwhile, remittances are slowing down.
The economy supposedly grew by 4.7 percent in FY16-a number widely contested by economists-but even so, poverty levels are coming down, and the country is heavily relying on Chinese loans and investments for infrastructure and energy growth. But how far have we realistically come, there is still no sure-fire way of knowing if the country will be able to sustain the current account balance?
<B>Side note: US, the important third wheel</B>
When talking about IMF and Pakistan, a quick word on the United States is necessary since US is a key factor in so many IMF loans going through. While the Pakistani layman view is that Pakistan is nothing but a puppet for the US; like the Pavlovian dog conditioned to doing as it was told as funds flowed in-fighting America's war wherever it set foot- analysts believe the truth is a lot more complex, lying somewhere in the middle of Pakistan's convoluted priorities to stabilise its economy with a weakening desire for self-reliance, the vested interests of its political parties and Pakistan's strategic importance to the United States.
The latter kept pumping money into the former's economy to keep it to continue toeing the line, and toe the line it did. Though the relationship has had its fair share of ups and downs- a surge in economic and military aid after the Cold War in the 1960s, and the most notable downs witnessed in 1980s when Pakistan proceeded to enrich uranium; after 9/11 when funding all but halted, and more recently after Congress urged the US government to take a tougher stance on Pakistan's "double game" in fighting terrorism.
But more often than not, with its influence in the IMF, the US has ensured that Pakistan's economy does not go off the rails because a destabilised country that is at the epicentre of chaos-with terrorist factions operating within, and flowing out; with the continued war in Afghanistan, a brewing rivalry with India- a stable Pakistan is better than an unstable one.
In fact, as latest as June of 2016, a vote was put out to reduce CSF funding to Pakistan but the proposal was rejected and US authorities maintained that Pakistan was a key route for supplying US troops in Afghanistan, and that Pakistan was a key ally in counter terrorism.
Dr Ehtisham Ahmad and Azizali Mohammed propose an interesting view on US-Pakistan dynamic in a paper that the influx of assistance from the US had created a Dutch-Disease like effect in Pakistan. It is phenomenon that shows a causal relationship when one flourishing sector; usually a natural resource, thwarts the development of other sectors, so for example, in presence of oil in a country, a large influx of foreign currency due to oil exports makes any other exports or investments in other sectors uncompetitive leading to un-industrialisation.
In Pakistan's case, constant influx of funds made the economy so dependent on debt that any growth the country had was in the absence of greater productivity, mobility in the exports sector, revenue mobilisation or efficiency in governance. This is ultimately why Pakistan's economy always remained at the brink, and never achieved sustainable growth, countless IMF loans and frequent US economic and military aid notwithstanding.