Cover Story

IMF or No IMF?

Having been trapped in IMF’s big arms for over 34 years, Pakistan will never be able to break free from the debt trap in the next 50 years too if its leadership does not change its mindset.

By DR. ASHFAQUE H. KHAN | April 2023

First of all, we need to understand that the International Monetary Fund (IMF) is not just a financial institution but it is also a part of global politics. The major shareholders of the IMF have a lot of interest in world affairs and employ the institution as the most effective foreign policy tool, a harsh reality known to the whole world. Therefore, the IMF lends money only to those countries who tend to meet its strict requirements whether they like it or not.

I have dealt with the IMF for about 11 years. Believe it or not, we had to fulfil and implement all its 32 conditions just within a period of ten months in 2000 under the Standby Arrangement and that was the most difficult programme for Pakistan to execute. Although the current program was initiated in July 1, 2019 the then government was implementing the prior actions some nine to ten months earlier. As an economist, I don’t think the IMF has ever given such a tough programme to any country.

I had the opportunity to study at better school and from better teachers than many of the IMF staff members handling Pakistan, therefore I can understand how their policies are hurting Pakistan’s economy. IMF has four policy instruments in its pocket. These policies remained invariant with respect to time and geography. These four policies are as under.

First, tighten the monitoring policy, second devalue the currency, these two are counterproductive, and third is to take austerity measures. Then it comes to increase the prices of utilities, e.g. electricity and gas. The price increase is not reform. Reform exercise leads to the improvement process but the current slew of measures are not reforms by any means. Honestly speaking, any government can straightaway increase the prices, then what is the need of the IMF for this?

Greece, for instance, is a member of the European Union. However, if it were a non-European country like Pakistan, its fate would not have been different either. The IMF has so much capacity to destabilise any system as it has already done with Pakistan’s. The former finance minister believes that we have no other option left but to reschedule our outstanding loans. Prime Minister Shehbaz Sharif also recites the same mantra without realising the fact that Pakistan’s Paris Club has already been rescheduled. This facts are well-documented in Pakistan Economic Survey. Paris Club debts amounting $12.5 billion were gone through the stock rescheduling in October 2001. Nobody in the government informed the Prime Minister that there is no scope for Paris Club debt rescheduling. The Paris Club debt of $12.5 billion had two components: one was Official Development Assistance (ODA), amounting $8.8 billion with an average interest rate of 1.3 percent while the remaining $3.7 billion was non-ODA with an average interest rate of 4.3 percent, which was a bit expensive. Under the Paris Club agreement, the ODA amounting $8.8 billion was rescheduled for 38 years including a grace period of 15 years, while the non-ODA debt amounting $3.7 billion was rescheduled for 23 years including a grace period of 5 years. Knowing the fact that the rescheduling of the Paris Club debt has been done till 2039, then what kind of rescheduling are the people in the government talking about? Also, the debt given in terms of Non-official Development Assistance has been rescheduled for 23 years and will now be payable in 2024. The bulk of our debt is such that they cannot be rescheduled. For example, our bilateral debt amounts to $26.2 billion or only 21 percent of the total external debt and liabilities as on end - December 2022. Multilateral debt alongwith IMF debt, commercial banks loans and sovereign bonds totaled $71.1 billion or 56.3 percent of the total debt and liabilities – much more than the bilateral debt. These multilateral debt (World Bank, Asian Development Bank, Islamic Development Bank, the IMF and the AIIB) cannot be rescheduled as they are known as “Preferred Creditors”. As far as foreign commercial banks and sovereign bond debts are concerned, their rescheduling is very complex and very risky. Pakistan should not ever attempt to do so without the active support of the G-7/G-20 countries as well as the United Nations.

What can Pakistan or other low-income developing countries do to handle their debts? Presided by Japan, the G7 Summit is going to be held in Hiroshima from May 19 to May 22. The debt relief for low-income developing countries will be a part of the Summit’s agenda this year. The Asian Development Bank Institute, headquartered in Tokyo, is basically a think-tank of the Asian Development Bank. Being a member of its advisory council, I am the first Pakistani to be a member of the Institute since its inception. Japan asked them to make a policy brief for the G7 Countries. Since I am in its advisory council and they know my professional credentials as the founder as well as the Director General of the Debt Office of Pakistan, they invited me to join their drafting committee and I accepted the invitation wholeheartedly.

Read More