International Monetary Fund (IMF) and Pakistan Economy
By: Fida Karim
The International Monetary Fund (IMF) is an
organization of 189 countries, and was established after World War 2 in
1945.The Purpose of IMF is to ensure economic stability in the international
monetary system i.e. the system of exchange rate and international balance of
payment that enables countries to trade with each other.
From the view point of the IMF, whenever a country
faces balance of payments crisis it is because of the excessive demand
prevailing in the economy, or in other words due to heating up of an economy.
Pakistan faces a similar type of situation in fiscal year 2018-19 when the
balance of payment when the import-export Gap reached to record high of $32
billion in monetary terms and 10.1 percent of Gross Domestic Product(GDP).While
o the domestic side the fiscal deficit has also increased and stand at 8.9% of
GDP in fiscal year 2018-19.
Ever since the new government took charge of the
state affairs the debate was open whether to go IMF for a bailout package or
not but things become worse at the end of last fiscal year and there was no
other option left. Pakistan finally entered the 22nd IMF programme on 1st July 2019.Pakistan has gone
to IMF 21 time in the past and fourth time since 2000.
IMF Framework:
From the view point of the IMF, whenever a country faces
balance of payments crisis it is because of the excessive demand prevailing in
the economy. In other words, aggregate demand (Consumption (C) + Investment (I)
+ Government Spending (G) + Exports (X) – Imports (M) (C+I+G+X-M) exceeds
aggregate supply (Y). The country, when approaches IMF for financial support,
they are asked to pursue a policy prescription known as demand management
policy or austerity policy. The IMF believes that by curtailing aggregate
demand through various policy instruments, the country can restore a balance
with aggregate supply. It is critical to note that the IMF never advocates for
raising aggregate supply or never prescribes supply side policy. Its entire
policy prescription deals with the right hand side of the national income
identity (Y ≡ C+I+G+X-M) and never advocates policy for augmenting aggregate
supply (Y), the left hand side of the accounting identity.
Stabilization Policy:
There are three key instruments of Stabilization Policy.
These include: i) floating/flexible exchange rate policy; ii) tight monetary
policy; and iii) tight fiscal policy. The country would be asked by the IMF
Staff to pursue floating or flexible exchange rate policy which invariably
leads to devaluation (the objectives are to reduce import and increase exports
– the two components of aggregate demand). Devaluation is by definition
inflationary as all the landed costs of imported items in local currency
increases. To counter inflationary pressure, the Central Bank immediately
tightens monetary policy by increasing discount rate which, in turn, increases
overall interest rates in the economy. Higher interest rate discourages private
sector investment (another component of aggregate demand).
Tight fiscal policy on the other hand, prevents
government to spend more (major component of aggregate demand). Given the
committed nature of spending such as interest payment, defense, running civil
administration and subsidies in which there is little or no flexibility, the
axe of spending cut falls invariably on development expenditure. Cut in
development expenditure means that public sector investment also declines.
Thus, higher interest rate discourages private sector investment and cut in
development spending means decline in public sector investment; therefore,
total investment as a percentage of GDP declines. Investment being the critical
input to economic growth, lower investment slows economic growth. Pace of job
creation depends on the pace of economic growth. Slower economic growth slows
the pace of job creation and hence, rises in unemployment and poverty.
Impact on Pakistan’s Development
and Growth
According to an IMF staff report
released in July, Pakistan’s government will drastically increase
revenues mobilization through taxation by
four to five percent of its GDP. This will increase the tax
to GDP ratio from 10.4 percent to
15.3 percent. However the increase in taxation have slow the growth process and
overall the economic growth has become stagnant.
simultaneously,
the rupee has lost its value by nearly 50 percent since 2017. The inflation rate hovers around nine percent and is expected to rise
further in the coming months to about 13 percent. In June, the rupee reached an
all-time low of Rs 164 against the dollar. Despite the devaluation, Pakistan’s exports have remained
unchanged, leading to a trade deficit of over USD $30 billion.
There is a rising
discontent among the general masses as prices
for basic necessities and taxation both increase. Rupee
devaluation, rising energy costs, and
higher taxes have increased the costs of production. Nationwide, traders have called for strikes against IMF-imposed taxes and the complicated taxation
mechanism introduced by the Federal Board of Revenue (FBR).
Severe austerity measures have already affected various development
projects in the country. In the June 2019 budget, the budget allocation for
Education Affairs and Services has been reduced by 20.5 percent. Sweeping cuts in Pakistan’s
higher education budget have also been made. This is a dismal development for a
country that only spends 2.4 percent of
its GDP on education.
These measures are certain to limit Pakistan’s economic growth in the
coming years. It is estimated that the GDP growth rate will fall to 2.4 percent
next year—the lowest Pakistan has seen in a decade. Austerity measures
introduced as part of an IMF bailout often lead to cuts in welfare benefits,
the privatization of state-owned enterprises, and fewer employment
opportunities. Similarly, the measures Pakistan has adopted under the IMF
prescription will reduce government expenditure, increase taxes on the poor,
and slow down economic growth. To avoid a similar balance of payment crisis in
the future, the government needs to consider new ways to address its structural
economic issues by increasing its exports and broadening the tax base to tax
the rich instead of burdening the working class.
 and Pakistan Economy By: Fida Karim){kind=link}
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