IMF Board comes through

Pakistan approaches the end-game of the current programme

The IMF Board of Directors on Friday approved the latest tranche of the Extended Fund Facility, worth $ 7.7 billion, of $1.1 billion, as well as $220 million under the Resilience and Support Fund, for a total of $1.32 billion, which is expected to take foreign exchange reserves to $17 billion. This is being spun by the government as a positive development, but it commits Pakistan to following a path of continued austerity at a time of conflict in the Gulf, in which the closure of the Hormuz Strait has led to the spiralling upwards of oil prices, making it virtually impossible for the country to achieve the reforms demanded  by the IMF. It has been argued that the IMF’s basic philosophy is flawed, but the problem might well be in its economics, which does yield real-world outcomes.

The problem with the IMF’s economics is that it does not offer the country a path off IMF support. As the current programme is due to expire in October next year, the government does not seem ready to make do with another one. The present government had committed that this would be the last IMF programme, but a path to generating sufficient foreign exchange does not appear visible. IMF programmes are needed because a country has got problems earning enough  forex through exports, to pay for its imports, and needs to borrow from the IMF. A symbol of that appeared in the rise announced in fuel prices, in the rise announced in the current weekly review, to Rs 414 a litre for petrol. As an aside, the FIA finally caught up with the oil marketing companies, who had been selling at the heightened prices, stocks imported at old rates, good old-fashioned fraud. That was perhaps inevitable in the current market, but it makes it much more difficult for the government to work out how to keep paying for imports.

It should be understood that Pakistan does not borrow from the IMF to pay for development which would generate the necessary revenue for repayment. It borrows to pay for essential imports, like fuel, edible oil and pharmaceuticals, and to allow for embezzlement. Now that the USA’s dominance is being eroded, it may be time to reconsider Pakistan’s relationship with the Bretton Woods institutions like the IMF, and its broader relationship to the financial institutions that constitute the money markets.