The end of the affair?

Why keep on going to the IMF?

AT PENPOINT

The approval of another tranche of the IMF’s Extended Fund Facility was only to be expected, but now that the end of the programme is only a year-and-a-half away, it might be the right time to contemplate how far the programme has delivered.

When Pakistan began the programme in March 2024, it was after it had completed a nine-month Stand-By Arrangement. Though this SBA had been reached with Mian Shahbaz Sharif\s coalition, it carried the country through an extended caretaker period, and into the initial period after the 2024 election. Mian Shehbaz formed a government again, and among its first tasks was the negotiating of an agreement with the IMF for a longer commitment.

It should be understood that the reason Pakistan keeps on having recourse to the IMF is because it keeps having foreign exchange difficulties. The IMF is the lender of last resort, and is meant to provide foreign exchange to countries which are having difficulties paying for their imports.

One reason for foreign exchange difficulties is having to service foreign debt. Pakistan’s foreign debt has reached $138 billion by the end of last year. Not only must it be repaid, but interest must be paid on it. The only way of retiring this debt is to earn foreign exchange by selling goods, services or obtaining remittances from abroad. Well, that is a permanent solution. There is also the expedient of borrowing money to service debt.

That is what borrowing from the IMF means. It is a loan taken because the country needs the foreign exchange to pay its loans.

The next step is government finances. Is the government raising the necessary revenue to pay the State Bank of Pakistan (which holds all foreign exchange) the money to buy the foreign exchange? The government is sorely tempted to print the rupees to buy the dollars, yen, and whatever currency it needs to service that debt. Therefore the IMF has to make sure that the government has the money to buy the requisite foreign exchange. Therefore, the SBP: must be made independent of the government, and the government’s budget has to be so structured that a primary surplus is generated, whereby the total revenue is more than interest payments. It seems to assume that repayments are to be made by borrowing.

There are three types of loans broadly: commercial loans (made by banks, basically because the banks want to make money), project loans (made by development finance institutions, so that projects can be set up, which will generate the income needed to repay the loans) and programme loans (which are made by international finance institutions like the IMF for balance of payments support). The first and second types (especially the second type) are meant to be embezzled, and are essentially political bribes so that senior officials, both permanent and elected, follow policies favorable to the USA, which is the architect of the post-World War II financial system, which revolved around the Bretton woods institutions, like the World Bank and the IMF. The World Bank and Asian Development Bank do programme lending too, but this too is designed to keep borrowers obedient to the USA.

In fact, that ability to embezzle is what keeps officials obedient. The problem is that borrowing countries like Pakistan face difficulties repaying development loans, so they turn to the banks to tide them over. At this point, both officials and bankers (both borrowers and lenders) profit. Left carrying the bag are the ultimate guarantors of the loan, the people of the country, who have to repay the taxes which will repay those loans.

Though Pakistan has well over a year before the end of the current EFF, there is already talk of extending it. That is a way of getting another programme without actually saying so. However, while it will spare the Finance Ministry people from having to think (at present they do not have to come up with a policy), it will probably not solve Pakistan’s forex problems. What will stop Pakistan from going down Argentina’s path?

One additional problem is that the projects for which the loans were made are rendered unviable because of the embezzlement, or were never viable in the first place, have been dreamed up merely to provide room for embezzlement. The theory is that the project should result in enhanced revenue, which should enable the repayment of those loans. It need not be direct revenue. A new canal will result in direct increase of revenue from increased abiana (water rate), but the real revenue is supposed to come from increased produce. If farmers do not pay tax on their income, arhtis (brokers) evade them, and so do shopkeepers, where does the government get the wherewithal to repay the loan?

This is not just a problem in Pakistan. It is a problem throughout the Global South. That is where IFIs like the IMF, the World Bank and the Asian Development Bank  step in, with programme loans. These are loans meant for balance of payments support. In short, they provide balance of payments support. They lend, so that the country concerned can keep servicing its debt.

In return, they demand that the country be in shape to repay these loans. That’s where the IMF comes in. It works with the local government and comes up with a programme designed to ensure that the country’s debt will be serviced. It should be noted that the debt now includes loans from the IFIs, which have replaced the commercial loans and development loans.

It must be remembered that the IFIs are basically banks that want their loans repaid. Therefore they expect a say in how their money is being spent.

However, the IMF is not a guarantee of economic stability. The example of Argentina has been held up, which suffered a disastrous partial default, where it welshed on $80 billion of its debt (though not on its debt to the IMF) in 2018, and which then entered on a $50 billion Stand-By Arrangement. The SBA did not achieve its objectives, it was allowed to expire. To replace it, there came a 30-month Extended Fund Facility IN 2022, of $44 billion. In 2025, there was another loan approved, of $20 billion over four years. Argentina owes more to the IMF than any nation, about $57 billion. Pakistan presently owes about $7.3 billion.

Argentina is frightening for Pakistanis because it has been conceded by the IMF (albeit grudgingly and with caveats) that the 2018 SBA was badly designed. What is to guarantee that the previous SBA, and the EFF, were not badly designed for Pakistan. In short, what if the IMF gets its economics wrong?

It might seem heretical to say that the IMF doesn’t know its economics, what with the vast number of economists it employs, who have all been to the best institutions of the world? However, the alternative is that the economists know their stuff and get the desired result: dependence.

In Pakistan’s case, it is glaringly obvious. The IMF programme is singularly free of anything contributing to the only way out of Pakistan’s foreign exchange difficulties: more exports. This is either bad economics, or that will come in some future programme. That assumes that this programme does not leave Pakistan able to stay out of another one.

Though Pakistan has well over a year before the end of the current EFF, there is already talk of extending it. That is a way of getting another programme without actually saying so. However, while it will spare the Finance Ministry people from having to think (at present they do not have to come up with a policy), it will probably not solve Pakistan’s forex problems. What will stop Pakistan from going down Argentina’s path?