F as in IMF

Author Name: Dr. Usman W Chohan      24 Oct 2019     International Economy

An International Monitory Fund (IMF) mission concluded a five-day visit to Pakistan last month, and issued a press statement that highlighted progress in several key areas. The delegation was led by their regional mission chief Ernesto Rigo, and involved visits to Islamabad and Karachi, with a view to checking the Pakistani government’s policy implementation for the period since the IMF’s issuance of an Extended Fund Facility (EFF).

Pakistan was deemed to be making decent headway, particularly in revenue collections and tax administrative reform. However, various structural issues loomed large, and it was pointed out that it is still too early to congratulate the country on any current initiatives. It may be inferred that Pakistan would get a report card of “C,” but it is still too early to tell.

What is not too early to tell, by contrast, is the record of the IMF in implementing programs in beleaguered economies. The historical record of the IMF is indeed long and dismal, and rather than looking at the entirety of its performance, which is well documented elsewhere, it is useful to look at some of the recent programs that the IMF has deployed and how countries have fared therein.

An important instance of fresh provenance is Argentina. In mid-2018, the IMF agreed to offer the country a three-year loan worth nearly $57 billion; the largest in the institution’s history. This was pursuant to a series of detrimental decisions by the Macri government since it was elected in 2015, including striking deals on toxic legacy debts on which the country had already defaulted, as well as going on an unsustainable multi-year borrowing binge.

The first decision was largely made to appease predatory “vulture” hedge funds in New York, while the second decision was based on political point-scoring with Macri’s voter base. Argentina’s public debt, which is mostly denominated in US dollars, exploded by more than one-third, to $321 billion by 2017, and its fiscal and current-account deficits exceeded 5 per cent of GDP. An economic and crisis ensued, and public debt ballooned to nearly 90 per cent of GDP, which was met with soaring inflation and a flight of capital that caused the peso’s value to collapse.

Under pressure from President Donald Trump, who has known business ties to President Macri, the IMF swooped in with its unprecedented loan. This Faustian bargain came with terrible conditionalities including scathing and far-reaching budget cuts. Ever since Macri complied with the IMF, Argentina’s continually worsened. Today, inflation in Argentina is well over 50 per cent, the poverty rate exceeds 30 per cent, and both GDP and employment are shrinking. As for the lofty targets the IMF set, they were nowhere to be achieved and have been revised twice since the loan package’s issuance.

Argentina simply couldn’t grow out of its economic pains and achieve the IMF’s targets, and how could it when the conditionalities of the program themselves hamper growth through massive and brutal austerity? We can issue a report card for the IMF on its Argentinian escapade, and give it a solid “F.”

By way of another ongoing example, in March, 2019 the IMF approved a $4.2 billion loan for Ecuador, with a view to reducing public debt and implementing economic reforms. In exchange, the IMF has imposed demands of severe cuts to wages and public-sector jobs, a hiking of energy prices, additional charges for public services, and more widespread indirect taxes. Independent economists have estimated that these draconian IMF measures will immediately drop Ecuador’s annual GDP and cause the current economic recession to persist for the entirety of the IMF’s stipulated 4-year program.

Riots broke out in Quito, Ecuador, with tens of thousands of citizens on the streets protesting the government’s IMF-imposed austerity law. The protests were so vociferous that, last week, the government had to go back on the austerity bill and yield to the wishes of the people, ultimately resisting the policies being forced by the IMF.

Ecuador and Argentina are but two among the countless IMF failures. During the Asian Financial Crisis of 1998, from which some countries have still to recover (not least psychologically), the IMF had to sign five successive Memorandums of Understanding with Thailand, precisely because all of the austerity requirements imposed by the IMF ineluctably meant that Thailand would miss its macroeconomic targets. Another “F” for the IMF.

Rather than learning from the Asian experience, the IMF repeated the same dogmas to Europe a decade later, when Greece and other European peripheral economies sank under the weight of the 2008 financial crisis. Instead of allowing Greece to default on its unpayable debts to private creditors, the IMF lent it even more money but with conditionalities of austerity that nearly decimated Greek society.

Today, 25 percent of the working population of Greece does not have a job, while household incomes have shrunk by nearly one-third, and one in every three businesses has gone bankrupt. Horrifyingly for an OECD developed country, about 14 per cent of Greece’s children remain malnourished, and one-quarter of the nation’s children live in poverty. That warrants another “F” for the IMF.

This is the context in which Pakistan finds itself. Due to pressing structural issues including tax avoidance by the public, an informal economic structure, an appetite for imports without commensurate exports, managerial shortcomings, and exogenous pressures (FATF), the Pakistani economy has been ripe for the IMF to swoop in as it did this year. The IMF has imposed many conditionalities and presented lofty targets. We can commiserate with a litany of current and former victims.

While it is endearing to hear IMF economists take note of Pakistan’s ongoing efforts, giving us what might be a “C” for specific improvements in an otherwise adverse climate, we may in turn offer a report card to the IMF itself. Looking at the cross-country and longitudinal data, the IMF has consistently earned an “F,” and to put it in schoolteacher’s parlance “needs to demonstrate substantial improvement.”

The writer is the Director for Economics and National Affairs at the Centre for Aerospace and Security Studies (CASS). This article was first published in THE NATION newspaper. He can be reached at cass.thinkers@gmail.com.

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