Pak­istan and IMF

The Pak Banker - - 4EDITORIAL - Khur­ram Hu­sain

EV­ERY time I tell some­one that I am work­ing on the his­tory of Pak­istan's re­la­tion­ship with the IMF, there is one ques­tion that al­ways comes up: "Is the IMF evil?"

There are many it­er­a­tions of this ques­tion, but it al­ways boils down to this: "They say once a coun­try bor­rows from them," said one par­tic­u­larly keen ques­tioner, "that coun­try can never re­pay the debt and re­mains in their clutches for­ever, is it true?"

I'm al­ways struck by the level of fear and awe that the Fund com­mands in our popular imag­i­na­tion. It is run by the Jews, some say. It op­er­ates like a me­dieval money lender, it has usu­ri­ous terms on its loans, no­body who falls in their clutches ever gets out. The bet­ter off try and con­nect it with some im­pe­ri­al­ist am­bi­tions: it is a tool of US for­eign pol­icy, used to re­ward those who serve the im­pe­rial masters and pun­ish those who dis­agree. It en­gi­neers the over­throw of gov­ern­ments and works in ca­hoots with the CIA, another told me rather in­sis­tently, brush­ing aside my ques­tions that would cast doubt on the as­ser­tion.

My an­swer to the ques­tion is al­ways the same: no, the IMF is not evil, but it's also not as in­no­cent as it would like us all to be­lieve. Does this mean that it is only slightly bet­ter than what popular imag­i­na­tion would say? No, the fact of the mat­ter is ac­tu­ally far more hum­drum than what popular imag­i­na­tion would like to be­lieve. The Fund is ac­tu­ally just another bu­reau­cratic body, try­ing to pur­sue an in­creas­ingly dif­fi­cult mis­sion, in an in­creas­ingly di­vided world.

The popular imag­i­na­tion in Pak­istan is used to per­ceiv­ing this coun­try as per­me­ated by for­eign in­ter­ests, a mind­set that is in part a legacy of the many front­line roles the coun­try has played in su­per­power cam­paigns. It's also used to per­ceiv­ing all gov­ern­ment bod­ies with ex­treme dis­trust and an equally ex­treme dis­dain. In­ter­na­tional in­sti­tu­tions that in­ter­act reg­u­larly with the gov­ern­ment, there­fore, find them­selves sucked into the per­cep­tions that arise from this dis­trust and dis­dain.

And few in­ter­na­tional bod­ies have had a longer and more in­tru­sive role to play in Pak­istan than the IMF.

So what ex­actly has this long role been that the Fund has played in our econ­omy?

Let's start with the ob­vi­ous. The IMF is an in­ter­na­tional in­sti­tu­tion cre­ated in the af­ter­math of World War II along with a whole num­ber of other in­ter­na­tional in­sti­tu­tions that were de­signed to help op­er­ate the post-war or­der that emerged from the ru­ins of the Bri­tish Em­pire. Those in­sti­tu­tions in­clude the United Na­tions, the World Bank and the In­ter­na­tional Postal Union to give a cou­ple of ex­am­ples.

The IMF had a spe­cific man­date. It was de­signed to help coun­tries tide over tem­po­rary bal­ance of pay­ments dif­fi­cul­ties. If the price of cot­ton col­lapsed in one year, for ex­am­ple, due to a bumper har­vest in some other cot­ton pro­duc­ing coun­try, small coun­tries that re­lied on cot­ton ex­ports to earn their for­eign ex­change would find their re­serves of dol­lars de­plete very rapidly. The de­plet­ing re­serves would cur­tail their abil­ity to pay for their im­ports which could end up crip­pling large sec­tions of their econ­omy if, let's say, they couldn't af­ford to make pay­ments on oil im­ports any longer. A small and tem­po­rary pay­ments dif­fi­culty of this sort could cas­cade through the econ­omy and cre­ate a much larger cri­sis, maybe even lead to de­fault on ex­ter­nal debt obli­ga­tions. There needed to be, the ar­chi­tects of this new or­der agreed, some way for coun­tries vul­ner­a­ble to pe­ri­odic bal­ance of pay­ments dif­fi­cul­ties, to be able to bor­row quickly to tide over short term prob­lems with­out fall­ing into a full blown cri­sis that could have in­ter­na­tional ram­i­fi­ca­tions.

Those were the good old days when the world was a sim­pler place. Pak­istan bor­rowed three times from the IMF dur­ing the Ayub Khan regime, and each of those fa­cil­i­ties was a short-term Standby Ar­range­ment of ex­actly the sort en­vi­sioned in the orig­i­nal Ar­ti­cles of Agree­ment un­der which the Fund was cre­ated.

The more in­ter­est­ing bor­row­ing his­tory be­gan in the 1980s. Those were the years the world econ­omy was emerg­ing from a de­bil­i­tat­ing decade of stag­nant growth and high in­fla­tion that the 1970s be­came fa­mous for. But the re­newed global growth came at a cost. Many parts of the Third World, as it was known at the time, fell into a mas­sive debt cri­sis, as the lev­els of their bor­row­ing fast ex­ceeded their abil­ity to re­pay. Latin Amer­ica was at the epi­cen­tre of that cri­sis, and by mid decade a mas­sive ef­fort had to be launched to en­sure that the re­gion did not de­fault on its ex­ter­nal loans, in part by urg­ing those banks that had ex­tended loans to them to soften the terms on which re­pay­ment would be made.

The Fund's mis­sion un­der­went an im­por­tant change dur­ing that time. When the dust set­tled from the Latin Amer­i­can debt cri­sis, the Fund was no longer con­fined to lend­ing only to pa­per over tem­po­rary bal­ance of pay­ments prob­lems. From that point on­wards, the Fund's mis­sion grew to in­clude re­viv­ing eco­nomic growth in stag­nant economies.

This was a crit­i­cal turn­ing point, and it car­ried the Fund deeper into the bor­row­ing coun­tries eco­nomic man­age­ment than it had ever gone be­fore. Re­viv­ing growth, it turned out, was a far more com­plex af­fair than sim­ply pa­per­ing over a tem­po­rary bal­ance of pay­ments prob­lem. The Fund staff had to be­come party to the myr­iad and com­plex dys­func­tions that af­flicted the bor­row­ing coun­try's econ­omy, and the terms of its loans en­tered into ar­eas that they had never imag­ined they would be en­ter­ing. From here on, the Fund found it­self ex­am­in­ing the bud­gets of ev­ery bor­row­ing coun­try and urg­ing struc­tural changes in the econ­omy that they could not have done in the ear­lier times. Pri­vati­sa­tions, trade lib­er­al­i­sa­tion and al­ter­ing the in­sti­tu­tional ar­chi­tec­ture of the state were all far reach­ing re­quire­ments that the Fund be­gan to in­sist upon from bor­row­ing coun­tries in this time.

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