With the Pakistani elections in the rearview mirror, one thing is clear—the economy remains a longstanding mess. In view of mounting economic stresses, it has been conventional wisdom for over a year that Pakistan will need to embrace the IMF immediately after the elections. According to IMF data, the fund has had 21 programs with Pakistan since 1958, 14 of which since 1980. Suffice it to say, overall this has not been a healthy relationship. While the fund may have helped maintain a semblance of macroeconomic stability, the IMF’s involvement, along with the World Bank and others, has surely not helped Pakistan break out of a low-growth trap.
Pakistan’s economic failings are well documented. For decades, Pakistan’s real per capita income growth has lagged many peers. Budget deficits are frequently large. Revenue as a share of GDP is low due to widespread tax evasion; a failure to tax the well off, including in the agricultural sector; and fiscal federalism woes. Much spending goes to defense, squeezing resources for more productive uses, such as education and investment. The rupee is often overvalued, causing balance of payments strains and reserves to sink, in turn frequently necessitating a rush to the IMF. The economy is highly vulnerable to shifts in global oil prices. Power outages and arrears to the energy sector are frequent. Privatization has made insufficient headway.
The fund’s last program, a three-year Extended Fund Facility arrangement between September 2013 and 2016 was touted as a huge success. It was oversold. Pakistan’s performance began to deteriorate immediately thereafter. While progress was surely made, Pakistan at the time was benefitting from a positive shock from lower oil prices, and the program’s targets were not ambitious.
A new factor in the Pakistani economy is CPEC—the China-Pakistan Economic Corridor—a Chinese led series of projects to build infrastructure in Pakistan that some estimate at over $60 billion. China provides loans; Pakistan inter alia imports equipment and services and adds to its debt and debt service; the current account deteriorates. While CPEC holds forth the prospect of boosting the Pakistani economy, especially if investments are sound, the terms and conditions of much of the lending are opaque, and interest rates on some loans may be higher than Pakistan can afford.
The United States has long backed Pakistan in seeking recourse to the IMF and made this clear to the fund. But as Richard Haas wrote in a Project Syndicate piece earlier this year entitled “The Pakistan Conundrum,” Pakistan and the United States have had a transactional relationship that won’t bring the parties closer together.
The IMF should surely seek to help Pakistan, if Pakistan comes knocking at its door. But given the Trump administration’s tougher posture on Pakistan and the checkered history of Pakistani-IMF relations, the IMF should now seek to escape its own transactional relationship.
That would free the IMF to pursue much stronger Pakistani policies than it has in the past in return for fund financial support. What might the IMF think about?
The rupee has already fallen considerably over the past year. But it ought to be realistically valued, flexible, and market-determined. Intervention to defend the rupee should be sharply constrained.
Currency depreciation will do little good, though, if not backed by tough fiscal and monetary policies, which prevent second round price effects from spilling over into the economy.
Revenue needs to be boosted and budget deficits curbed. The focus should be on tax administration and an incentive friendly structure of revenue raising. Pakistan must pass requisite measures up-front to do so.
Positive real interest rates must be maintained.
To stop perpetuation of Pakistan’s low-growth trap, the fund also needs to demand implementation of widespread prior actions on structural reforms, such as to tackle financial problems in the energy and agricultural sectors. Privatization must actually be carried out.
Measures to improve governance and combat corruption are essential, including addressing AML/CFT deficiencies.
The fund should limit access to its resources under any possible new program. Exceptional access would be highly inappropriate. Access should not be front-loaded. The IMF should explore seeking the support of the Pakistani opposition. The fund must stand ready to halt disbursements at the first sign of problems.
The fund must also ensure that its resources are not used to bail out unsustainable Chinese CPEC lending. The fund needs to have at its fingertips comprehensive data on all CPEC lending—its terms, maturities, and parties involved. Chinese lending should be on realistic terms and consistent with Pakistan’s sustainability. Otherwise, China should reschedule or write down its loans, sharply reducing the value of its claims.
This message may sound tough. But that is what is perhaps needed. The last decades have not succeeded in putting in place a sound economic framework that promotes stability and significantly greater economic opportunity for Pakistan’s citizens.
Pakistan, the IMF, and the United States can do better.
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