ISLAMABAD: Leading economist and Principal National University of Sciences & Technology Dr Ashfaque Hassan Khan considers the International Monetary Fund’s programs to be harmful to the Pakistani economy.
Dr Ashfaque explains key policies of IMF and the economic rationale behind them to support his claims.
According to WealthPK, the renowned economist considers the deep understanding of the economic foundation of the IMF to be pertinent in order to evaluate the economic consequences of the program.
How does the IMF program affect the Pakistani economy?
The intellectual foundation of the IMF is the new liberal economic order. The economic order is associated with laissez faire or, in other words, no government intervention.
The Fund derives its policy inputs from two intellectual power houses – the first one is the European Austrian School of Thought which follows the ideas of Friedrich Hayek while the second one is Milton Friedman’s Chicago School of Thought.
According to Dr Ashfaque, “The staff of the Fund has to be staunch believers of the Chicago School of Thought, regardless of their educational background or personal views. Furthermore, governors of central banks throughout the world are, by default, members of the IMF – indicating their broader economic ideas to be aligned with that of IMF.”
The historical foundation of these policies can be traced back to the oil crisis of 1979. Amidst the oil crisis, developing countries were hit the worst which led to a lot of them turning towards IMF’s bailout packages.
According to Dr Ashfaque, the United States decided to turn the process into a political one as the opportunity presented itself. “This is when the historical Washington Consensus took place,” he pointed out.
The Washington Consensus is marked by the alignment of three key institutions in the international development sphere – namely, the United States Treasury, the IMF and the World Bank. The three institutions agreed on a set of four policies which were to be imposed by any economy that approaches the IMF, henceforth.
The policies are:
Tight fiscal policy marked by austerity and expenditure cutting
Tight monetary policy or the increase in the policy rate
Market-based exchange rate or, essentially, devaluation
Raising utility prices – gas and electricity prices
“These policies were the standard ‘one shoe fits for all’ set which was and is recommended to developing countries regardless of their geographical or economic conditions.”
While talking to WealthPK, Dr Ashfaque furthered, “These policies are harmful in isolation; however, in tandem, the four policies cripple economies”
Talking about the implications of tight monetary policy, the renowned economist said, “As per IMF’s prior action conditionalities for the Extended Fund Facility (EFF), Pakistan increased its discount rate from 6.5% to 13.25%. The discount rate serves as a benchmark rate in the economy which leads to an increase in the lending rates of commercial banks.
The rise in private sector interest rate would discourage private investment as the cost of borrowing has increased. Eventually, per basic economic principles, economic growth will slow down.”
Dr Ashfaque told WealthPK, “In the past three years – on account of the IMF program – our average growth rate has been 2.6% while the population grew at 2.2% which leaves the increase in real per capita income at an insignificant level of 0.04%.
Low economic activity leads to low growth which means less job creation and, eventually, high poverty.”
Tight monetary policy also has a severe budget-side impact. According to Dr Ashfaque, “We always borrow to fill the gap between revenue and expenditure; increased discount rate increases our interest cost and subsequently, our interest payment.
Pakistan’s interest payment has more than doubled in three years since 2018. On the other hand, the country’s revenue cannot increase proportionally to expenditure as economic growth has slowed down due to tight monetary policy.”
Talking about the implications of tight fiscal policy, the leading economist commented, “We have already decreased private sector investment through tight monetary policy and through fiscal tightening we also decrease public spending.
Hence, no one is investing in the economy which means no economic revival. And this is why the IMF programs are known to be anti-growth.”
Dr Ashfaque said market-based exchange rate or devaluation further jeopardizes the economy as devaluation is by definition inflationary as the value of all borrowings increases in domestic currency terms.
Moreover, he said, in the context of Pakistan, empirical evidence suggests that one percent increase in interest rate will increase CPI-based inflation by 1.3% – this is why inflation is persisting in Pakistan.
“As the Pakistani industry imports more than 60% inputs, devaluation will cause the cost of all of these inputs to increase.
Coupled with a rise in utility prices, industries will suffer as the cost of production will rise exponentially. This has led to Pakistan experiencing deindustrialization,” he added.
INP
