This article is in response to the criticism of IMF in the earlier article titled “The new East India Company”. I am a critic of IMF’s policies but the earlier article ticked me off as it was based on populist aphorisms with no reference to economics or any stats. I was surprised that it was written by authors claiming to be professors at a prestigious business school, tax consultants and writers of several books.
In second half of 2008, Pakistan was facing a crisis. Shaukat Tarin came up with three plans notoriously known as Plan A, B and C. ‘Plan’ was a misnomer as in reality they represented a pecking order for our begging bowl. Plan A involved approaching Asian Development Bank (ADB) and World Bank (WB). Plan B consisted of approaching so called friends of Pakistan. Plan C was approaching IMF, the least desirable option.
ADB, WB and friends of Pakistan had reached a conclusion that they could not bail her out, though they had bailed out Pakistan earlier. The most famous was Saudi Oil Facility wherein Saudi Arabia allowed Pakistan to purchase oil on deferred payment basis after the nuclear blasts which was later turned into grant. This time again Saudi Arabia was considering a deferred payment facility to help out Pakistan. But Pakistani media and ministers were thinking that this additional facility might also be turned into a grant so Saudis refused to be taken for a ride. Hence, plan C was the only option available.
There was another option: Default. Default is not a good thing but it is not the end of the world. But to do that, you really have to have a good economic management team to breathe life back into the economy. The emerging market success story of last year, Russia, had defaulted in mid nineties. Argentina has a history of default. Ecuador was contemplating deliberately defaulting on its debt this year. I would have been gung ho for Pakistan defaulting on its debt but tell me the name of one person who had the financial acumen and leadership to steer the country out of the ensuing crisis. For all the talk of ‘home grown’ formulas, this country has failed to produce ‘home grown’ economists and financial managers.
Role of IMF
So it was our own incompetency that we ended up with IMF. When Pakistan borrows from IMF, Pakistan has to demonstrate to IMF that it can repay the loan from its cash flows. Otherwise IMF will request Pakistan to take steps and implement policies that will generate enough revenue to ensure repayment. Obviously one can argue for and against IMF’s policies but like a prudent lender, IMF will recommend and push the policies it knows best.
Amongst all this, we should not forget a more important role that IMF plays. It becomes the devil for forcing the government to take positive yet unpopular actions. For example, for such positive moves as reducing fiscal deficit, increasing tax base, and imposing tax on agriculture etc., IMF was painted as the New East India Company in the earlier article.
The authors of the original article make the most ridiculous statement about agriculture tax. Agriculture is 21% of the national GDP however as far as I know tax contribution from agriculture is negligible. Would the authors let me know how much taxes does the agriculture sector pay and what is the mechanism to collect it? While they are at it, would they also please enlighten me who is paying taxes to Shaukat Tarin before they are due which was another absurd claim in their article.
I want to smoke what the authors have been smoking. How can they say that IMF is strangling the export base? As per SBP statements, from FY06 and FY08 when FDI was highest, around 70% of FDI was directed towards consumer sectors whereas only around 3% was directed towards export based sectors broad categories being cotton, leather and chemicals. There was no IMF at the time. As a matter of fact, we have not made any policies in this country for expanding the export base for quite some time with or without IMF.
The traders on the stock exchange pay next to nothing on the profitable trades that have made them millionaires and billionaires. IMF is pushing for imposition of Capital Value Tax on stock exchange trades. Yet successive governments have succumbed to powerful trader lobby’s whims and never imposed taxes (even as low as 0.2%) on these transactions.
Shockingly and shamefully, our tax-to-GDP ratio has never gone over 10%. The authors claim (and I believe them), the poor are already heavily (and disproportionately) taxed which means that the rich i.e., stock market billionaires, real estate landlords, textile magnates, industrial tycoons, and agriculture landlords who are not being taxed as much as they should be. So when IMF requests us to increase the tax base, it is actually doing us a favor.
True, all these multilateral aid agencies have a negative impact as well. For example, IMF will push for cutting certain expenses such as development expenditure, subsidies etc which hurt the underprivileged the most. Any serious criticism of IMF’s policies should target such issues but the earlier article was found wanting in the area.
Anyway, in our case, I would conclude that IMF is not ‘New East India Company’. Rather I would say Pakistan is a ‘Subprime Borrower’.
For serious criticism of these aid agencies, I recommend two wonderful books: ‘Confessions of an economic hitman’ by John Perkins, and ‘Neo Liberalism or Democracy’ by Arthur MacEwan.