Why do Pakistan need IMF?

“Why a country goes to IMF?”

Because the country wants to import some stuff which it doesn’t produce in-house, and is short of money, so it has to borrow money from IMF.

“What are the other ways a country can make money to buy stuff from other countries?”

There can be many ways, Export revenues, tourists’ spending money, remittances, foreign investment, donations from other countries, lending from friendly countries etc.

“Why can’t we rely on these sources?”

Because:
1. Exports require investment in the industry and govt. support like subsidies, low taxes, investment in infrastructure and human capital, promoting a soft image globally, low exchange rate, easy access to raw material, manufacturing of items or industry which is price sensitive means low cost would increase demand (price elasticity), ensuring property rights (law enforcement), making entry and exit easy, easy availability of financial capital etc.
2. Tourists come when it is easy to travel, when they feel secure, and this also require lots of investment in law enforcement and infrastructure, and relevant policy frameworks.
3. Pakistani’s abroad do send remittances, however, they only send as much required by their families. The do not invest as that require confidence in the economy and ease of liquidating their investments, and taking back their money when needed with ease, which unfortunately is not easy in Pakistan.
4. Foreign investment has the same problem, if the returns are not attractive, and if exiting is not easy then investors prefer to invest at venues where returns are higher and they can fly away with their capital with ease.
5. There are international donor agencies, however, the amount is not significant, and typically investment in a way it advances the agenda of donor agencies. Also much of the donations come when there is a national emergency like flood or earth quake etc.
6. Lending from friendly countries again can bring in short term capital flows but cannot fix the issue once and for all, but same goes for IMF, perhaps worse, as IMF brings a bag of conditionalities with it …

In short, among all of the above the most effective way is to develop the export and tourism industry, other measures however have relatively a smaller impact …

OK, so how IMF funding can help in improving exports and develop tourism industry?

Well, generally IMF brings some ‘conditionalities’ means it would lend a country only when the govt. agrees to (a) allow market forces to determine the exchange rate, labor wage, all types of prices (b) the govt. cuts expenses (remove subsidies) particularly to facilitate the general public which makes the govt. look attractive, and improves its electability in the next election, (c) remove subsidies given to the industry as well (c) reduce taxes, and increase tax base, (d) privatize state owned production facilities and services, (e) improve financial management of state owned resources and eliminate inefficiencies etc. Often IMF conditionalities are kept secret so we may not exactly know if there are more than these …

So if we talk about the impact of these conditions on export industry in particular, here is the impact:

“This doesn’t seems like very beneficial for Pakistan’s export industry … neither for the general public as well!”

True, the cost of production goes up for exporters due to various conditions imposed by IMF while reducing exchange rate is not always sufficient to make the products look cheaper in the international markets. Even if the products are cheaper as compare to other alternatives, due to inelastic nature of products manufactured by countries like Pakistan, the impact is not much in terms of increase in sales. 

It is also interesting to note that despite repeated failures to pay back IMF in the past, IMF has kept giving us more money. From the point of view of an outsider, the bad governance – either due to incompetence or corruption - of state institutions has been persistent, and no guarantee of improvement. On the other hand, good governance has a massive impact on government’s ability to support the economy, boosting the export sector. Any creditor (formal or informal) would hesitate giving a loan to a person with a bad record of returning the money. However, experts like Joseph Stiglitz (a Noble prize winner economists, and former chief economic advisor at world back) and Naomi Klein (an award winning journalist) suggests that the creditor in such a case can only be interested, if it has eyed upon the assets the debtor mortgage to get the loan. If the debtor defaults, the creditor will claim the ownership of the assets owned by the debtor. A poor person may not have enough assets to mortgage for a loan, however, a poor country may have many. The assets of the defaulting country are sold out in the name of privatization to the multinational corporations at a fraction of their actual price in the international market. Since USA is the biggest lender of IMF along with other so called developed countries, therefore, much of the corporations which come forward to purchase the assets in poor countries are perhaps owned by US investors. The critics argue that the countries which lends money to IMF are more concerned about their ROI rather than the welfare of the recipient country, who eventually use the assets for the benefit of their economies eventually. 

IMF trade liberalization policies eventually allow the multinational corporations to penetrate into the local markets, which may end up harming the local entrepreneurs as well, contributing further in unemployment. The poor of the country is therefore not just effected by inflation, but also by unemployment, and reduction in govt. social investment like in health care and education. 

That’s unsettling, so what should a country like Pakistan really do if going IMF is a bad idea? 

To bring in dollars, the quickest route to Pakistan is perhaps boosting tourism, Malaysia earns $40+ billion annually, only Dubai bags around $34 billion per annum. The govt. is already focusing on that, and perhaps need to focus more … International hospitality industry may be invited to invest, however, this should be considered with a pinch of a salt, as this would end up bringing in lots of culturally incompatible trends in the country … 

Govt. also need to reduce the entry and exit barriers for entrepreneurs, and provide all types of facilitation, which may include easy access to funding, tax reliefs, particularly the ones looking to export their products abroad. Sense of security when investing money is also particularly important. IT exports can also bring quick returns with least amount of investment. 

The govt. already know about the above, and many other similar ideas. Another critical component to improve the flight of dollars from the country is to put capital controls, which the govt. has done to some extent. In Dubai alone Pakistanis have purchase a property worth Rs. 445 billion in past few years, that’s around $3 billion as per current exchange rate. Malaysia, Korea, China, even Japan as stimulated their growth through strict capital controls. Experts need to evaluate how beneficial further restrictions on outflows of capital in this context can be. 

Some of the important measures necessary to transform a country into a net-exporter from a net-importer are long term, require decades of good governance. For example, if we locally want to manufacture the stuff we are importing now, like machinery, automobiles, chemicals etc, than we must develop relevant industries. For that we must invest in both R&D and human resource necessary to manage the new industrial segments. In order to bring output at par with international quality standards, lots of expertise is required, which cannot happen unless we invest in the right talent. For example, global demands of renewable sources of energy is souring, why not Pakistan become the leading exporter of solar panels? Of course that will require investment, both in technology and human capital, while environmental impact also needs to be assessed. Nothing of this sort is as easy as it being said, but is there any other option for the country? 

We must keep in mind that Pakistan’s dependence on international donors or creditors is only because we have to import stuff that we do not produce. The only way out perhaps is to enhance our degree of self-reliance. But it all depends on the seriousness and long term commitment of a govt. which does not want to think beyond five years.