Does Pakistan really deserve another loan from the IMF?

Pakistan's reforms, considering another loan from the IMF, are a perfect recipe for, among others, higher inflation.

Pakistan is about to enter into its 22nd loan from the International Monetary Fund (IMF) in its 72-year history. This is a unique record by any country in the world. Importantly, we are visiting the same doctor for cure despite no improvement in health. The obvious question that comes into mind is that, are we incurable or the IMF has no proper prescription for Pakistan?
To find the answer for the above, we need to really understand the disease and the prescription suggested by the IMF. Interestingly, the prescription suggested by the fund is very expensive and for any political party it is near impossible to implement.
Before entering into the IMF programme, standard prior actions include massive devaluation, an increase in policy rate, increase in utility prices, tight fiscal policy led by higher taxes and reduced development expenditures.
The above reforms are a perfect recipe for subdued productivity growth, higher inflation, increased unemployment and higher fiscal deficit - and, hence, higher debt.
If you had gone through all the programmes' letters of intent, you will hardly find any dissimilarity in the prescription, especially in 2009, 2013 and prior actions suggested in 2019.
There is no disagreements with the policy actions recommended or suggested by the IMF, but it may not be favourable in the environment where Pakistan operates.
What are Pakistan's problems?
The basic problems of Pakistan are productivity growth and lower tax income. But the IMF perceived it oppositely - higher expenditures and artificial or imported growth. With the IMF prescription, government deficits usually go up then comes down as it usually recommends to increase interest rates by 100 per cent.
Take the last 12 months' example: Interest rates have gone up to 12.25 per cent from 5.75 per cent. This caused the deficit to overshoot by 2.5 per cent of gross domestic product. Government expenditures are recorded in rupees, with devaluation in government debt servicing on foreign loans also increasing, hence impacting the deficit. The government is compelled to borrow more due to inelasticity and hence leading to more indebtedness.
Usually, the IMF imposes restrictions on a government to borrow from state banks directly. Hence, it creates more pressure on market interest rates and crowd out private-sector borrowing.
Now it comes to the private sector; due to higher inflation it needs more working capital to sustain or grow its business. But due to the crowding-out factor and higher domestic interest rates it usually prefers to reduce or suspend its operations. This obviously has greater impact on productivity growth and, in turn, government revenue-generating ability - and the vicious circle goes on.
What does the country need?
Pakistan wasted over $20 billion per annum in public sector enterprises (PSEs), energy circular debt and subsidies to satisfy the corrupt political chain, bureaucrats and elite businessmen. All the policies prescribed by the IMF basically compounded our problems as it creates more arbitrage for the groups mentioned above.
Higher utilities charges encouraged power thefts; higher duties and taxes encouraged more smugglings and tax evasions. Higher interest rates subdued growth and hence encouraged more imports.
Going back to the earlier argument, we need productivity growth to generate exports and higher taxes. Pakistan does not need to spend Rs1,500 billion in PSEs' losses and Rs500 billion in subsidies to big landlords and industries. We need to divert these funds to agriculture, SMEs, tourism, information technology and finance. The latter option is key for the success of the first four areas. So far, credit is only available to big industries, big landlords and government. This is where we can generate maximum employment and taxes.
So the solution lies not in an expensive prescription. It lies in simple modification of the economy through eliminating arbitrage, leakages and capping the safe-heavens of undocumented/black economy.
The writer is former chief executive of EFG Hermes Pakistan. Views expressed are his own and do not reflect the newspaper's policy.