Holding the IMF to account

DESIGNED to be the international lender of last resort and help countries facing short-run balance-of-payments distress, the IMF has a rich history of being the quack physician that killed the patient.
Driven by myopic market fundamentalism and riddled with policy missteps, its advice and actions have too often in the past proven to be detrimental to the long-run interests of its borrowers, whether in Latin America, East Asia, Greece or Pakistan.
Since its founding, but more overtly since the 1990s, it has allowed the interests of its shareholders, including the geopolitical objectives of the largest, to trump the well-being of smaller sovereign borrowers.

To those not familiar with the IMF’s history of flawed advice to developing countries, Pakistan’s latest programme encapsulates many of the Fund’s failures over the decades. Bad lending policy, bad programme design, bad policy advice, and suspect projections are the hallmarks of its latest lending arrangement.
For a start, perhaps the most egregious failure has occurred with the Fund’s lending practices. Countries seeking the Fund’s safety net are typically low- or low-middle income, debt-distressed nations experiencing an exogenous shock. Like Pakistan, they have been tipped into a sovereign debt crisis by a combination of poor national policy choices, bad economic management, and unfavourable external developments. Since the Covid-19 pandemic, however, developing countries have been compelled to accumulate unsustainable levels of debt, with the IMF itself being a leading international voice calling for concerted global action to deal with the consequences.
Rather than playing a more assertive role in constructing a proactive and flexible framework for dealing with the debt-distress of developing countries, it is forcing distressed borrowers such as Pakistan to close even small financing gaps by punitively high-cost commercial borrowing.
With a financing gap of only around $2 billion needing to be filled, Pakistan’s current IMF loan was on hold for months as the country was made to camp at the door of creditors seeking loan rollovers while also scouring the globe for fresh financing.
In doing so, it became the target of predatory lending, agreeing to a short-term commercial loan at an 11 per cent interest rate, the most expensive external borrowing in its history. This interest rate will not only set the benchmark for additional foreign currency commercial borrowing that the country is going to require in FY25, estimated at $13.9bn, but will also seriously undermine its external debt sustainability.

Is this what the IMF’s lending policy should be designed to achieve? This self-defeating behaviour on the part of the Fund is an abdication of its mandate and responsibility to distressed borrowers such as Pakistan. To make matters worse, the IMF’s own charges and all-in cost of funds are punitive, with Pakistan reportedly being charged 5.09pc on the recent Stand-by Arrangement. Since 2022 alone, Pakistan has paid the IMF a whopping $750 million in interest and charges.
To ensure Pakistan bounces back sustainably from its unstable low-growth trajectory, the IMF should be leading the effort for a broad-based external debt restructuring that gives the country sufficient breathing space to put in place appropriate policies under the aegis of a Fund programme. Instead, the international lender has consistently worked to defer the inevitable, while focusing its efforts on unwarrantedly singling out China for a ‘bail in’.
In order to ensure that Pakistan can continue to repay the Fund, and the latter’s preferred and super-senior creditor status remains protected, the IMF has worked hard to make sure that the country’s access to commercial and bilateral foreign currency loans is not choked off. To achieve this has required the maintenance of a façade of sustainability of Pakistan’s external debt — which the IMF has provided periodically via its ambiguous and questionable Debt Sustainability Analysis or DSAs.

With the country’s mounting sovereign debt distress clear to all for several years, the IMF continued to term it ‘sustainable’ until as recently as January 2024, albeit noting the risks as ‘high’. This equivocal signal to capital markets marks a serious failure of the Fund’s fiduciary responsibility.
I have written quite extensively over the years on the failings of IMF programme design and will not delve too deeply into this aspect here. The bottom line is that the design of Fund programmes is fatally flawed in most cases, in that it creates perverse incentives and has unintended consequences. In the case of Pakistan, poor programme design has set up perpetual negative feedback loops in tax collection and the energy sector, which have worsened rather than helped the underlying structural problems.
Furthermore, the near-exclusive focus on fiscal austerity via asphyxiating tax collection from the formal sector while giving the government a free pass on unwarranted expenditure, mostly political bribes to constituents and institutional backers, points to the political undertones of its lending. It also misses the root cause of Pakistan’s boom-bust growth: an abysmally small export sector and its supply chain which need to be nurtured rather than suffocated.
Instead, the programme has mounted an assault on the survivability of the formal sector, treating it as the problem, rather than focusing on capturing the large non-compliant segments of the tax base. In doing so, the programme appears to have been designed by diligent bean-counters rather than competent economists.

Additionally, the IMF’s programme design has failed repeatedly to get the burden of adjustment right. While it rightly calls for expanded safety nets for the poorest and most vulnerable, it impoverishes the lower- and middle-income segments of society through ‘shock therapy’ involving steep increases in administered prices, increased incidence of taxation, removal of subsidies, and growth-stifling austerity that produces unemployment and turbocharges poverty. Numerous countries under the IMF’s stranglehold, ranging from Argentina, Indonesia, Greece, and Egypt, and now Pakistan, have seen spiralling poverty due to programme conditionality.
In summary, with its current lending policy and practices, the IMF is failing its main stakeholders, the liquidity-constrained, debt-distressed low-income developing countries, while upholding the interests of its largest shareholders. This is both unconscionable and untenable.
The writer has been a member of several past economic advisory councils under different prime ministers.
Published in Dawn, October 3rd, 2024