Pakistan is faced with a politico-economic impasse and needs IMF’s financial assistance to avert an imminent financial crisis. The country has not been able to complete previous IMF programs as well which is why the mutual trust deficit has also widened. Pakistan, in order to, eliminate the existing trust deficit and avert a financial crisis needs to alter its modus operandi through politico-economic reforms.
Developing countries can learn from examples set by states such as Ireland that have successfully completed and benefitted from IMF programs in the past.
The International Monetary Fund (IMF) came into existence with the Bretton Woods system and revolutionized the global economic system, thereafter. The purpose of the Fund was to promote international monetary cooperation, maintain a multilateral system of payment and ensure the availability of emergency financial assistance.
Such utility enabled the IMF to provide member states with the opportunity to borrow short-term loans and avoid financial disasters during times of recession. Thus, contributing to its effectiveness as an international regulatory authority as well. So far, several states have benefited from the IMF and case studies such as Ireland’s can be useful for Pakistan which continues to struggle in its relationship with the Fund.
Up until the last quarter of the 20th century, Ireland was far behind other European economies. However, tables turned quickly as Ireland transformed into a prosperous European economy. Irish citizens started enjoying low taxes, moderate pay, and increased job opportunities due to incoming multinational investment companies (Coca-Cola, Dell). The booming construction sector accounted for 12 percent of employment in Ireland and, subsequently, the Irish economy blossomed experiencing growth of more than six percent.
With the global financial crisis in 2007, Ireland’s growth bubble also exploded. Home buyers took more loans than they could pay back, properties were littered, and ‘ghost estates’ led to the complete collapse of the construction industry. Clueless stakeholders in Ireland, then, had to look towards the IMF and European Union for an immediate relief package.
Together the IMF and EU provided Ireland with 67.5 billion Euros as loans. The IMF provided Ireland with financial experts along with a multifaceted economic recovery plan. Also, as a part of a three-year recovery program, cuts in civil service, additional income tax, and taxes on vehicles were recommended to which the government complied and, consequently, achieved 8% GDP growth. Soon after, investment firms regained confidence, home prices improved and, by 2017, the unemployment rate went back to less than 7 percent. Irish government’s practice of taking IMF’s advice on the reconstruction of banks, balancing of government finances, and funds allocation for appropriate sectors is a practice that Pakistan’s government can also replicate.
Pakistan’s current financial situation is fragile and the country’s liquid foreign reserves which are constantly depleting stood at $10.14 billion on March 24. In such a volatile situation, IMF’s assistance will carry significant value. However, Pakistan’s case is not as simple since the Country is engulfed in severe politico-constitutional turmoil as well.
Since its membership, Pakistan has signed 23 agreements with the IMF, and no wonder the loans have turned out to be Dutch disease since the country has been involved in a vicious cycle of borrowing and spending to escape long-term economic solutions. Pakistan’s government is still busy in efforts to revive the IMF loan program worth $6.5 Billion in order to tackle the current financial crunch.
Pakistan and IMF are even finding it hard to reach a staff-level agreement. The fact remains that Pakistan would continue to struggle on the economic front until it gets rid of its credit-driven growth and makes fundamental politico-economic reforms.
With regard to economics, Pakistan has to move towards permanent solutions for wealth creation. Also, the country needs to get rid of domestic tax evasion through effective techniques such as a track and trace system. Similarly, in the political domain, the modus operandi needs to be revisited. It is an election year in Pakistan and the country is deeply entrenched in political instability due to polarization that intensified after a successful vote of no-confidence against the former Prime Minister Imran Khan. Even after a year, stakeholders in Pakistan have been unable to reach a consensus over the future course of action. To make things worse, the Election Commission of Pakistan has also decided to postpone elections, in Punjab, that was originally scheduled to be held on April 30. This decision may lead to a constitutional crisis that will hasten the country’s tailspin toward lawlessness and chaos.
It is time that the stakeholders in Pakistan develop a national consensus on the economy and decide that finances would no more be awarded by leadership to local allies for political gains at the cost of national economic interest.
Stakeholders in Pakistan need to realize that with such impudence no amount of IMF bailouts would ever be sufficient and the country would always remain entrenched in deficits.
The understanding is that international organizations are only facilitators and do not guarantee that countries with economic success need to prevail in Pakistan. Learning from the aforementioned, case study of Ireland can be Pakistan’s first step in the positive direction. Ireland was also entrenched in the financial crisis when it sought IMF’s help. Once economic assistance was secured, the country shifted its focus to long-term growth and ignored short-term temptations. Pakistan can, certainly, follow in Ireland’s footsteps but that would require far-sightedness and strong commitment in the overall decision-making paraphernalia.
Ammar Hassan Sajjad is an International Relations Scholar and a visiting faculty member at the International Islamic University Islamabad. The author tweets @AmmarHS96