The current inflationary environment, primarily due to the pandemic-associated supply chain shocks and the Russia-Ukraine war, ensures that the prescriptions of the International Monetary Fund (IMF) will not work for Pakistan at this time. A recent survey by the World Economic Forum has also highlighted the global vulnerability associated with these shocks.

The present timing has illuminated the flaws in the IMF as a lender of last resort. The IMF’s governing board and members should devise a programme allowing for more gradual reforms in countries seeking loans from the lender of last resort. They should take some lessons from their host country — from how the US states handle local financial crises.

States in the US are familiar with local financial crises, which have been a feature since the 1800s. Post-colonial municipal debt was first issued in 1812, although Massachusetts issued the first municipal debt in 1751, according to a publication of the Securities and Exchange Commission.

Even New York City has needed a managed programme a few times; the most recent one lasted for many years. The direct supervision programme for New York City under the New York State Financial Control Board commenced in 1975, and by 1986, direct management had terminated. However, the state agency still monitors the city’s finances.

Climate change and fiscally demographic transformations in countries most heavily reliant on the International Monetary Fund require it to develop more flexible strategies

Pew (The Pew Charitable Trusts) has studied and published reports about state oversight and intervention in local financial crises. The Pew reports The State Role in Local Government Financial Distress and State Strategies for Detecting Fiscal Distress in Local Governments discuss the strategies used by US states to detect and/or address a local financial crisis.

History of local interventions similar to the role of the IMF reveals that it works where underlying issues can be mitigated more easily (for example, the contrast between New York City and the continuing struggle for the financial stability of the city of Camden, New Jersey).

Contrast India with Pakistan. When India sought IMF relief during its currency crisis in the 1990s, it was able to develop a trade surplus with the US by deploying its Indian institutes of technology (IIT) educated young workforce. India remains a top outsourcing destination today.

Coincidentally, the Nehruvian-era establishment of the IITs became useful when US businesses became more technologically conscious. While services grew in the 1980s in India (when it began dismantling its system of industrial licensing), they boomed in the 1990s (when trade barriers were also reduced).

Pakistan’s short-term-oriented governments did not have the foresight of the Nehru era on which India still relies. Boosting exports will take more time in Pakistan. Part of a FY15 report of the State Bank of Pakistan discussed some of the reasons why exports have stagnated. A Staff Note in February 2017 discussed the structural factors. Pakistan has deep-rooted economic problems that cannot be solved quickly.

History of local interventions similar to the role of the Fund reveals that it works where underlying issues can be mitigated easily

Even Greece, a member of the European Union since 1981, did not fare well. According to a Reuters investigation, internal IMF documents revealed its prescription was flawed. IMF itself has admitted it underestimated the cost of austerity. By 2015, Greece had missed an IMF loan payment.

Whereas IMF has ruled out a debt restructuring for Pakistan, it has been argued that it was allowed too late to prevent unnecessary damage in Greece. A report by Barclays has also suggested that debt adjustment may be required.

In 2018, prescriptions for Argentina were highlighted as being flawed, and the agency was accused of learning nothing from its experience with Greece.

Unlike Greece and Argentina, IMF’s programme for Iceland was a success. But the reasons demonstrate that it was in a stronger position than Greece when it experienced its crisis.

Greece has long been financially weak. In fact, for 90 years after independence (according to the article by professor Gylfi Zoega of the University of Iceland), Greece has been in default on its external debt and shut out of capital markets.

These debt crises occurred before the pandemic affected supply chains, and the Russia-Ukraine War disrupted trade in essential commodities. The examples of Greece, Argentina and Iceland highlight that countries that need deeper reforms need a more flexible policy with a longer timeline.

Climate change and fiscally transformative demographic change in some countries most heavily reliant on IMF require the Fund to develop more flexible strategies and programmes for managing countries with different economic conditions.

The writer is a senior fellow at the international think tank the City Mayors Foundation

Published in Dawn, The Business and Finance Weekly, March 6th, 2023