For a better deal
AS the IMF’s most habitual client globally, we often get a dose of the Fund’s harsh medicine. Each time, business, civil society and other groups rightly object to an IMF deal’s harsh terms, but mostly after it has been struck. As an IMF team will arrive soon for a new deal, they must coordinate to influence deal talks.
Some blame our leaders but others the IMF for harsh deals. The problem starts with our governments — from Musharraf to the PTI. In their zeal to get high GDP growth, they take the faulty path of high fiscal and external deficits and money supply growth, instead of high investment, productivity and exports that require politically costly reforms. That path soon leads to high inflation and falling dollar reserves, and finally to the Fund’s door. But just as doctors often mistreat serious diseases caused by bad patient habits, so does the IMF often misdiagnose and mistreat economic ills caused by state policies.
The immediate patient symptoms before the IMF are usually high inflation and falling reserves due to high twin deficits and money supply growth. To stabilise the patient, the IMF usually prescribes higher interest rates, rupee depreciation, higher taxes and cuts in state expenses. All these put a brake on GDP growth, albeit fake, and cause a huge loss of jobs and state services that hurt poor and small businesses more.
In our recent deals from 2000 to 2019, the IMF has also included issues that affect the twin deficits and money supply growth indirectly — State Bank autonomy; state units, circular debt and power sector reform; exchange rate and tax policy; etc. Even though we were at the peak of economic crises each time and needed major stabilisation, many IMF demands were rightly criticised for their sequence, extent and precise focus.
But things now differ. Economic policy targets macroeconomic stability, growth, equity and sustainability. We already have some stabilisation from the last stand-by IMF deal. Inflation and fiscal deficit are falling; reserves are up and the rupee has been climbing for months. Thus, we need an unorthodox IMF programme. We must not raise interest rates but cut them.
The IMF wants high interest rates to treat both inflation and falling currency and reserves. True, a stable rupee has been achieved via stringent controls on dollar demand for imports, profit repatriation, etc. which are slowing GDP growth. Once these controls are ended to raise GDP growth, reserves and the rupee may fall. But this pressure must be fixed via front-loading about half of IMF flows (and back-loading the rest to ensure compliance) and dollar flows expected from multilateral and bilateral donors rather than high interest rates. This will reduce fiscal deficit and create room for GDP and job growth.
The Fund often misdiagnoses economic ills.
Instead of indirect taxes and development and social spending cuts, the Fund must demand non-essential defence and civilian outlays cuts and increased direct taxes on non-taxed sectors and elites. If it signs a deal without this, it would be equally culpable in burdening the poor.
Such steps will help achieve both stability and growth. But durable growth will require more creative strategies to raise savings, investments, exports and outputs. Our savings must rise, being among the lowest regionally. This means that even for investment for domestic outputs, we often use foreign investment which creates profit repatriation liabilities without export earnings, thus raising our external deficit.
We must ideally use foreign investment for sectors that give export revenues and/ or help obtain high-end technical capacities. Increased exports require state-capital collaboration to enter the high-end export sectors. But growth policies are beyond the IMF’s remit, the wrong neoliberal take being that stabilisation will automatically give growth. This raises questions. The IMF must not overdo stabilisation now, to let us follow growth policies. It must ensure equity by requiring big outlays for the poor suffering from years of stagflation.
Beyond specific IMF terms, austerity-linked Fund deals imposed since 1980s don’t make sense, unlike earlier condition-free ones. Policy conditions encourage reform-averse states to adopt good policies, but they can’t afford them during economic crises when IMF aid must allow counter-cyclical growth policies. Donors must proactively apply policy conditions linked to bigger aid from bilateral and multilateral donors in normal times when the roots of crises are being laid via faulty state policies. Rich states must also change their unfair global policies that choke growth in poor states. Only then can recipient states achieve stability and equitable growth.
The writer is a political economist with a PhD from the University of California, Berkeley.
Published in Dawn, May 14th, 2024