IMF and efficacy of its prescriptions By ANJUM IBRAHIM

ARTICLE (May 10 2010): What is it about the International Mone-tary Fund (IMF) prescriptions that can raise the ire of an entire nation? Why are the people of Greece up in arms against the Fund for agreeing to allocate 40 billion dollars in emergency assistance and are referring to an "IMF junta," and "asphyxiation" of the Greek people?

And why are the Pakistani analysts, the common man in this country largely unaware of the influence exerted by the Fund on our domestic economic policies, expressing concern over the IMF prescriptions that are being meticulously adhered to in spite of what is regarded as the "asphyxiation" of the Pakistani people?

Many analysts refer to the disastrous outcome on the poor of the standard normal prescriptions as proposed by the IMF for diverse countries in the past. The IMF may well point out that pro-poor policies is not its objective when extending emergency assistance to over heated economies that have been compromised by poor governance including profligacy and corruption, as that is the objective of other international financial institutions notably the World Bank; the Fund's objective instead is to ensure macroeconomic stabilisation. Ideally of course, the Fund would have the capacity to forecast a melt down well in advance so that corrective measures can be taken in time.

Its critics refer to ample literature on its inability to forecast a crisis in several countries during the 1980s and 1990s, including the Asian financial crisis. Be that as it may the need for continued Fund support for several economies was felt during the 2000-10 decade, marked by the global financial crisis of mammoth proportions. Lessons everyone argued had been learned by the IMF and prescriptions were tempered by past mistakes.

One of the mistakes of the current decade was the IMF handling of Argentina's needs in 2001. The reference is to what was referred by several analysts as Argentina's 'implosion in 2002' when full-scale riots by almost every section of the society were seen to have the IMF fingerprints. The Argentina government at the time opted for a fixed exchange rate - one to one peso parity with the US dollar.

This had disastrous consequences for the economy as it made Argentina exports expensive and imports artificially cheap resulting in a trade deficit of 400 billion dollars. To maintain the overvalued currency, Argentina required large reserves of dollars as the government had to guarantee that everyone who wanted to exchange a peso for a dollar could get it. While the IMF denied that it had supported a fixed exchange rate policy, yet it played a crucial role in sustaining the rate by arranging massive amounts of loans, $40 billion in 2001 alone. Overvaluation of the peso, in turn, compelled the market to demand ever rising interest rates, which literally crippled the economy.

This accounted for the inability of the Argentine economy to recover from four years of recession while its foreign debt became impossible to pay back, 100 billion dollars, leading to default. Currency support was also extended to Brazil and Russia in 1998 by the IMF with equally disastrous consequences.

The second fatal error of the IMF with respect to Argentina was to insist on a zero deficit policy. It convinced most analysts at the time that it was the government's profligacy that was responsible for its economic malaise. And in this regard, the Fund was fully supported by Washington. The then White House spokesman Ari Fleisher is on record for having stated that "it's important for Argentina to continue to work through the International Monetary Fund on sound policies." While one cannot challenge the IMF assumption that profligacy was a factor yet its associated policies, notably attached fiscal conditions, played havoc with the purchasing power of the people of Argentina leading to massive riots that forced the incoming government to send the IMF packing.

It is a measure of the continued anger of the Argentina government that in spite of the recent need to issue bonds, which would be facilitated if the IMF gave the economy a clean bill of health the government made the following statement: "If we had followed the recommendations traditionally made by (the IMF) - which have favoured opening our economies, foreign indebtedness, financial liberalisation and 'unbeatable' market-oriented reforms - the outcome would have been totally different and today we would have been embroiled in a fresh economic, social and political crisis...Therefore, we celebrate today our well-gained economic independence."

Any Pakistani analyst would recognize all the terms associated with the IMF prescriptions in this statement and would urge the government to follow the Argentina prescription: economic independence. That, however, appears unlikely as the recent addition to the government's economic team namely the Advisor to the Prime Minister on Finance has already assured the Fund of compliance with its prescriptions.

More recently, three Eastern European countries namely Latvia, Romania and Hungary also went on the IMF programme. The Fund had learned some valuable lessons: fixed exchange rate was not supported and all three have by now been enabled to issue bonds in the financial markets as a consequence. And zero deficit policy was abandoned in favour of supporting budget deficit targets that would be sustainable. However, all three countries missed budget deficit targets by big margins. All of them found spending cuts and tax hikes pushed their economies into deeper recessions than expected, and all were forced to renegotiate budget targets with the IMF.

Even before the assistance package with its attached conditionalities has become effective the tangible anger on the Greek streets has already led to violent deaths. Greece as a case in point is distinct from other countries suffering from similar economic malaise: it cannot devalue its currency given that it's a member of the single currency euro zone which effectively implies that fiscal adjustment "must be the cornerstone of the programme," according to the IMF. In other words lower expenditure on public services, including wages and entitlements like pension, and higher taxes. Little wonder that the anger on the Greek streets is so palpable.

And then there is Pakistan. The Fund's programme is to be adhered to, or so stated the newly appointed Advisor to the Prime Minister on Finance. What does that mean for us, the people? Unfortunately, not a rationalisation of government expenditure as the government continues the policy of hiring jiyalas in the public sector and raising public as well as military salaries, and a reduction in military spending is impossible at this stage given the ongoing war on terror. The major cut in expenditure is from development expenditure with obvious implications on the poor.

On the revenue side the possibility of implementing a value added tax remains a challenge with all stakeholders opposed to this tax and with tax exemptions for the rich and influential continuing. Thus the cornerstone of fiscal adjustment in Pakistan remains lower development outlay and a rise in existing taxes. With respect to monetary policy, the high rates of interest as per the IMF prescription are having the same impact they did on the Argentina economy: crippling productivity. In our case, it is further crippled by a continuing energy shortfall.

The question is can we go the Argentina way: towards independence? This would require living within our means and that this government has shown little inclination to do so far.

Source: http://www.brecorder.com/index.php?id=1054308&currPageNo=1&query=&search=&term=&supDate=