Despite the bad news that usually comes with an International Monetary Fund loan in the form of attached strings, Pakistan had no choice but to go to the lender of last resort. Its economic crisis is of a different order from the meltdown being experienced in the rest of the world. It began much earlier — triggered by high global energy prices, terrorist strikes, and political instability. The resultant flight of capital led to a dangerous reduction in foreign exchange reserves, and Pakistan risked defaulting on its debts. The low credibility of the rulers combined with the global financial crisis put paid to the country’s hopes of easier bailouts from friends such as Saudi Arabia and China. Going to the IMF was the only course available. In return for the $7.6 billion loan that the Fund approved earlier this week, Pakistan is required to reduce its budget deficit through a number of measures: implement taxation reforms that will include bringing agriculture into the tax net; slash subsidies on fuel and electricity; and cut government spending. As the withdrawal of the fuel subsidy has already shown, these measures will be unpopular. The government is also required to stop using public funds indiscriminately, for instance, to keep the stock exchange propped up. It is expected that by curbing wasteful expenditure, Pakistan will be able to put in place some social safety nets to offset the impact of the reforms on the poor.
The immediate crisis is over. Yet, going by the history of IMF interventions, it is questionable whether the latest one will lead to long-term economic stability in a country whose all-round health is crucial to regional and international stability. Pakistan has had several tie-ups with the IMF. It is well-documented that successive governments approached the lending organisation only for the short-term objective of tiding over a cash crunch, making marginal changes to the economy to keep the lender satisfied. Usually these hit the poor. At the same time, they avoided putting in place conditions that would hurt the entrenched military-feudal-business aristocracy. The net outcome: an unviable economic situation each time recession, or unemployment or inflation sets in, leading to an abrupt end to the arrangement with the IMF. Except for one stand-by agreement in the early years of the Musharraf regime, Islamabad has never completed an IMF programme. Ultimately, Pakistan’s economic salvation lies in radical measures such as land redistribution and the expansion of its small manufacturing base. The country’s rulers know this but have failed to show the will or the inclination to bring in such reforms.