Can Pakistan Free Itself From the Reins of IMF?
Some time or the other, as a Pakistani, you must have wondered why Pakistan ends up reaching out to the IMF for a bailout plan again and again. The previous 23 massive programs in our pocket suggest that we are addicted to this scenario. In fact, Pakistan has proven itself to be the most loyal customer of the IMF, whereas Argentina is in second position with 21 programs to their count. Our neighbour country India has only approached the IMF seven times. India never looked towards the IMF after the landmark reforms of Manmohan Singh and Narasimha Rao in 1991, which changed India forever.
There has to be a better way to run the country than ending up in an emergency ward 23 times in 75 years. In this article, I will explain as clearly as possible why Pakistan could not withdraw from the International Monetary Fund. Trust me, it will not be a beautiful story.
When a country runs out of foreign exchange reserves, it usually goes to the International Monetary Fund. The Foreign currency reserves are used to pay for imports and repay money borrowed from other countries and multilateral institutions such as the International Monetary Fund and the World Bank.
Countries can build their foreign exchange reserves in one of two ways. The first option is to maintain the current account in surplus. This can be achieved by creating a situation where the amount earned from exports and foreign remittances is greater than imports. The second option is even if the current account is in deficit, a condition opposite to a surplus; it can still increase foreign exchange reserves by absorbing foreign exchange inflows in the form of debt and equity that exceeds this deficit.
In our history of 75 years, Pakistan has rarely witnessed a current account surplus. There were times when the current account deficit was very large; for example, during 2017-19 and 2022, more than 3% of the GDP. Whenever the country faced this situation, we usually had to go to the International Monetary Fund immediately. Pakistan’s exports have always been so poor that we have almost always had a current account deficit. As a share of our economy, they are only about 10%. This amount is much higher in prosperous countries and is 20-30% of the GDP.
The current account situation of a country shows the amount of savings and investment in the country. When a country invests heavily, it usually needs foreign financing, resulting in a current account deficit. This type of current account deficit is healthy because investment creates future growth and exports that can be used to repay the foreign financers from whom the money was borrowed. It is even better if the borrowed capital from foreign countries is in the form of foreign direct investment (FDI) rather than debt because if the economy does not do well, the government does not have to pay it back as much. Unfortunately, our current account deficit has failed on both counts.
First, Insufficient savings and excessive consumption of resources played a vital role in Pakistan’s current account deficit. This excess consumption is caused by increased imports and the government’s negligence towards growing exports. Our national tendency toward overconsumption of foreign goods is present in both the public and private sectors. The public sector runs a large budget deficit, typically around 5-8% of GDP, a large number as per international standards. In the meantime, the private sector consisting of individuals and businesses, is also unable to save enough due to cultural habits.
Second, FDI in Pakistan is less than 0.5% of the GDP, but it is around 2% in developed countries. Rather than making arrangements to increase FDI, we are leaning more toward debt financing to cover our deficit. This significantly increases the government’s debt burden. Today, Pakistan’s government debt is about 78 % of its GDP, approaching extreme levels for emerging markets.
A big question arises here why do the foreign exchange reserves run out? It is due to excessive economic import bills, which are higher than reasonable and the export bills and FDI is way less. Technically, “external financing needs” (the sum of the current account deficit and foreign debt due in the year) surpass the export bills and foreign direct investments plus borrowing from other countries. Suppose this gap between external financing needs and available resources is too large and continues for a long duration; eventually, the foreign exchange reserves will run dry, and the country will again need to return to the International Monetary Fund. As a country’s external financing needs are more or less known in advance, a lack of foreign exchange reserves usually indicates poor macroeconomic management and planning.
This pathology brings us back to the IMF again and again. To overcome it, we need to focus on four achievable goals:
- We must increase exports to at least twice the current level of our GDP.
- We must increase savings and investment to at least twice the current level of GDP. In particular, government budgets should be tightened so that banks can better meet the economy’s needs.
- We need to attract more FDI and reduce debt to finance the current account deficit needs, including strengthening the rule of law.
- It would be best if we plan our external financing needs and availability of resources in advance to avoid last-minute surprises.
These are the indicators on which the government’s macroeconomic strategy and performance should be based.
Achieving these goals requires innovative strategies at the microeconomics level and constant determination. According to the international experience and local conditions, we can take some actions immediately. Some might take a while to implement because it requires shifting resources between different sectors and must improve the business environment model.
India’s experience of 1991 reforms clearly shows that these measures can pay off well. If our government is serious about not going back to the IMF again, in that case, we must stay within four preconditions.
By combining these four priority areas, we can increase our reserves and get off the IMF cycle for good. Here is the latest killer statistic that shows the dominance of foreign reserves in determining IMF referrals. Currently, Pakistan’s foreign exchange reserves are less than 3 billion dollars. Our reserves have never exceeded $21 billion in history, Bangladesh about $35 billion, India about $600 billion, Russia has more than $630 billion and China about $4 trillion. Since the early 1990s, Pakistan has taken 11 IMF programs. Bangladesh has three. India and China had none.