Rida Yamin is a graduate student of international relations from Punjab University. Her areas of interest include world politics, political economy, and hybrid warfare.
Poor governance does more harm to the economy than IMF’s loan programs. Amidst the controversies about the role of IMF (International Monetary Fund) in Pakistan and whether its policy reforms do more harm than good to emerging nations, the question of poor governance of countries is more important. Pakistan can do without the IMF loans, but the question is, is it willing to make this IMF program the last one?
Submitting to the IMF conditions, the present prime minister of Pakistan hiked fuel prices by Rs.60, which will further go up. When it comes to the IMF’s role in lending, its conditions include a reduction in state spending, limited role of the state in the economy, privatization of state-owned enterprises (SOEs), high-interest rates, and trade liberalization. Let’s take an analytical workout of these lending policies.
Privatization of SOEs
In case the state cuts down on its expenditure means subsidies and investments in development projects, like the health and education sector, which are primary beneficiaries of the poor class, the poor will face high inflation. SOEs, which unfortunately produce fewer revenues and more losses, burden the economy. Still, at least they are making something, and in the absence of a robust private sector, this something is a blessing.
Thus, selling SOEs to private companies, which are mostly foreign, does worse than good to the economy. High-interest rates along with political instability will distract FDI. Trade liberalization in a country with low domestic export productivity will increase its trade deficit.
Our exports cannot compete in global trade, as a result, our imports jump higher than exports. Sounds a bit strange. After all this, the role of the IMF makes it seem like a predator rather than a savior, right? But actually, one cannot blame a teacher for strictness if one does not complete the homework.
Pakistan cannot blame the IMF alone; poor governance plays a pivotal role. Many structural problems in our economy led us to the brink of bankruptcy, and we have always been saved by eleventh-hour emergency loans from IMF programs.
We make high-cost-low-yield flawed policies. The effective policies we make couldn’t be implemented due to political instability. If they’re near to being implemented, we fall victim to elite interest that is always in contradiction with everything that does not benefit them.
With the history of a flawed policy framework and staggering policy implementation due to existential political instability, the country never achieved its economic growth. Our politicians used to rely on short-term growth plans by borrowing and to maintain that growth, further borrowing. Inefficient use of loans and aid, through misdirected subsidies that generate the rent-seeking mentality of industrialists, is undermining the domestic productive capacity and capabilities.
An already fractured economy cannot bear a single crack anymore. The Russia Ukraine war further aggravated the situation for an economy like Pakistan. A crippled economy with the burden of the constitutional and political turmoil on its shoulder could not be able to walk a single step ahead.
Every country takes loans, but only those who have the ability to repay them can flourish their economy. Pakistan lacks this ability, or one can say it never bothers to build the capability to repay the IMF loans with massive interest rates. We take loans and spend them on inefficient industries that cannot boost our export capacity.
Furthermore, in these industries, the machinery used to produce exports is also imported. As a result, imports exceed exports, leading to the current account deficits, which depreciate the currency, increasing the debt repayment money. To overcome the deficit, we take further loans. This vicious cycle of circular debt sucks the country’s 80% budget in debt servicing.
Depleting Foreign Exchange Reserves
Now, with the depleting foreign exchange reserves, we could be the next Sri Lanka. Essentially $7 billion in our reserves are not our own; it belongs to Saudi Arabia and China. So, the amount from the remaining $10 billion that we can use is $3 billion, which can hardly cover a two-month import. We have to make repayments of $21 billion in the next twelve months.
Additionally, to overcome the trade deficit, $12 billion is needed. The country can only roll over the repayments if it regains trust in our economy. To the investors, the dropping of Pakistan’s dollar notes below 70% is an indicator of the country’s default chances.
Credit default swap premium expands. The investors are reluctant, raising the concerns that the country may default at any time. We cannot borrow from other countries, or they are not ready to lend us. Here, the role of the IMF becomes that of our savior; without its loan, we cannot stabilize the financial crisis and revive the investors’ trust in our economy.
Bangladesh’s Economic Development
In the 1990s, when the economic growth of Pakistan was being affected due to the interplay of two political parties, some South Asian and Southeast Asian countries with a tragic history like ours emerged as economic miracles. Bangladesh, which started as an independent country with famine and war, has become the second-largest economy in South Asia with a $400 billion GDP and a growth rate of 7%.
Abid Hassan, a former World Bank advisor, said that it seems likely that Pakistan will end up taking aid from Bangladesh as its economy is expected to be doubled in 2030. Today, Bangladesh is 45% richer than Pakistan. The country covers its journey from the basket case to the case study through far-sighted economic governance. A high-yield financial strategy assures economic growth. Bangladesh secured it by restructuring resource allocation by increasing expenditure on the industrial sector from 13% to 50%, an input that was previously given to the agriculture sector.
The transformation in the economy came with innovation and uniqueness in export performance. Its focus on the shipbuilding sector makes it an exporter of ships as its ship imports decline from $16 billion in 2018 to $6 billion in 2022. Not only this, but by specialized production, Bangladesh is competing with the Asian shipbuilding giants— China, Japan, and South Korea.
Additionally, the shift from primary goods to manufacture goods makes Bangladesh a robust economy; the best example is the RMG sector, utilizing its large labor size. Bangladesh’s total exports are worth $43.3 billion, with a year-on-year growth of 52%, compared to Pakistan’s exports worth approximately $28.8 billion, having year-on-year growth of 25%. Still, Bangladesh has many challenges to face, but they seem likely to overcome them faster than Pakistan with this economic performance.
Doi Moy in Vietnam changed the political and economic scenario. With the consistency of campaign reforms, Vietnam has now become an economy of $310 billion with a GDP growth rate of 6.5%. With the history of the ten-year war, Vietnam is now the fastest growing economy in the region and very much near to being the next economic power after China. The country is the largest exporter of electronics and the second largest of textile footwear in the region.
With a robust economy, Vietnam is a hub for FDI. Due to the Sino-US trade war, Vietnam provides the perfect substitute for China because of its almost similar exports and high production capacity. With the reliance on manufacturing goods, it has $88.58 billion shares in global exports and seems likely to be the next factory globally.
Pakistan has a $292 billion GDP with a 4% growth rate. With high dependence on imports and foreign loans, Pakistan cannot flourish until its savings to investments ratio is high. Pakistan cannot use the presence of corruption, inflation, establishment intervention in politics, bureaucracy problems, and the role of IMF loan programs as reasons for poor economic performance. Without prudent policymaking and reforms in long-standing structural issues, Pakistan cannot step into the race of Asian economies.
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