An open discussion about the performance of economies under International Monitory Fund (IMF) programmes is highly welcomed, as lessons learned from past performance can and should be an important input into the design of economic programmes.
An open discussion about the performance of economies under International Monitory Fund (IMF) programmes is highly welcomed, as lessons learned from past performance can and should be an important input into the design of economic programmes.
To draw such lessons, it is important to understand the role of the IMF as well as its views on key economic issues. One of the IMF’s principal functions is to provide countries with access to financial assistance in times of severe economic distress, often when no other source of external financing is available. Over the past several decades, such assistance allowed many countries to avoid collapse of their exchange rates, hyperinflations, or debt default. Even more important, IMF assistance can help prevent a crisis. In the case of the current programme with Pakistan, IMF assistance arrived at a time of significant risks in 2013 and provided breathing space to restore macroeconomic stability and lay the foundation for sustainable growth by setting out, and beginning to implement, a reform agenda to address important bottlenecks to economic growth.
We at the IMF are convinced that macroeconomic stability is a necessary ingredient for growth. Countries experiencing runaway inflation, depletion of foreign exchange reserves, abrupt and large exchange rate depreciation, or debt default, typically suffer from severe recessions and thus cannot generate enough jobs for new entrants into the labour market. We are equally convinced that such stability by itself is not sufficient—it needs to be complemented with sustained reforms that strengthen the structure of the economy and eliminate important bottlenecks to growth. Many countries have used IMF programmes as a springboard to fundamentally transform their economies and achieve high and sustainable growth.
Through policy advice and funding, IMF programmes provide a framework to formulate and launch wide-ranging macroeconomic reforms. Importantly, these reforms always belong to, and are implemented by, member countries. Where the reforms have not gone far beyond alleviating the most immediate pressures, macroeconomic imbalances soon re-appeared—sometimes prompting a need for repeated support. Where the root causes of these imbalances remained unaddressed, growth tended to underperform. And where the reform effort was not sustained, gains from initial reforms were eventually lost or reversed.
The IMF learned many valuable lessons from the performance of past programmes. Among other things, these lessons led to refining of our lending instruments, revamping of our technical assistance to member countries, a more selective and streamlined approach to conditionality, increased emphasis on social protection, and improved financial sector surveillance. While this learning process continues, the design of today’s IMF programmes already reflects many of these changes to better help countries implement their economic reform programmes.
Reviewing past performance of IMF programmes is a continuous process, and the IMF just completed its most recent such review covering 32 programmes over the span of the global financial crisis. It found that without IMF financial support, more rapid adjustment would have been necessary to close financing gaps, which would have created disruptions and risked further intensification of crises.
IMF-supported programmes thus helped to smooth the necessary adjustment and provided time for addressing the underlying problems. In the case of Pakistan, we also believe that the IMF-supported programme has helped the authorities make significant progress in improving economic stability. The budget deficit has been brought down, foreign exchange reserves have been rebuilt, and inflation has declined, and during this phase growth has gradually picked up and interest rates declined.
At this stage, the authorities’ programme is at an important juncture, and the focus has increasingly shifted towards making the gains in stability more durable by rolling out important economic reforms to support growth.
Among other things, important reform areas include widening the tax net and improving tax compliance to create the necessary space in the budget for higher spending in priority areas such as infrastructure investment and social assistance; reforming the energy sector to reduce the cost of doing business; and restructuring and/or privatising loss-making public enterprises to improve the investment climate. A continued substantive discussion of this reform agenda will be most welcome.
Pakistan’s economic future rests on the ability to implement these reforms, regardless of whether they are put in place with the help of international financial institutions. Therefore, it is important that the public economic discourse focuses on reaching a consensus on the content of the reform agenda and on ways to implement it.
The writer is the IMF’s mission chief for Pakistan
