Pakistan stands on the brink of default even as it remains engaged with the International Monetary Fund at the tail end of a three-year programme. While the country’s economic woes are rooted in its own inept policies, International Monetary Fund has escaped scrutiny of its stabilisation programmes that have failed to put Pakistan on a sustainable path in 22 attempts and certainly needing another programme immediately after this one concludes.
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The journey to the brink has been a long one. Throughout the development experience of Pakistan, irresponsible government expenditures led to chronic fiscal deficits, mounting debt and rising interest payments, contributing to excessive domestic demand spilling into external imbalances and loss of reserves. With scant attention to competitiveness, export performance remained weak. Hence, Pakistan experienced persistent foreign exchange crises, forcing the country to seek International Monetary Fund programmes. Each time, International Monetary Fund programmes built reserves with borrowed funds, paying previous debts with new loans and arranging financing for foreign exchange shortfalls from various sources. Programmes were approved if creditors could be repaid, not necessarily if Pakistan would be able to stand on its feet.
But inevitably, crises re-emerged soon after the programmes ended because the fundamental issue of increasing foreign exchange earnings for import needs remained unaddressed or aggravated. The programmes failed to recognise that competitiveness is more than the real effective exchange rate in the post-World Trade Organization trading world.
Further, in its narrow focus on reducing fiscal imbalances through revenue measures of every kind, Fund programmes paid little heed to the impact of tax measures on investment, resource allocation, economic activity, export promotion and income distribution. As a result, exports remained stagnant, investment rates low and small and medium enterprises collapsed in recent years with rampant unemployment. Increasing allocations for income support programmes is neither sustainable nor a substitute for policies to support the robust growth of small and medium enterprises and agriculture.
During the current 22nd programme, Pakistan has largely followed the International Monetary Fund stabilisation programme but like many democratic governments living and spending in the present while ignoring the medium-term consequences of accumulating expensive debt, both governments during the programme period failed to contain expenditures, which exceed 20% of gross domestic product.
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Pakistan has asked for IMF bailout to avoid an imminent collapse. In contrast to many African and South American countries, a collapse in Pakistan might have global consequences.
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