IMF conditions adding to ranks of poor: experts

Wednesday, December 16, 2009
By Mansoor Ahmad

LAHORE: Recent rise in poverty in the country is reminiscent of the wave seen in the 1990s when besides less-developed rural areas it made inroads into urban areas caused mainly by International Monetary Fund’s adjustment programmes.

In the 1990s, all the IMF programmes put too much emphasis on removing structural rigidity and macroeconomic imbalances, paying no attention to welfare of the poor and vulnerable.

Economists are concerned that this time around the IMF is quite stubborn on the macroeconomic targets it has fixed while releasing quarterly installments out of a total loan of $11.3 billion it approved for Pakistan in November last year. However, it is not much bothered how these targets are achieved.

Senior economist Naveed Anwar Khan says the IMF has been advising the rest of Asia to exercise restraint while tightening monetary policy because it could stall the economic recovery they are currently enjoying after the recent global recession.

However, in case of Pakistan, he adds, the advice is to keep interest rates high on fears of inflation. Owing to insistence to keep interest rates even above the market levels, the burden of interest payment on government borrowing has increased manifold and has caused an increase in budget deficit beyond the target.

He says the government has already been under severe pressure in debt servicing due to constant depreciation of the rupee.

Another economist Asif Ali Shahid, a CPA, says high interest rates have not only discouraged fresh investment but have also made many industries sick, adding accompanying unemployment has increased poverty in urban areas where most of the industries are located.

When interest rates are high, banks prefer lending to the government because it is safe to provide credit to the state at the policy rate of 12.5 per cent than to give funds to the private sector at the policy rate plus premium of 2-4 per cent, he points out.

He says chances of default on high interest rates are high while loans to the government are risk-free, adding when interest rates go down, say to 6-8 per cent, banks will be earning much less if they provide credit to the government.

In case of private sector, they can add 2-4 per cent more to keep their profit margins intact. Moreover, he adds, the risks are also low as the businesses are in a better position to return loans if the mark-up is lower.

Shahid says inflation risk will be very low as banks will not have much liquidity because the private sector will be competing with the government for loans. He says banks will prefer the private sector in a low interest regime and will entertain the government with surplus liquidity, if available. This will force the government to take austerity measures.

Faisal Qamar, an ACA, says policy reforms pursued under the IMF programme tend to impose restricted wage and employment policies, cut in pro-poor subsidies, cut in development expenditure, increase in sales taxes and utility charges and frequent rupee depreciation.

A logical outcome of these policies is worsening of income distribution as well as inevitable rise in both relative and absolute poverty, he adds.

He says if the IMF is serious about addressing the economic malaise, it should put conditions that ensure transparency, good governance and action against corruption. Each quarterly installment of its loan should be linked to some progress on these three issues with no waivers. This, he adds, will create more resources.