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Social dimensions and IMF deals

Political economists believe that economic growth is important, but it alone cannot help reduce poverty and inequality, marring prosperity, unless the right choices and unbiased selection of priorities are made for the economic stabilization process by governments, especially while they join any IMF programme whether concessional or non-concessional.

The literature available (dates back to 2000) on the impact of IMF programmes on poverty, income inequalities and social expenditures has suggested mostly negative impacts on these key determinants. Some new studies (2017 onwards) which have specially reviewed IMF programmes via these factors are of the view that, though IMF programmes impacted in terms of reduction in social expenditures, they did not cause phenomenal increase in poverty and inequality.

The studies find that the correlation among IMF programmes, economic growth, poverty and inequality depends upon the timeframe of the programmes since, in the short term, the impacts have largely been negative, while in the long run, impacts were different. Graham Bird, Faryal Qayum and Dane Rowlands in their paper published by Routledge in 2019 were of the view that the academia is left with an empirical issue in terms of looking at possible impacts of IMF programmes as theory does not provide any clear reason to expect IMF programmes to have either beneficial or detrimental effects on absolute or relative poverty.

As a follow-up to the 1995 World Summit for Social Development, the Fund in March 2000 issued a document embedding social policy issues in an IMF-supported programme. Explaining the IMF’s mandate post 2000, the IMF’s social policy issues document says that the Fund contributes to ensure employment and real income of member countries by promoting high-quality growth, which encompasses a wide range of elements, including social policy as a social pillar which is much needed for a sustainable international financial architecture.

In 1999, the IMF replaced its Enhanced Structural Adjustment Facility (ESAF) by its Poverty Reduction and Growth Facility (PRGF) to meet the objective of poverty reduction as a result of concessional lending programmes. The IMF is committed to supporting SDG realization in member countries with a focus on eradication of extreme poverty by 2030. Earlier, the IMF used to get expert support from the ILO, UNDP, WHO and the World Bank to be compliant with social policy issues in IMF programmes.

The studies, conducted before the incorporation of social policy issues in IMF programmes, including one by Pastor M (1987) traced IMF programmes’ link to worsening poverty and widening inequality. The studies by Garuda (2000), and Vreelan (2002) saw poverty worsened and inequality widened. Post 2000, with the incorporation of social policy issues in IMF programmes, Oberdabernig (2013) finds that, though poverty and inequality have been on the higher side in the short run by IMF programmes, these effects were seen fading away in the longer run.

The goal of economic growth can better be achieved through reasonable compliance and it has been seen in the past that concessional loan facilities with an appropriate compliance brought positive effects on the economic growth leading to increasing social sector expenditures. But when compliance is compromised and commitments betrayed amid short-term domestic political vested interests, then the countries go off track on IMF programme implementation; and face global financial pressures that push them to enter into re-negotiations with the IMF as a last-ditch effort to salvage their economy from default; they have to face additional tough conditionalities by the IMF in such situations.

This is what exactly happened with Pakistan when the previous government breached the contract with the IMF and the new government had to go into new negotiations, and had to ‘do more’ to reach a staff level agreement. Still Pakistan needs to do more in terms of reducing expenditures; now it will be the country’s choice again either to cut spending on development and social sector or slash non-development expenses, mostly the cost of administration (civil and military).

While analysing the above contrasting propositions by the academia in the pre- and post-2000 IMF programmes’ context without and with social policy issues embedded into the results matrix of the Fund’s programmes – concessional and non-concessional – to push governments to achieve targets of economic growth, liberalization and stabilization coupled with reduction in expenses on running hefty administration and creating a cushion for social sector spending, one would conclude that state governments must strike a balance between economy and people.

State governments have to explicitly plan whether they want to come out of the economic crises using the IMF programme facility for the time being or to plan out in a way that it leads to economic stabilization, steady growth in a real sense, and reduction in government expenditures instead of cutting development or social sector spending. Moreover, country plans should also mobilize the IMF for addressing social policy issues embedded with any concessional or non-concessional programmes.

Unfortunately, what we have seen is that most of the countries including Pakistan go to the IMF as a last resort and commit to the Fund’s toughest conditionalities without considering social dimension of the impacts of IMF programmes and they hardly mobilize social policy issues as the IMF’s own commitment while building their cases before the IMF negotiators. Since only economists frame a case for the IMF, they only focus on the economic bailout; if social sector experts are also consulted in this process, they may help build a case with the lens of SDGs and social policy commitments of both the lender and the country.

Generally, state governments, for their audiences at home, portray the IMF as a culprit for their own misdeeds, politicking and gross mismanagement of the economy. The leaders in developing countries including Pakistan should put their own house in order. They should give serious thought as to why the IMF places conditionalities – not because the Fund wants to raise the debt burden; it tries to ensure that the economies benefitting from the Fund’s concessional facilities perform better and through the IMF loan programmes build economic architecture on a sustainable and resilient foundation.

Here the purpose is not to advocate for the IMF, but to propose that if it becomes inevitable to go to the IMF, state governments should prepare the case with a mindset of creating a balance between the economy and the people, exploring concessions available through social policy dimensions including SDGs indicators as a pitch. Going to the IMF in the interests of economic revival is not a bad idea but betraying, backtracking and politicking on commitments leads to a bad impact for the country as Pakistan had experienced recently. It is good that finally as a result of re-negotiations between the IMF and the new government once again Pakistan is back on track and got the new revised deal which will attract $1.17 billion in the next three to six weeks as confirmed by the IMF.

This is a great breather, though we still have to swallow bitter pills; with this deal Pakistan has been able to avert a default and has been cleared to receive an extended bailout package of $7 billion and with the ongoing programme, the tranche will reach around $4.2 billion. Many economists (for or against) are looking at the deal with a hardcore economy lens, but there a need to create a balance between prioritizing social stability, peace and harmony in society by strengthening social safety nets and graduation plans for livelihood support and stabilizing economy taking the cue from the quoted statement of IMF Director Gerry Rice: “We’re hoping this will help stabilize the economy and amongst other things help expand the social safety net to protect the most vulnerable; accelerate structural reforms; and help stabilize the macroeconomic situation in Pakistan.” Let us not miss this opportunity as the IMF director has given the recipe of using a social policy dimension for the deal with the IMF.

Moreover, there is a need to boost agriculture, IT and IT-led businesses, and an exports-based industry to increase income and reduce dependence on loans and move on the path of prosperity with a social dimension – the people first.

Email: shafmunir@gmail.com

Dr Shafqat Munir Ahmad, "Social dimensions and IMF deals," The News. 2022-07-23.
Keywords: Economics , Economic growth , Economic stabilization , Economic situation , Exports , Businesses , Industries , Graham Bird , Faryal Qayum , Pakistan , IMF , PRGF