International Monetary Fund (IMF) __ Friend or Foe?

We eagerly await release of tranches of money from the IMF donors while cursing them simultaneously. There are accusations on Governments of extending the begging bowls to them ; sacrificing national pride ; compromising fiscal priorities ; and endangering democracy by mandating politically unpopular steps like removal of subsidies on essential items ; while not realizing that IMF doesn't invite any nation to borrow from it!

It's the Governments that go running to IMF when they run out of reserves.

How did this come to be? How did the IMF attain the power where one cannot live with it but cannot live without it either? How did it become the favourite punching bag of third world nations but when called upon to bail out economies it happily obliges!

The answer lies in the punjabi proverb " Chor noon kyah chori karo tey Thaneydar noon kyah pharr lao " (asking the thief to steal and telling the policeman to nab him). The IMF follows a carefully worked out strategy of divide and rule by financial means which proved to be lethally effective in the Far-Eastern and Russian currency crises of 1997.

After the devastation of the Second World War, there was a rush towards accelerated growth to rebuild affected economies. It was widely accepted that accelerated growth cannot be achieved without creation of "paper money" i.e. deficit financing, so that was preached to the developing nations. A new economic doctrine of 'borrow and spend' (or spend what doesn't exist)
was established to appease the worldwide scramble to create national wealth through consumption largely financed by government spending on major infrastructural projects. The doctrine did work by creating demand, which spurred industrialization thus boosting per capita incomes (demand-pull).

However, continued deficit financing also created inflation thus putting pressure on currencies. With creeping devaluation in the developing countries eating into their foreign exchange reserves, these countries were advised by the multilateral lenders to open up their economies for foreign investment; both direct in industries as well as portfolio investments in their stock markets; and to make their currencies convertible on the capital account,i.e. float their currencies fully in order to benefit from resources available abroad in order to close their budgetary gaps.

All the recent victims of the crisis of 1997, i.e. South Korea, Taiwan,
Indonesia, Malaysia and Thailand fell into the trap. Russia did too in an unparalleled haste. By opening up their economies and floating their currencies, tanks and naval vessels were no longer required to colonize these countries.

Institutional speculators emptied the vaults of the central banks while the monetary authorities sought in vain to prop up their currencies. In 1997, more than 100 billion dollars of Asia's hard currency reserves had been transferred in a matter of months into private financial hands. In the wake of the currency devaluation, real earnings and employment plummeted virtually overnight leading to mass poverty in countries, which had in the post-war period registered significant economic and social progress.

Under repeated speculative assaults, Asian central banks had entered into multi-billion dollar contracts in the forward foreign exchange market in a vain attempt to protect their currency. With the total depletion of their hard currency reserves, the monetary authorities were forced to borrow large amounts of money under the IMF bailout agreement. Following a scheme devised during the Mexican crisis of 1994-95, the bailout money, however, is not intended "to rescue the country". In fact the money never entered Korea, Thailand or Indonesia; it was earmarked to reimburse the institutional speculators, to ensure that they would be able to collect their money owed in hard currency.
In the words of renowned currency speculator George Soros (who made 1.6 billion dollars of speculative gains in the dramatic crash of the British pound in 1992) "extending the market mechanism to all domains has the potential of destroying society".

In the late twentieth century, the outright conquest of nations can be carried out in an impersonal fashion from the corporate boardroom, a computer terminal, or a cell phone. In the words of Malaysia's Prime Minister Mahathir Mohamad: "This deliberate devaluation of the currency of a country by currency traders purely for profit is a serious denial of the rights of independent nations."

Where does the money come from to finance these multi-billion dollar operations? Only a small portion of the money comes from IMF resources. The US Treasury was called upon to make a large contribution to IMF sponsored rescue operations. The
treasury issued US public debt to finance the same. Interestingly this issue was underwritten and guaranteed by the Wall Street merchant banks involved in the speculative assaults in the first place. In other words, those who raised the bailout money were those who were the ultimate recipients of it.

Pakistan has so far been resisting pressure to make the ruppee convertible but for how long can it continue to do so? When partial convertibility was
allowed and the stock markets opened up to foreign portfolio investment, it boosted the markets temporarily but then resulted in wild fluctuations leaving the small investors holding the bucket every time. We have been seeing creeping devaluation since decades. A nation of 140 million people has to suffer humiliation for $ 280 million which is probably equal to any respectably sized fund manager's portfolio in Hicksville USA. We may curse the IMF but we simply don't have the money ourselves - Period!

The lesson to be learnt from all of above is self-reliance. We cannot blame the East India Company for colonizing the sub-continent before we search into our own wasteful Mughal souls. It's easy to blame foreigners but not so easy to look within and blame our own selves. The world is competitive and there aren't any free lunches. The foreign armies will come to colonize, now armed with financial weapons, if we ourselves are weak.

The practical answer in the context of Pakistan; amongst all the clichés, lies in first formulating and then amalgamating fresh doctrines of economy and defense. Both are inextricably entwined. The budget cannot be balanced without cutting non-productive expenditure, which in the most part means Defense expenditure; both visible, that is allocated in the budget as well as invisible which is never revealed. Military hardware purchases and maintenance place demands on foreign exchange resources that are unsustainable. All other economic concerns are secondary to this primary factor and are dependent upon its
rationalization. If we continue the love/hate relationship with multi-lateral donors like IMF to fund what we don't need and can much less afford, we'll soon fall into either a terminal debt spiral or hyperinflation or both.

The friendship of IMF is like that of a bear. Its embrace will kill you.