Showing posts with label USD. Show all posts
Showing posts with label USD. Show all posts

Tuesday, October 13, 2020

THE IMF QUAGMIRE

IMF is known to be the world's most powerful financial institution. Its board of trustees consists of representatives from various governments who have contributed its seed capital. Hence the IMF is not answerable to anybody except the largest shareholder. They are said to have the world's largest team of highest ranked economists and financial experts. They specialize in formulating mathematical models of a country's economy and analyze it. Probably they use Einstein’s tensors and supercomputers to execute their analyses. However, since my knowledge is limited to Newtonian mechanics, I would try to convey my observations in a language that my wife would understand. Blogging, in any case, is love’s labor. From close scrutiny of the terrific things that have happened in countries that sought assistance from IMF in their hour of peril, it seems that there exists an IMF dollar that makes the ordinary US dollar disappear. Wherever this august institution extends its helping hand, severe scarcity of US dollars takes place and its price in local currency inflates, often to determined levels. This inflation of the dollar or in other words the devaluation of the local currency creates contrasting scenarios when viewed from different perspectives. To the IMF actuaries who maintain accounts in US dollars, it results in the shrinking of the local debt in dollar terms dollars and the total debt in current dollars reduces. That is a good indicator. However, the local economists notes that whereas the local currency debt is constant the local currency equivalent of the dollar or other currency debts has increased in proportion of the devaluation and the total national debt in local currency has increased and a larger chunk of tax collected would go into debt servicing. It actually happens that way. The tale of woes does not end there. If the GDP in local currency remains the same or increases at a rate less than the devaluation, then the GDP in current dollars will register a hefty decline. That would be a bad indicator and cause embarrassment. Now, the local currency GDP can be increased in two ways; either by rapidly increasing the volume of indigenous production or by instantly inflating the costs of goods and services. The former requires dynamism, capital goods to expand industries, finding new markets, additional skilled labor, and increased supply of raw materials assuming that additional capital is available. The latter is extremely easy, it just requires mismanagement. So, the cost of local goods and services must inflate to bring the local currency GDP to such a level that current dollar GDP exceeds the previous year’s value. A simple numerical example should suffice to elucidate the complicated logic. Thanks to the IMF economic package USD parity grew from 100 to 160 PKR. Soon price of wheat flour rose from 40 to Rs. 64 per kg and sugar, rice, vegetables, meat, poultry, clothing, stationery, and everything else followed suit except salaries of civil servants; therefore, bribe rates and police extortion were upgraded accordingly. Now all indicators are good, and the IMF has done a great favor to this Godforsaken nation.