IMF’s warning to London


WEB DESK: Although, the International Monetary Fund (IMF) is not supposed to meddle in the internal affairs of a country, it seems to have made an exception in the case of Britain, where an intense debate is currently going on over whether it should remain a part of the EU or make an exit.

Speaking openly on 13th May, 2016, its Chief, Christine Lagarde, said that there were no economic positives to Britain leaving the EU and the impact would range from “pretty bad to very, very bad.” The Fund, in a report on Britain’s economy, opined that an exit vote would “precipitate a protracted period of heightened uncertainty, leading to financial market volatility and a hit to output.”

The country would also face the risk of falling into a spiral of weaker economic growth, lower house prices and diminished foreign investment if voters opt to leave the EU after the referendum on 23rd June, 2016. A sudden stop to investment in key sectors of the economy such as commercial real estate and finance could exacerbate Britain’s current account deficit, depressing further asset prices in a self-reinforcing cycle. Britain was also warned that a Brexit shock could also upset the global economy. The IMF position was also echoed by a number of other institutions.

For instance, the OECD warned that British voters risk paying a “Brexit tax” equivalent to a month’s salary by 2020 if they leave the EU. The Bank of England said the economy would slow sharply or even enter into a recession due to Brexit. The IMF is so much sold on the idea that it has promised to publish detailed forecasts for the size of a Brexit hit to Britain’s economy around 16th June, a week before the referendum and Finance Minister George Osborne and the BoE Governor are due to make high-profile speeches at the annual Mansion House dinner. Anti-EU campaigners were, however, quick to hit back at the IMF, saying that it has no right to wade into the internal affairs of a country and its forecasts are not reliable. In the old days, it had backed the euro but did not see the financial crisis coming.

The IMF had also admitted that it miscalculated the effects of the Greek crisis. An “Out” campaign official, went to the extent in saying that Britain was being bullied by the IMF. Defending her outspoken behaviour, Lagarde said that “we are not doing it out of politics; this is not the job of the IMF. We are doing it because it is a significant downside risk. And second, it is not just a domestic issue, it is an international issue.” Although there could be a great merit for staying in the EU and a great harm was expected to the British economy by Brexit, yet we feel that it was better for the IMF to remain neutral in matters that are perceived to be political or purely internal.

It may be recalled that the IMF set up in 1944 under the Bretton Woods arrangement was mandated to look after the exchange rate of various currencies and maximise world trade and output. How the voters vote on a particular issue in a country appears to be outside the scope of its functions. And second, and more importantly, if such a practice is established, developing countries would, of course, be the losers as the IMF would then quote the precedence of UK to dabble in their affairs when they ask for Fund’s assistance.

Powerful countries holding overwhelming quota of the Fund often do not need assistance and usually ignore its advice. Nonetheless, it does not mean that we do not agree with the Fund’s point of view. In fact, the whole world is waiting with bated breath insofar as the referendum on June 23, 2016 is concerned. The EU, its major trading partners as well as Britain have to particularly undergo a lot of adjustments to establish their place in the new environment.

For instance, if British voters say no to the EU, London’s status as a financial hub could be undermined and it could take years for Britain to renegotiate trade deals with the EU and other countries, hitting investment and weighing heavily on economic sentiment. To quote an example, German companies are already scaling back their investments in Britain, ahead of the June referendum and German industry is becoming increasingly vocal in warning that a Brexit would hit the economies of both countries.

So far, however, numerous warnings about the destabilisation of the economy do not appear to have changed the minds of many voters. Although opinion polls show that Britons believe that it would be good for the economy to stay in the EU but they seem to be equally split about the actual vote on 23rd June, 2016. This shows clearly that though economic imperatives are important yet other factors such as dislike for the free market in the Eurozone, the fear for mass immigration from other EU countries and loss of sovereignty in terms of economic decision-making could be more important for determining the outcome of the June 23 referendum.

Needless to add that Pakistan, like other developing countries, would also be badly affected by Britain’s exit due to its close economic relationship with the EU countries. Policymakers need to be very alert to the unfolding situation and try their utmost to insulate the country from ill effects of this negative development.

Source: Business Recorder