By Yousuf Nazar
PAKISTAN’S current economic meltdown is a crisis of competence if judged in light of the recent past. In the context of history, it represents a colossal failure of the establishment’s long-term foreign and economic policies.
Pakistan desperately needs $4-5bn to avoid default on its external obligations. The government is working on the multilateral institutions and the Friends of Pakistan to raise this sum within the next few weeks failing which it will go to the IMF.
The government does not want to borrow from the IMF to keep its hands relatively ‘free’ and avoid the likely political fallout from following the IMF’s prescriptions. Does Pakistan have an option? Unfortunately, no.
The World Bank has not disbursed any aid so far for this fiscal year. Its yearly aid to Pakistan is about $500-600m and is unlikely to come through now, that is, before the IMF puts its seal of approval on Pakistan’s economic plan.
The Friends of Pakistan group includes Saudi Arabia, China and the United States. Saudi Arabia has observed a meaningful silence for several months regarding Pakistan’s request to supply oil on credit. China’s commitment to help with specific projects is welcome but its ambivalence about outright cash loans is understandable given its own policy to channel foreign aid through project assistance. It did provide emergency loans to Pakistan in the past (in Dec 1996 and April 2008) but not to the tune of billions of dollars.
The People’s Party government took charge in April 2008 and put the privatisation programme on hold without making alternative funding arrangements. It did not act upon proposals from global banks to raise money from international markets at a time when market conditions were relatively stable. It kept hoping it would get the Saudi oil facility whilst the oil price shot up and the foreign exchange reserves evaporated. Capital flight ensued as the market confidence sank and business sentiment turned negative.
The government’s team of economic managers and advisers lacked the experience in international financial markets to anticipate or manage what was about to hit the economy. This writer warned on these pages of Dawn (May 30, 2008): “If the economy continues its present slide, even the US may not be able to bail Pakistan out. Its own once mighty financial giants are being rescued by Chinese and Arab investors. Pakistan’s last resort would be the IMF with its usual conditionalities and the inevitable pain they would cause. For Pakistan, the most sensible course would be to put its house in order now”. But the government devoted almost its entire attention to the judges issue and power politics as the country headed towards its worst financial crisis in a decade.
The government continued Musharraf’s Washington-centric foreign policy. Yet, in the hour of its greatest need, the US not only ditched Pakistan but a third-ranking state department official publicly humiliated its ‘friend’ by saying that the Friends of Pakistan “wouldn’t throw money on the table”. This wasn’t surprising given Condoleezza Rice’s more subtle remarks earlier on Sept 26: “We are very engaged with Pakistan, through the international financial institutions, to help Pakistan as it takes the difficult decisions that it is and must take on economic reform.” Translated: Pakistan should go to the IMF and reform its economy.While the US pressure on Pakistan to go the IMF has political undertones, it is also true that Pakistani rulers’ historic tendency to indulge in profligate spending and corruption has left them with few sympathisers despite the much trumpeted ‘geostrategic’ importance of Pakistan.
The US has historically directed most of its ‘aid’ to make Pakistan fight its wars. The aid has been primarily used for military purposes (e.g. Pakistan’s arms purchase orders in 2006 alone totalled $5.1bn) but the indirect cost of the conflicts since 1980 has been catastrophic, although some people continue to believe in the ‘benefits’ of such ‘aid’.
The ‘aid syndrome’ stymied any serious effort to reform the economy. Infrastructure investments and tax reforms were neglected because the so-called austerity programmes advocated by the multilaterals hit subsidies but not the pockets of vested interests. Oil and food subsidies played a major role in Asia and the European Union respectively in keeping the prices low because the governments had fiscal space, of which Pakistan never had much. Cutting fat in defence and establishment expenditures and taxing the rich were not high on the multilaterals’ reform agenda as the focus was usually on indirect taxes (e.g. sales tax) that inevitably hit the lower-income groups.
But what is the point in complaining about the US’s ‘real agenda’ or the IMF’s ‘conditionalities’ when the country’s leaders are unwilling to tighten their belts and undertake necessary reforms and are known to own assets worth hundreds of millions of dollars abroad? Confidence and credibility are important issues and cannot be wished away.
Today, there is hardly a major country in Asia or the Middle East that owes any debt to the IMF except Turkey and Pakistan. Turkey is the largest borrower of the IMF and accounts for about 40 per cent of its $18.3bn total lending worldwide. Pakistan owes about $1.3bn.
Turkey went to the IMF in 2001 and the ruling Justice and Development Party (AK Party) came to power in 2002. During the last six years, Turkey’s inflation fell to single digits (though it has risen again due to higher energy and food prices) and foreign direct investment (FDI) rose, helping it to repay almost two-thirds of its loans from the IMF. Turkey still has issues (e.g. a persistent current account deficit) but AK’s economic record is one reason why it easily won the July 2007 elections.
India was nearly bankrupt in 1991 when a balance of payments crisis forced the country to pledge its gold by actually shipping 20 tonnes of it abroad. It was left with no choice but to approach the IMF. Its then finance minister Manmohan Singh recalled later: “There was a silver lining though. India launched the most sweeping economic reforms that year dismantling decades of licence raj, and didn’t ever look back although progress was fitful in the first few years.”
Pakistan can learn from the experiences of India and Turkey. They had serious problems, although their nature differed. However, their leaderships demonstrated sincerity and political acumen to undertake difficult reforms to enable their economies to recover. The reform process was led and executed by people who were highly respected for their integrity and competence. In Pakistan’s case, the real problem is not the IMF; it has been and continues to be the country’s leadership.
Source: Daily Dawn, 29/10/2008