Pakistan in the debt trap

Muhammad Jamil

Barring a few proverbial exceptions, almost all governments in the past took loans from the IMF and other financial international institutions; and every government said it was taking loans in order to pay back loans taken by the previous government. In this backdrop, the loans taken by the PML-N government under the current EFF arrangement will have to be repaid by the next governments. Meanwhile, Finance Minister Ishaq Dar has the opportunity to brag about building up $20 bn foreign exchange reserves, unparalleled in the history of Pakistan, claiming that it reflects sound economic management by the PML-N government. The fact of the matter is that the present government is engaged in reckless foreign borrowing through the IMF and issue of Euro bonds and domestic borrowing from the banks. It is also poised to sell prime national assets to meet the budget and balance of payments deficits.

It is common knowledge that there are always strings and conditionalities attached to the IMF loans such as reducing budget deficit, increasing the capacity to generate revenue, downsizing and privatization of state sector enterprises and further effecting increase in the prices of electricity and other utilities to balance the budget. It has to be mentioned that the IMF is driven by many factors, including the dictates of its larger shareholders - big powers - to promote their own security and economic goals, and its own financial interests. In the process, instead of being helpful in restoring long run viability of the economy, the IMF has been responsible for enabling the successive governments to survive on borrowing and postpone the difficult economic policy reforms including measures for controlling corruption, stopping loot and plunder of national resources, and making appointments in public sector organizations and institutions on merit. 

The Executive Board of the International Monetary Fund (IMF) on September 28, 2015 completed the eighth review of Pakistan's economic performance under a 36-month program supported by an Extended Fund Facility (EFF) arrangement. The Executive Board's decision enables the immediate disbursement of an amount equivalent to SDR 360 million (about US$504.8 million), bringing total disbursements to SDR 3.24 billion (about US$4.54 billion). Following the Executive Board discussion on Pakistan, Mr. Mitsuhiro Furusawa, Deputy Managing Director and Acting Chair said: "Economic activity is picking up pace and vulnerabilities are gradually receding.
Continued prudent policies and reform efforts are necessary to lock in the gains so far in macroeconomic stability and reinforce the foundation for sustained high growth. Additional steps to increase revenue mobilization, including broadening the tax base and strengthening tax administration, remain key to generating resources for priority spending and greater social protection, he added. 

Such IMF reports make a mention about the problems but give superficial assessment of the economy and the institutions, and suggestions for improvements. For example, in one of the recent report, the IMF statement is silent on the stagnation in exports, widening of the current account deficit, overvaluation of the nominal and real effective exchange rates, slowing down of growth in credit to the private sector, expansion of the informal or underground economy and increase in income inequality and corruption. The problem is that public-sector enterprises continue to bleed adding to the contingent liabilities that are kept out of the budgetary statistics. There is no improvement in the tax-to-GDP ratio while mega projects involving huge expenditure commitments are being inaugurated by the prime minister. Circular debt continues to accumulate and the government budget financing is at the mercy of foreign funding and domestic bank borrowing. 

In the above situation, the fake certificate of good health being provided to the government by the IMF is helpful for more foreign borrowing to solve the short-term liquidity problems of the government, but adds to the long-term insolvency of the country. IMF touts that it helps recover the economies that are in dire straits, but in fact it has the record of multiplying the problems of debtor countries. Its conditions of withdrawing subsidies, devaluation of currency and privatization of prime national assets adversely impact the people and the state. Pakistan is already in the grip of foreign debt of $65 billion, and despite the rescheduling of the debt (passing on to the next generations), one day it has to be paid. If this trend continues, Pakistan would find itself in the vicious circle; and it would have to take more loans to pay back the old loans. 

This rising debt would result in an increase in debt servicing and as a result increase in fiscal deficit. Secondly, Pakistan would be constrained to abandon development projects and find difficulty in allocating adequate resources for defence. Thirdly, the US and the West may persuade the IMF to stop providing loans to Pakistan to force Pakistan stop working on nuclear and missile programs. Perhaps this is the objective of the big powers and its proxy the IMF, who can bring Pakistan on the verge of bankruptcy. To avert the economic disaster, the government must show zero-tolerance to corruption, tax evasion, wastages and mismanagement in public sector enterprises. It should learn to live within its means and reduce the non-development expenditure by curtailing perks and privileges of cabinet members and parliamentarians.