Between The Devil And The IMF
The lesson here is that there is no such thing as free lunch. And if the IMF is picking up the tab — Naya Pakistan will be paying for it on the never-never, warns Miranda Husain.
Pakistan has been here before. Even if Imran Khan hasn’t. And the thirteenth time was never going to be a charm. Not least for a Prime Minister who, instead of celebrating one year at the top, risks encountering more chants of: Go Niazi Go. For the IMF (International Monetary Fund) has now formally approved the country’s latest bailout package to the modest tune of $6 billion over a 39-month period. And that means the gloves are off.
Of course, as everyone and their cat knows: the PTI government inherited a haemorrhaging economy. Thus going to the Fund — begging bowl firmly in paw — was always on the cards. Yet nine months were squandered pussyfooting around the issue; including touching up allies for $9bn collectively in a bid to avoid the diktats of a global lending institution that is viewed by many as inherently mercenary in nature.
And in the final dash to woo the IMF, Kaptaan switched the batting side. The Finance Minister, the Governor of the State Bank and the revenue chief were all sent off the pitch. Indeed, rumours began circulating along the corridors of power that the former had been effectively sacked at the behest of a security establishment displeased with lacklustre efforts to stabilise the economy. Especially given that defence expenditure typically gobbles up around 18-23 percent of the national budget. Thus Asad Umar was replaced by Dr Hafeez Sheikh; assuming the role of adviser to the PM on Finance, Revenue and Economic Affairs. Thereby adding one more jock to the PTI squad that had served under Pakistan’s last military dictator.
As expected, the IMF imposed stringent austerity measures as a pre-condition for negotiations. Along with the possible understanding that nearly half of the $6 bn outlay will go towards clearing previous debt obligations to the institution. Nevertheless, the markets have already begun responding to the release of the first tranche of $1 bn; with the US dollar falling more than Rs 1 on the interbank market (the top-level forex market where banks exchange different currencies). This is welcome news given that the USD had hit an all-time high of 164.2 to the rupee in the last week of June; sliding to 160 at the beginning of July. But considering that the rupee was trading at Rs 124 when the PTI took to the helm — long-term optimism is likely premature.
The Fund has, in its own words, admitted that its Pakistan policy will stunt economic growth. At the close of FY 2018-19, this hovered at 3.3 percent, down from 5.2 percent the previous year. According to analyst forecasts, this will plummet further in FY 2019-20 to 2.4 percent. Thereby accounting for the country’s lowest growth rate in a decade and warning of serious repercussions to an already degraded development sector.
Similarly, inflation hit 9 percent back in May and is expected to rise to 11-13 percent for FY 2019-20; also representing a 10-year high. To conclude that this bodes ill for the country is an understatement. For slow economic downturn means little hope of narrowing the fiscal deficit (occurring when government expenditure exceeds revenue generated). Skyrocketing inflation, by the same token, translates into escalating costs for energy, food and other essential commodities as well as goods and services.
The knock-on effect is that the cost of living goes up as does the price of doing business and borrowing money. All of which fuels the balance of payments (BoP) crisis; where Pakistan imports more than it exports. And for a hard country like this — one that doesn’t boast a robust manufacturing base — the news can only be but bad. In fact, when rising unemployment is added to the mix the result is a recipe for disaster: stagflation.
But what’s bad for the economy doesn’t necessarily bode ill for everyone else. In this case, the Army comes out on top. For this financial recession has come to a head since the boots retreated to the barracks and let the civvies run the show; or so the story goes. And now Immy’s detractors are quick to accuse him of doing the khaki bidding.
There has been much talk of witch-hunts against opponents. Nawaz Sharif, a man thrice-elected to head of government, by means fair or foul, is behind bars on corruption charges. As is former President Asif Ali Zardari. To be sure, the PTI chief deserves credit for taking on the big boys of Pakistani politics. Yet as long as Gen Musharraf escapes judicial remit — accusations of selective justice will not be far behind.
Ditto when it comes to the PM’s much-lauded loan commission; probing how the country acquired large-scale national debt. Significantly, this covers Islamabad’s longest period of uninterrupted democracy (2008-2018). Equally noteworthy is the inclusion of intelligence agency representatives from both the ISI and IB in the task- force. Needles to say, this has prompted additional charges of bias.
So, what is to be done?
Pakistan has always suffered when it comes to ensuring its elite cough up and pay due taxes. Towards this end, Khan introduced an amnesty scheme to encourage the citizenry to declare assets and pay tax accordingly. The upshot being that 137,000 people have reportedly registered under the pilot; resulting in Rs 70 billion collected in taxes and declaration of assets worth some Rs 3,000 billion.
The IMF, however, pooh-poohed designs to extend the programme on the grounds that it would hurt taxpayers’ morale and sense of fair play. But in a nation where less than one percent of the population traditionally pays tax — there was perhaps no need to pull the plug on this welcome initiative. The Fund appears to be prioritising its own repayment concerns.
And herein lies the rub. Interest on IMF loans are notoriously high and oftentimes exceed initial cash injections. As such, these have been blamed for crippling entire economies; particularly in Latin America. Under this model, states are actively encouraged to pursue export-led growth to service debts. With FDI (foreign direct investment) identified as the fastest way to realise this. Thereby provoking a perilous ‘race to the bottom’ as countries more or less do away with social and environmental protection costs in order to render their respective markets more competitive. All the better to attract MNCs (multi-national companies) keen to set up shop and take advantage of lax labour laws; among other ‘perks’. In this case, it is a path best not followed. For Pakistan is already well-known for failing to safeguard workers’ rights. From the all too routine deaths of coalminers. To media owners paying employees on a seemingly ad hoc basis.
More than a passing glance at the bigger picture is therefore required; going beyond recovery of looted wealth. Because if the country is to have even the slightest chance of becoming a viable and self-sustaining economy, the Centre must focus on transforming it into a regional manufacturing hub.
CPEC has helped out with infrastructure projects and the like; for more than a pretty penny. Similarly, important land reforms are imperative to eradicating antiquated yet prevailing notions of bonded labour. It is also about time that domestic workers were fully mainstreamed and that international commitments outlawing the practice of child labour upheld. Naturally, tangible results would not be seen for two or three generations. None of which fits in with the IMF timetable.
Of course, there are those who are wont to talk of Islamabad’s reduced leverage when dealing with the Fund. For the Musharraf era is long gone. And with it the country’s status as a prized US ally in the fight against global terrorism. Yet this had much to do with the personal rapport between the latter and a certain son of a Bush. Indeed, once out of office and out of action, the good general ‘fessed up to having redirected a cool $10 bn in American counter-terrorism aid earmarked for fighting the Taliban and Al-Qaeda to strengthen anti-India defences; effectively fudging the national budget. Thereby accounting for artificial increases in GDP per capita growth during this period.
Be that as it may, all is not lost. Pakistan still enjoys considerable clout in terms of delivering US geo-strategic ambitions in Afghanistan; that other Khan-Trump Twitter row notwithstanding. Also, its nuclear status acts as a buffer of sorts; meaning that the world powers will not allow the country to teeter over the brink and descend into absolute chaos. But this doesn’t automatically mean that everyone wants to see Islamabad prosper.
Thus those at the helm must do everyone — man, woman and cat alike — a favour and sincerely crack down on home-grown terrorist groups operating both here and abroad as well as choking financing channels to these networks. Moves have already been made in this regard.
On the same day (July 3) that the IMF deal was inked, Pakistani authorities registered 23 cases against Hafiz Saeed, the man believed to be the mastermind of the Mumbai attacks. He and 12 aides were booked for using five trusts to collect funds and donations for banned militant outfit, Lashkar-e-Taiba (LeT).
The naysayers, however, remain sceptical; arguing that action only occurred once the FATF (Financial Action Task Force) president warned that Islamabad could well join Tehran and Pyongyang on the dreaded blacklist come October; the anti- money-laundering watchdog’s next scheduled plenary session.
All that being said, the most pressing issue facing the PTI government is rescheduling loan repayments. To the IMF and those friendly nations that decided to splash the cash and save the economy from completely tanking. This is not to mention Pakistan’s CPEC obligations to the Chinese that are estimated to total a whopping $90 bn (over a 30-year-period against the original outlay of $50 bn).
And with the threat of stagflation forever looming large, analysts warn that the only option will be to go back to those who dug deep and request possible freezes on pending debt burdens; given that 30 percent of annual budgets are reportedly spent on tackling ever-increasing debt. All of which will likely subject Pakistan to the whims of its allies and ongoing inter-regional power plays. Or, put another way, the country’s very sovereignty will be further compromised.
The lesson here is that there is no such thing as free lunch. And if the IMF is picking up the tab — Naya Pakistan will be paying for it on the never-never.