Nothing Naya About IMF Deal: Pakistan’s History Of Sleep Walking Into Debt Trap

Nothing Naya About IMF Deal: Pakistan’s History Of Sleep Walking Into Debt Trap
Muhammad Ziauddin in this article lays out the history of Pakistan's IMF programmes and the political repercussions they brought upon the country. "If past experience of the Fund programmes is any measure it is hard to have faith in the assurance held out by Hafeez Shaikh", he argues.

When the two, the PTI government and the opposition, blame each other for the socio-economic mess the country is facing currently, both seem right. But they are wrong as well.

The economic model that the two, the PPPP and the PML-N, followed during their respective regimes of five-years each over the last ten years, was based on the faulty prescription of what is called the Washington Consensus. Therefore, the mess.

The Washington Consensus refers to a set of broadly free market economic ideas, supported by prominent economists and international organisations, such as the IMF, the World Bank, the EU and the US. Essentially, the Washington Consensus advocates free trade, floating exchange rates, free markets, macroeconomic stability, privatisation of state enterprises, abolition of regulations that impede market entry or restrict competition, and prudential oversight of financial institutions.

The PTI government that came to power about ten months ago promising change (Tabdeli) has so far followed almost the same model but its implementation is being managed by an inefficient team of governors led by Kaptaan Imran Khan, the Prime Minister. Therefore, the mess has turned even worse.

Indeed, it is not the last 10 months or for that matter the last ten years that have brought us to this sorry pass. It is the baggage of the last 40 years.

The Beginning Of The End

At the time of Independence, we had no industry worth the name, neither did we inherit any industrialist of repute. All that we were bequeathed with were small-time traders and one bank. Most of these traders had come over from the other side of the border. They were not entrepreneurs and neither did they have the wherewithal, like capital etc. to set up industries. So it was the fledgling state which per force had to play the role of the main provider of social (education, health etc.) and physical infrastructure (energy, water, transport etc.).

A number of industries, mostly of textile were set up by a public sector entity – the Pakistan Industrial Development Corporation (PIDC) – and transferred to some of these politically and socially influential traders for peanuts.

This economic model had but one big flaw. It lacked distributive justice which by the late 1960s had resulted in the emergence of a wide gap of inequality between the West and East Pakistan paving the way for the creation of Bangladesh by 1971; and the residual Pakistan was by then was literally captured by the so-called 22 families who had cornered most of the wealth created by the nation.

Public Sector Expands

The following five years of Prime Minister Zulfikar Ali Bhutto saw the dismantling of the 22 families and the creation of an industrial base of sorts in the public sector as in this period one saw the public sector setting up the Heavy Mechanical Complex, the Heavy Electrical Complex, the Machine Tool Factory, the Special Steel Factory, and a couple of fertiliser factories etc.

Most of these facilities were set up with the help of China. The defunct Soviet Union meanwhile had assisted us in setting up the Pakistan Steel Mills. ZAB had also nationalised banks, educational institutions, health facilities and transport and at the same time introduced a sort of land reform as well and set up entities like Rice Export Corporation, Cotton Export Corporation, Agriculture Price Corporation etc.

And just before he was thrown out he had also worked out a plan to introduce income tax in the agricultural sector at the federal level. He had also set up an Export Processing Zone (EPZ) in Karachi.

Bureaucratization Of The Economy

During the 11 years of President General Zia ul-Haq his finance minister Ghulam Ishaq Khan who perhaps had not read a single book on economics in his life time totally bureaucratised the economy, raised questions on the steel mills, closed down the EPZ and gobbled up not only the assets created by ZAB in the public sector but also at least about 50 billion unencumbered US dollars that this country received from all over the world except the USSR during the first Afghan war.

And when Zia died in an air crash the country had to pledge its cash crop in a foreign bank for a paltry sum needed to run the government and the then caretaker finance minister had to rush to the IMF for an emergency assistance.

A programme was approved by the Fund but conditioned its disbursement on its approval by the incoming government of Benazir Bhutto.

Greed Is Good

Meanwhile, by the mid-1980s Pakistan had started following the economic model which had been propounded by the Milton Friedman’s Chicago School of thought that promoted what is called free market economy. In this model greed was good; small was beautiful; and it was not the business of the government to be in business. In essence a Washington Consensus prescription.

The incoming Prime Minister Benazir Bhutto had spent much of her exile years in the UK when Mrs Thatcher was holding the economic fort and which had even forced the UK’s Labour Party to abandon its socialist policies and introduce what was called the New Labour which was a caricature of Mrs Thatcher’s economic model.

Benazir was seemingly greatly influenced in her thinking by the New Labour’s policies and, therefore, quickly embraced the prescription of the Washington Consensus abandoning, but seemingly half-heartedly, the socialist policies of her father.

So, from then onwards Pakistan just sleep walked into a debt trap from which it now seems impossible to get out as long as we continue to follow the economic model built on the prescription of Washington Consensus.

The Days Of Free Lunches

Pakistan could perhaps complete no more than three out of the 12 IMF programmes which it was obliged to enter since the mid-1980s. Of the three that we completed in this period, one was the last one undertaken in 2014 by the PML-N in its last tenure reportedly with as many as 12 waivers.

Of the other two that were completed with more than 12 waivers, one was a front-loaded Standby programme of 10 months amounting to around $568 million signed in June 2000 and completed on September 30, 2001; the other was a three-year Poverty Reduction and Growth Facility (PRGF) amounting to $1.3 billion signed on December 7, 2001 and completed on December 30, 2004.

Cash flow savings during the life of the 3-year PRGF were estimated at $2.7 billion, with significant savings during the subsequent decade, thereby removing the spike in debt service commitments.

The PRGF programme was immediately followed by the Paris Club’s (group of bilateral donors) offer, made on December 13, the same year, of a $12 billion “stock re-profiling” of loans for 38 years under which Pakistan was to pay nothing in debt servicing during the first 15 years.

The stock re-profiling of debt for 38 years were to eventually provide us 30 per cent debt write-off. The agreement included $0.5 billion loans write-off and debt swap by Canada, UK, Italy and Germany. Pakistan was the fourth country after Egypt, Poland and Yugoslavia to get this unprecedented package from the Paris Club.

According to the announcement of the then finance ministry officials the total stock of debt affected by this arrangement was in excess of $12 billion. Two-thirds of this debt related to concessional lending, and was to be rescheduled over 38 years, including a 15-year grace period. The remaining involved guaranteed commercial debt, and was to be rescheduled over 23 years, including a 5-year grace period.

This reorganisation differed from Pakistan’s previous rescheduling agreements not only in that it treated the entire stock of eligible debt, inclusive of previously rescheduled debt, but also in that the repayment terms for concessional loans were nearly twice as favourable as in previous arrangements.

The Paris Club agreement was seen as a major milestone for the government’s economic reform agenda. The delegation, led by the then Finance Minister, Shaukat Aziz, an imported technocrat (banker) of Pakistani origin reportedly made a strong plea before bilateral creditors that Pakistan’s request for debt relief should be seen in the light of President Pervez Musharraf’s commitment for economic reforms and the policies pursued by his government over the last two years.

The representatives of the International Monetary Fund, the World Bank, the Asian Development Bank, and UNCTAD gave their independent views of Pakistan’s economic situation before they came out with support for the government’s request.

Here are some of the exuberant claims made by Shaukat Aziz on getting the debt re-profiling offer from the Paris Club:

      • “It was beyond expectations and something amazing and incredible”.

      • “Since Pakistan is implementing its economic reform programme, the Paris Club decided to favour it in a big way to help lessen its debt.”

      • “This all happened due to restoration of our credibility”.

      • “Now our cash flow will greatly improve which will provide us an opportunity to look after our neglected social sectors adequately”.

      • “This agreement is unique, not only for Pakistan, but also in terms of the Paris Club... and it further testifies to changing attitudes of the international community towards Pakistan”.

      • “We consider today’s agreement as providing Pakistan with a credible exit from its external debt problem and with sustainability”.

      • “The donors have showed flexibility and understanding of Pakistan’s debt burden by not strictly following the conventional terms of the Club. This understanding resulted in a stock treatment of virtually all of Pakistan’s outstanding bilateral debt which would provide the much needed fiscal space for poverty alleviation and enhanced allocations for the social sector”.

The 10-month Standby arrangement for $568 million ended with the recession deepening further which in turn discouraged investment, causing job losses and failing either to improve revenue collection or reducing the budgetary deficit to the desired level.

The PRGF programme and the Paris Club stock re-profiling of debt were used by the banker-turned finance minister of the military regime to send the nation on a consumer spending spree that immediately caused manifold increase in oil-import bill part of which was assuaged with the deferred payment facility. With the increase in the sales of white goods increased the consumption of electricity as well. But the government of the day paid no attention to the generation needs. And by the end of 2006-07 this neglect had resulted in the country being seized by a long drawn bout of massive load-shedding. And the economy was further strangulated by the international financial crisis of 2008 that had caused the world oil prices to go through the ceiling shooting up from $60 a barrel to $150 a barrel.

Musharraf Regime Betrays

Since Musharraf’s government had started collaborating with the Americans in their second Afghan war and was expecting another long series of sumptuous US free lunches including the promised Coalition Support Fund for compensating our cost for fighting the American war on terror (finally billed at $33billion), it did not bother to use the massive fiscal space provided by the PRGF as well as the debt re-profiling by the Paris Club to introduce the much needed structural reforms because of which the incoming government of the PPPP led by Asif Ali Zardari had to face not only round the clock load shedding but also the increase in world oil prices forcing it to rush to the IMF for what was then the 11th Fund programme which had to be abandoned after the first tranche as our private sector forced the government not to introduce the second phase of structural reforms that threatened the profit margin of the private businesses.

It was indeed, because of this reluctance of our predatory private sector to share the resulting hardship of reforms with the poorer sections of the population which had forced Pakistan to abandon most of its 22 IMF programmes after the first tranche. That is why Pakistan at one time was known as one-tranche country.

The successive governments which entered into these Fund programmes did not feel any qualms in increasing the prices/fares of all essentials like food, energy, transport and housing etc., which affected the poorer sections of our society to obtain the first trance. But they would get cold feet when it came to introduction of second phase of reforms which meant causing some kind of reduction in the income and wealth of the ruling elite comprising the feudal aristocracy, big business, civil-military bureaucracy and the leadership of ruling political parties – the group that had captured the state from its very inception.

No Free Lunches Any More

The other day another imported international technocrat (economist), Prime Minister Imran Khan’s advisor on finance and economic affairs, Dr Hafeez Shaikh, while addressing a press conference assured that the coming year would be the year of stabilisation and steps would be taken to strengthen the economy and protect it from dangers to set sustainable basis for growth and development.

But if past experience of the Fund programmes is any measure it is hard to have faith in the assurance held out by Hafeez Shaikh. Technocrats like him take up such political jobs only to improve their CVs, not to help out a country in the midst of an economic melt-down.

One should also keep in mind that the days of free US lunches in the shape of generous PRGFs and even more generous Paris Club debt re-profiling are over. The kind of front-loaded conditionalities that the IMF is imposing on us betrays the impression that the days ahead are going to be highly testing and challenging for Pakistan.

The PTI-led coalition government does not seem capable of handling this challenge. And its finance team seems even more incapable. More likely the team is going to make matters even worse for Pakistan as the team, it is believed by some quarters, would be working not in the interest of the country but that of the IMF which gets dictation from Washington where currently we stand friendless.
Lead Analyst

The author is a senior journalist and editor.