Cover Story
Dating with Debt
For decades, the prevailing political mindset has been the root cause of the economy’s precipice—the prime reason for applying for IMF loans despite harsh conditions.
It was in June 2013, and there was a flurry of activities in the meeting rooms at Hotel Serena Islamabad. People moving in and out, some huffing and some puffing, some with red eyes and some with tousled hair. At first glance, it seemed that some company was holding job interviews. As we watched this to-ing and fro-ing, I saw a very senior officer of the Finance Ministry come out of one of the rooms. When we asked him about this hustle and bustle, he revealed that staff negotiations were going on between the IMF and Ministry teams. He added that it was just like a classroom in a junior high school, and the team from Washington was treating them as school students. The outcome, of course, was that Pakistan received a $4 billion extended fund facility.
Fast forward to 2024, Pakistan had again gone through what should now be termed a “ritual,” a scenario since 1958 when the nation secured the first IMF bailout amounting to $25,000. The stakes are now high, and the conditionalities of the IMF are more drastic this 25th time. But then, what can a country do when lessons are not learned, when profligacy and extravagance are standard features in federal and provincial governments, when decision-makers consider the loan as raffle winnings, and when these financial wizards have to ensure compliance with the conditionalities, all they have to do is to keep on increasing the rates of utilities, send out income tax notices that have zero impact, set up task forces to ensure fast track privatization of SOEs and hype up the determination to reform whatever needs to be reformed. And, naturally, the mantra that it would be the last time Pakistan knocked at the hallowed portal of the IMF.
Does the man on the street really understand what the IMF is and why the euphoria is hyped up by government spokespersons and whoever is the finance minister of the day when the IMF approves the loan? Does the man on the street realize the why and what of bearing galloping inflation of items of daily use, currency depreciation, looming job loss, back-breaking increases in rates of utilities, and the media and businessmen raving about the PSX Index? Does the man on the street comprehend the mechanism of the IMF funding, and why is he confused when the government mouthpieces promote IMF loans as crucial for the nation’s progress, whereas, in his opinion and experience, the aftereffects have always been economic, social, and political instabilities?
Pakistan keeps losing the financial battle. The nation was on the brink of default in 2023, and the pundits were comparing Pakistan with the Sri Lankan default. During this dark moment in Pakistan’s financial history, the “benevolent” IMF bestowed a stopgap arrangement that averted the default. However, the financial managers took this as an invitation to observe and apply the ritual again. They faced the ominous burden of the balance of payments, the unstoppable downward slide of macroeconomic indicators, the drain on resources due to an exorbitant energy bill, and the mother of all evils, the hemorrhaging of money by state-owned enterprises. No one dared to put a brake on all these because politics took the front seat by pushing pragmatism way back. This political mindset is the root cause of the economy being on the precipice for decades - the prime reason for applying for IMF loans despite harsh conditions.
Economists, financial experts, and many from the private sector believe that the IMF prescription is focused on revenue generation, not spending. This sort of “hands-off” policy of the IMF allows successive governments the leverage to indulge in political patronage (mainly through pork barrel projects that are notorious for large-scale misuse and misappropriation), white elephant projects (another mode of wasteful extravagance), and stuffing government departments, ministries, state-owned enterprises, etc., with human resources (hired generally because of political affiliation and rarely on merit). The dithering, dilly-dallying, and dawdling displayed by the Privatization Commission, tasked with fast-track privatization or disinvestment of SOEs, is mainly to perpetuate political patronage despite the flagrant hemorrhaging of financial resources. Will the expected $7 billion open the floodgates for more political employment, non-essential outlays, or unnecessary subsidies to the elite capture? Likely.
The World Bank, in its latest report, “Pakistan Development Update,” noted that although the economy is showing signs of recovery, it is not sustainable and would not address reduced poverty, which is now over forty percent. It described the worsening human development situation as a “silent, deep, human capital crisis.” Princeton economist Atif Mian warned that Pakistan faces an unprecedented financial crisis driven by complex challenges. He enumerated the convergence of skyrocketing domestic and external debts, unsustainable pension liabilities, and a failing power sector as critical factors plunging Pakistan into an economic abyss. He and some economists talk of three critical “doom loops” faced by Pakistan. The fiscal loop is paying interest on loans and pensions; the external loop is the vast gap between imports and exports; and the confidence loop is the disillusionment of youth, the low foreign direct investment, and the lack of trust in the pillars of the state.
Sharan Burrow, the former General Secretary of the International Trade Union Confederation and a person that this writer greatly admires, very meaningfully stated, “It seems evident that the IMF has learned nothing from its inequality-inducing policies during the 1980s debt crises in Latin America nor from its recession-deepening response to the East Asian crisis of the late 1990s. In both regions, the IMF has become synonymous with making bad situations worse.” It is also worthwhile to agree with American economist Steve Hanke, who stated, “Why is it so hard for the IMF to understand that putting out the fire comes before fireproofing the building?”
The writer is the former president of the Karachi Chamber of Commerce and Industry.
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