So, what is happening in Pakistan? As usual, the nation is on a begging spree. But a lot has changed since the country achieved independence. Before Imran Khan was sworn in as the prime minister of the state, it happened to be one of the responsibilities of the finance minister to represent the nation in bailout negotiations with international lenders such as the International Monetary Fund and “Dost Mumalik” (such countries as China, Saudi Arabia, the United Arab Emirates and others, which Pakistan considers its friends in need); unfortunately, the “brand new” chief executive of the country, Imran Khan, has set a new precedent – now, the world will see Pakistan’s prime minister himself representing his state during such meetings.
Khan personally met IMF managing director Christine Lagarde on the sidelines of the World Government Summit and discussed the country’s financial situation with her. According to a political analyst (see the tweet below), because of Khan’s anti-IMF stance – he has on many occasions commented against the Fund’s policies – it was the IMF’s demand to have a one-on-one meeting with him, to know his decisions and views in relation to the IMF’s bailout package and its policies.
By the way, it is clear after this meeting that Khan for sure won’t commit suicide (as he said in the past) but will instead welcome any IMF help.
Pakistan’s Finance Ministry, headed by Asad Umar, is paralyzed and incompetent to an extent that a high-level official from it in November told the Dawn, “We are not dying for the [IMF] bailout at this stage and can capitalize on the available cushion, otherwise we would not have allowed the [IMF] mission to go like this.”
He added that Pakistan was now in a comfortable position after the availability of US$6 billion from friends against a $12 billion financing gap and another $3 billion to $4 billion could be arranged “from here and there.” Poor him! Surely he didn’t see this coming so early – precisely after two months of him giving these amazing remarks, his PM is on his knees in front of the same institution.
During the meeting, Lagarde apparently asked Khan to take “decisive actions” that would help it “restore the resilience of its economy” and “lay foundations for strong and more inclusive growth.”
All the Fund wants is to help Pakistan prevent an ultimate economic collapse; unfortunately, the Khan administration is showing reluctance at implementing these reforms as these structural changes, which would provide a firm and stable base to the country’s economy, might affect the Pakistan Tehreek-e-Insaf’s vote bank in the short term. Thus, at the cost of Pakistan’s long-term sustainable economic stability, Khan and his party – as always – will enjoy short-term unsustainable political benefits.
The IMF’s staff during November’s negotiations in Islamabad was demanding adjustments in energy tariffs. And yes it is necessary to reduce trillions of rupees of circular debt. The Fund is asking the government to increase its tax-collection targets so that it can make more revenue and stop incurring humongous budgetary deficits. For the same reason, it wants the government to reduce the provincial share of the resources, which currently is approximately 57.5% of the total annual budget.
To maintain a productive, comprehensive and competitive business environment, and ensure proper tax collection, the Fund has asked the administration to change its current audit policies that encourage businesses to get involved in unsustainable and not-so-market-friendly business growth.
What is wrong with all that? Nothing at all.
The Pakistani central bank’s full autonomy is necessary for timely and meaningful implementation of monetary policies for the financial and economic stability of microeconomic and macroeconomic factors. A free-float exchange-rate policy is extremely important when your exports are sharply declining, and the IMF is asking the state to implement this.
Just for the sake of political point-scoring and promoting its vested interests, Imran Khan’s government is working against the economic interests of the country.
If this is not the case, they should immediately start working toward fulfilling the IMF’s demands, at least, for the sake of Pakistan’s stability and prosperity.
Reportedly, the size of the upcoming IMF bailout package will depend on how Pakistan will pay its $6 billion short-term debt before June 2019. Sadly, for Pakistan, it starts with debt and ends with debt – a macroeconomic disaster.
The economy is inching close to an ultimate collapse. With a looming balance-of-payments crisis, plunging foreign-exchange reserves, declining growth rate, skyrocketing inflation, ebbing investors’ confidence and soaring unemployment, no doubt, if the situation will last a little longer, Pakistan will face serious consequences.
Meanwhile, as the short-term growth stimulus from Chinese investment in the name of the China-Pakistan Economic Corridor (CPEC) infrastructure projects is fading away, the truth behind the guise of “win-win” is getting revealed.
While the infrastructure projects to some degree will support growth in the long term, the macroeconomic imbalances will counter these effects.
It requires more than just investment from one or two countries – especially when their intentions are to eat the entire cake made up of the ingredients which you have purchased from their supermarket or to eat the cake made up of their ingredients at the cost of the stability of your kitchen.
For economic stability, the administration must facilitate investors. Poor-quality unskilled labor is also one of the major causes of everlasting economic instability and slow growth. Quality of education has to be improved. Proper allocation of resources is necessary. Investment in the education sector must be prioritized. Quality of education (from primary to higher education) in Pakistan is nothing but the worst.
Businesses suffer because of multiple taxes, high rates and bureaucratic corruption, which creates substantial barriers before one can enter the market. In the developed and developing worlds, checks and balances are there to improve quality of production and maintain business environment – in Pakistan, unfortunately, because of bureaucratic corruption, these are mainly to victimize investors or to force them to indulge in bribery. For investors with relatively less capital available, it increases the cost of doing business – to the extent that it forces them to leave the market.
There are enough countries with good-quality labor, suitable security conditions, where laws are business-friendly and duly implemented by the authorities, other than Pakistan to start a business and therefore, Pakistan will have to improve its business environment, tackle corruption, improve quality of education and infrastructure, facilitate investors who want to invest in green energy projects, reduce barriers to entry (other than illicit practices, such as high taxes), and invest in research and industrial development.
In the 21st century, you just can’t rely on your raw agricultural produce to earn foreign exchange. With continuous technological advancements happening up and down the hyper-globalized economy, it is impossible for a banana republic to succeed. A lot has to be done, such as ensuring complete independence of the central bank, adopting a market-based flexible exchange rate, taking strict measures to reduce circular debt, expanding the tax base and duly enforcing tax laws to increase revenue, implementing social policies to promote inclusive growth, reduce energy (electricity and gas) theft, adjusting power tariffs to reduce budget deficit, etc.
A $20 billion ‘advance’
Saudi Crown Prince Muhammad Bin Salman, on his two-day visit to the country las month, blessed it with a $20 billion “advance.” It is not clear what Pakistan will give Saudi Arabia in return but you can read my previous analysis here on what it will give in exchange for the monetary aid from the “brotherly nation.”
So the Saudi kingdom will build a $10 billion oil refinery, a $1 billion petrochemical complex, and two RLNG (re-gasified liquefied natural gas) plants worth $4 billion and $2 billion for the mineral development sector. They say that this refinery will help Pakistan save $1.2 billion annually and it will create jobs – the Chinese were also saying things like this before they pushed the country into a debt trap.
The kingdom had already given $3 billion in aid to Pakistan the last time Imran Khan visited the country to ask for financial help.
Dear Pakistan, IMF is a savior
To help indebted economies that are suffering from looming balance-of-payment crises and severe shortages of foreign reserves, to help them pay their import bills, to stabilize their currencies, refurbish their foreign-currency storage, and very important, while doing all this, to help suffering states strengthen their economic growth, in 1944, at the Bretton Woods Conference, an idea fundamentally coined by the economists Harry Dexter White and John Maynard Keynes, the International Monetary Fund came into being. Its prime objective was promoting international monetary cooperation, free international trade, high employment, exchange-rate stability, sustainable economic growth, and protecting the global financial system from absorbing the brunt of economic crises faced by a single or a group of member countries – that is, to confine the impact of financial instabilities – as much as possible.
In short, for the sake of the greater good of the world, the IMF is working day in and day out.
Member nation-states contribute funds to the pool through a quota system from which countries experiencing balance-of-payments problems can borrow money. As of 2016, the Fund had about $666 billion in its reserves. In return for financial resources, the International Monetary Fund requires the member state to adopt certain micro and macroeconomic policies to overcome the problems that led it to seek financial aid from the international community.
These structural reforms help the suffering state to alleviate its balance-of-payments crisis without opting for irresponsible measures – which may affect its own and the world’s financial and monetary system. Also, these conditionalities are meant to safeguard IMF resources by ensuring that the country’s balance of payments will be mature enough to service the loan on time and in a proper manner, so that the resources of the Fund can be used by other suffering member economies.
All in all, to make sure that in its difficult economic situation, the country’s financial system prospers, grows and strengthens, the IMF demands certain changes in Pakistan’s macroeconomic and structural policies which were responsible for all its sufferings.
As soon as the government of Pakistan digests these facts, it will choose to adopt the Fund’s policies and avoid taking loans from so-called “friendly nations.”
Believe me, it is the only possible and sensible path to follow for the permanent cleaning up of this mess.
This article first appeared at DailyO (India Today).