September 2016

Ishaq Dar with Harald Finger

The three-year International Monetary Fund (IMF) Extended Fund Facility (EFF) programme, concluding in September, seems to have just added on to the economic woes of Pakistan. According to an expert observation, the programme exploited an inequitable and corrupt taxation system to meet the IMF’s fiscal targets. Massive international borrowing was also used to shore up the external reserves. It failed to create employment- generating and export-oriented growth in spite of the massive decline in global oil prices. It is now the eighth year of an economy that is averaging GDP growth of around 3 per cent, notwithstanding the dubious government claim of higher growth in 2016.

The very fact that the Fund has allowed the government as many as 16 waivers during the course of its programme reflects either an admission that conditionalities with regard to these waivers were not feasible or the Fund’s board favoured the concession because it was inclined to bail out the sitting government in Islamabad.

There has been no reprimand from the Fund on the government’s failure to deliver on its privatisation conditionality. Neither does the Fund feel obliged to explain why it has allowed the government to remove the burden of energy-related circular debt, which has gone up to Rs. 656 billion (Rs. 335 billion in arrears and a fresh burden of Rs. 321 billion). This concession allowed the government to achieve a near ideal budgetary deficit figure for the outgoing year as opposed to the over 8% that the previous government showed in 2013 when the circular debt had amounted to just Rs. 450 billion. An outstanding amount of Rs. 622 billion that the government had borrowed from commercial banks during the outgoing year for commodity operations has also been removed from the budgetary obligation for 2015-16.

A matter of greater concern is that the IMF programme has ended with a significant decline in the country’s export earnings, which can only be partly explained away as a consequence of worldwide recession. The sector has also been affected by the government’s consistent refusal to release refunds amounting to over Rs. 300 billion to exporters, causing huge liquidity problems. Power load-shedding also seems to have caused serious disruption in the productive sector, causing the loss of markets to regional competitors who are said to enjoy crucial export-related official concessions. There are reports that many textile mills have closed down because of liquidity problems and energy shortages or because they are unable to compete with regional suppliers.

Both the Fund and the recipient seem to be highly satisfied with the accumulation of foreign exchange reserves equivalent to four weeks of the import bill. However, most of this amount comprises commercial loans carrying heavy interest rates, with just a part stemming from the spillover of remittances. With the income of the rich Middle East countries plummeting in recent months, there appears a possibility that the millions of Pakistanis working there and sending substantial amounts of remittances home may lose their jobs. The trend can now be clearly witnessed in Saudi Arabia, where thousands of expatriates, including hundreds of Pakistanis, have been left destitute. They have not only lost their jobs, but are said to have been denied salaries due to them for months.

Former Finance Minister, Dr Salman Shah, is of the opinion that the IMF has not made a correct assessment of the situation on the ground in Pakistan, as growth is not on target, investment is low and required reforms have not been undertaken.

Ashfaque Hasan Khan, former Adviser to the Finance Ministry, said that contrary to the IMF and government claims there is no solid foundation for the economy, the growth rate hovers around 3 to 3.5 percent; the deficit is 8 per cent, exports and remittances are going down, and industry has not revived. According to him, installed power capacity decreased in 2015-16 against 2013-14.

Since both Dr Shah and Dr Ashfaque were associated with the Musharraf regime, their views on the state of the economy under the present government could perhaps be considered biased. But this cannot be said of Dr Hafiz Pasha, Professor Emeritus and former Finance Minister, who said that warning bells have already sounded for the economy. In the first month of the current fiscal year, 2016-17, remittances have plummeted by 20%; exports have declined by 7%; imports show an increase of 6% and foreign direct investment a decline of 15% . The current account deficit is likely to reach $500 million in July. All these negative developments have led to a fall in foreign exchange reserves of over $400 million over the last six weeks.

Various measures have been adopted over time in Pakistan to lift the country out of its depressed socio-economic moorings, but to no avail. For a long time, it depended on bilateral external assistance, mostly from the US, which came in the shape of cash and kind (military equipment, weapon systems and aircraft plus commodities). From the 1970s onwards, it started receiving significant assistance from Saudi Arabia and not-so-significant aid from China. In the 1990s, this source of aid increased manifold, along with assistance from Europe.

From 1958 onwards, multilateral assistance started flowing in from the World Bank (WB), as well as the International Monetary Fund (IMF). Since then, the WB has financed a number of physical and social infrastructure development programmes. The IMF has entered into 16 structural adjustment programmes with Pakistan, but except for two, all ended prematurely. The one that was signed on June 12, 2001 (Extended Credit Facility/PRGF) was completed ‘successfully’ on May 12, 2004 and the other, signed on September 4, 2013, was completed ‘successfully’ in September this year with as many as 16 waivers.

Since the 1990s, the country has also received generous assistance from affluent countries through their international non-governmental organisations (INGOs), bypassing the government in Islamabad and going directly to what, in the international and local NGOs’ assessment, were the most needy sectors or sub-sectors, like education and health. Local NGOs began to flourish when bilateral and multilateral aid-givers concluded the ruling elite in underdeveloped countries hijacked disbursed aid funds.

Let us take a look at bilateral assistance. Most rich countries design their foreign aid programmes to promote their own respective global, regional and indigenous economic interests. So out of every dollar of assistance, 99 cents go back to the donors in the shape of exports, transfer pricing, shipping, insurance, consultancy and technical assistance fees. A large part of the remaining one cent is siphoned off by the ruling elite of the recipient country, leaving next to nothing for inclusive socio-economic development needs. The Saudi and Chinese bilateral assistance was, however, different in design but even the benefits of this assistance went into meeting security needs rather than social needs.

Of the three multilateral aid flows, the two from the World Bank and Asian Development Bank did help. Since these were designed with highly restrictive rules, most of the assistance remained under-utilised, although the part that was used in full showed highly promising results. In any case, these interventions did not impact the national economy to any significant degree.

The IMF had proposed a list of improvements for successive governments in Islamabad to adopt. They focused on sensible things such as macroeconomic stability through a reduction in the size of the government sector, a flexible exchange rate, capital account liberalisation, privatisation, improvement in the efficiency of public service provision and introduction of anti-corruption laws. However, since these reforms were to be implemented by the political and bureaucratic leadership that had mismanaged the economy in the first place, new policies were either not adopted or implemented only half-heartedly.

As opposed to the route Pakistan has taken, China, Turkey, Russia, India and Brazil are some examples of countries that have followed a different route to economic growth and prosperity.

Thus growth in Brazil is not attributed to the engineering by economists of international institutions or aid flows Rather, it is the consequence of diverse groups of people courageously building inclusive institutions.

In the rest of the BRIC countries as well as in Turkey — most in a state of transition, politically as well as economically — it is the social market economy that guarantees inclusive development. These countries do not follow a common pattern of development but temper their attempts at inclusive development with their own respective comparative advantages, both politically and economically.