Pakistan’s official economic managers have been claiming over the past one year or so that the country would be in a position to live without IMF after the conclusion of the current three-year Poverty Reduction and Growth Facility( PRGF) which will come to its end in 2004-05.

With nearly $10 billion in the foreign exchange reserves (FER) and a saving in debt servicing of about $2.7 billion in the next three years, thanks largely to an extradordinarily generous debt rescheduling obtained in December 2001, Pakistan would surely have the fiscal space in the next five to six years to be able to live without the emergency assistance of the Fund.

But then what would happen after say 2009, if the population continued to grow at the rate of nearly 2.5 per cent;if the agriculture sector remained totally subservient to the weather cycles and the rate of literacy remained stagnant at around 50 per cent? Though the country completed for the first time one full IMF programme highly successfully in September 2001 when the the 10- month long Standby Arrangement(SBA) amounting to $596 million came to an end, the official economic managers as well as the the Fund officials are still putting a lot of store by macroeconomic stability and are continuing to keep a tight leash on the budgetary expenditures on development sector which makes it difficult for the overall economy to show any signs of the kind of growth that is needed to cover the socio-economic gaps that are likely to emerge by 2010.

Pakistan had been running chronic trade deficits, and its foreign exchange reserves have always remained at a low level. In the measntime, with the absolute amounts of principal and interest payments rising each year, external debt servicing was proving a major burden on the Pakistani government. Around the middle of 1998, Pakistan’s FER plunged to a level equivalent to about two weeks’ imports, pushing the country to the brink of default. Debt repayment difficulties had come to a head already in the first half of 1970s, forcing Pakistan to reschedule its external debt twice in 1972 and again in 1974. Since the mid- 1970s, however, Pakistan had an inflow of foreign currencies in various forms,and used them to repay debts and make up for international balance of payments deficits, putting off taking fundamental steps to solve the chronic problems like population growth, falling rate of literacy and uncertain agricultural production. From the mid-1970s through the 1980s, the sharp rise in the remittances from Pakistani nationals working in the Middle East was instrumental in covering the balance of payments gap. The total amount of remittances exceeded the value of exports in 1982-83 and 1983-84. While remittances from overseas peaked in fiscal 1982-83, the new source of hard currencies came in the form of military and economic assistance from the United States following the Soviet invasion of Afghanistan. The Reagan administration provided $3.2 billion in aid in the five years from 1981, and pledged an additional $4 billion in 1986. The US assistance was suspended in 1990 following the Soviet withdrawal from Afghanistan. In the early 1990s the then government of Nawaz Sharif allowed resident Pakistanis to open foreign currency accounts as part of the financial market liberalization under IMF pressure, creating a system of siphoning foreign currencies in the private sector.

In the mid-1990s, the balance of payments gap was also covered by foreign direct investment in privatized electric power businesses as well as by foreign currencies acquired through partial transfer of equity shares in Pakistan Telecommunication Corporation (PTC). During this period Pakistan continued to register trade deficis. In brief, Pakistan kept meeting the balance of payments deficits by compensating for its inability to earn sufficient foreign currencies through unsustainable methods. After the nuclear tests, these methods were no longer operative,and Pakistan found it extremely difficult to service its external debts without assistance from the IMF and subsequent external debts rescheduling approved by the Paris Club.

Full assistance to Pakistan under the IMF structural programme started after the death of Zia in 1988. In fiscal 1987- 88, Pakistan’s budget deficit reached 8.5 per cent of GDP while inflation rate rose to 10 per cent. The decline in remittances from pakistanis working in the Middle East and increased imports exacerbated the country’s balance of payments problems. All these problemns combined to destabilize Pakistan’s economy, prompting the country to seek support from the IMF. On December 28, 1988, the Pakistani government signed an agreement with the IMF to introduce a $2.1 billion, three-year Structural Adjustment Facility (SAF). The programme was later extended by one year, but ended without achieving the objectives.

Pakistan, under the second Sahrif government , then concluded a three-year Enhanced Structural Adjustment Facility (ESAF) accord for $1.56 billion, but this programme was suspended following the nuclear tests in May 1998. In January 1999, the IMF lending to Pakistan was resumed after the country was driven towards default amid the plunging foreign exchange reserves. The Paris Club also approved the rescheduling of $3.2 billion in official debts. In May 1999, however, the IMF lending was again suspended due to Pakistan’s failure to honour conditionalities attached to the loan. The Musharraf government and the IMF started negotiations on the resumption of lending in January 2000, and on November 2000, the IMF Executive Board approved SBA loan for 10 months. The accord paved the way for Pakistan to receive loans from World Bank and Asian Development Bank, while the Paris Club decided to reschedule debt repayments in arrears as of the end of November 2000 and debts worth $1.8 billion falling due between December 1, 2000 and September 30, 2001.

The terrorist attack on the US happened at a crucial moment for Pakistan’s economy. The attacks came just as the SBA to Pakistan was all but completed, and Pakistan and the IMF began talks on the medium-term PRGF amounting to $1.3 billion. The three year programme is linked with debt rescheduling by the Paris Club as well as lending programmes of the WB and ADB. The Paris Club agreement provides for a comprehensive restructuring of a stock of debt amounting to $12.5 billion and allows Pakistan to save $2.7 billion over the next three years, freeing up resources for social sector expenditure and development projects.

As Pakistan pledged to cooperate with the United States over the the fight against terrorism, the Bush administration, as a first step, decided to remove military and economic sanctions imposed after the 1998 nuclear tests. It also approved the rescheduling of $379 million in official US credits in line with the Paris Club decision of Jan. 2001. In addition, the US has decided to extend one billion dollars support to the government of Pakistan.

Once before during the early 1980s too Pakistan had been accorded such a genberous fiscal space by the inflows of foreign currencies to aid Pakistan in its war efforts against the defunct Soviet Union which had invaded the neigbouring Afghanistan. But this chance was lost by the then military government which instead of using these concessional resources on curbing the population growth rate, improving the rate of literacy and liberating the agriculture sector from the vagaries of weather, wasted them on things which cannot be acocunted for.

This is what is being feared even today. Though the PRGF has completed one full year, there seems to be no improvement in the level of poverty in the country. And so far, there appears no sign of the government’s willingness to take in hand, and quickly, economically viable development projects which would generate jobs as well as expand the growth capacity of the economy. Both the government and the IMF still seem to be engaged in keeping a tight lid on public sector spending and awaiting the private sector to play its ‘rightful role’ as the engine of growth. But there appears to be a misplaced confidence in this sector as it seems still awaiting for the public sector to take the lead.