Doing without IMF loan
Pakistan had last time taken a $1.3 billion loan package in 2001 which concluded in 2004. These programmes had compelled the country to liberalise its economy on neo-liberal lines, sell its big industrial assets, reduce tariffs, and cut down drastically its expenditure on health and education. While the IMF was on board, foreign investment did not pick up till such time capital and financial inflows, after 9/11, brought about economic recovery and growth.
Senior government functionaries are emphatic and consistent in their denial of any move to seek IMF bail out and intend to put more stress on seeking help from friendly countries. Even Asif Zardari, in his first press conference after assuming office of the president, categorically rejected the idea of going to the IMF and said Pakistan will instead ‘tighten its belt’ to overcome the difficulties. His finance minister reiterated on Friday the goverment’s position.
But a recent report by the Citigroup, quoted by Newsweek, “recommends” (sees) Pakistan as the IMF’s next big customer. The report finds Pakistan running a big risk of sovereign-debt default next year, primarily because of a weak rupee and higher energy prices (oil prices are now falling). And it comes at a time when the IMF seems going out of job and is ‘on the track of permanent downsising’ since early this year because emerging-market growth with comfortable foregn exchange reserves has left it without any clients.
At present, the IMF does not have a programme in any country except Turkey. And its latest customer is Georgia, now an ally of the West, whose economy suffered because of last month’s Russian invasion. So, the IMF would naturally be looking for clients. It will even offer its credits at very favourable rates in the beginning to lure a client into borrowing. But once one starts borrowing and becomes dependent, the rates may be raised. The current commodity boom, ( though weakenin now), the report says, might just put the IMF back in business.
Pakistan’s economy needs a substantial infusion of external funds as an urgent step to achieve some measure of stability. But becoming IMF’s ‘next big’ customer shall be the most disastrous option. The hard facts are that the country has spent more than $7 billion of its foreign currency reserves in 10 months (reserves have been falling at a rate of about $800 million a month), and its budget deficit has reached its highest level since the late 1970s.
Latest data released by the finance ministry shows the reserves fell from $9.13 billion on August 30 to $8.89 billion on September 3, the lowest level since 2002, of which the central bank’s reserves accounted for $5.5 billion.
The country is, in fact, struggling to pay its debts, though it was recently granted breathing space by Saudi Arabia, which it owed almost $6 billion for oil already delivered.
The Saudis have agreed in principle to provide an oil facility, which would defer the payment of part of the oil import bill but they are not eager to help us in any extraordinary manner.
The five-member IMF team which arrived in Islamabad on September 12 has been holding talks with officials of economic ministries and the State Bank and is to give its expert advice on the macro-economic framework prepared by the officials concerned.
An economist at the Citibank is of the view that under the prevailing conditions Pakistan “needs IMF advice more than money. But the international bond market has also been pricing in the risk on Pakistan’s possible default on its debt early next year.
Meanwhile, Mohsin Khan, IMF’s director for the Middle East and Central Asia, says that Pakistan has not asked the Fund for loans. In fact, he thinks, Pakistan does not need to turn to the IMF for loans in the next 10 months only if its government cuts spending, abolishes all fuel subsidies by December as planned, stops borrowing from the central bank and sticks to its privatisation plans to raise money. His advice covers all the guidelines (or essentials) that an IMF assistance programme stipulates.
He is also of the view that instead of seeking IMF money, Pakistan should get funds from other sources. The SBP Governor has hinted at securing over $1 billion worth of loans from the World Bank and the finance ministry officials expect another $500 million from the Asian Development Bank from its $1.3 billion loan programme. But the problem is that the IMF conditionalities have now become the general conditionalities for the developing countries if they were to get financial assistance from any non-IMF institution falling within the ambit of the Washington Consensus.
Pakistan’s immediate financial requirement is stated to be between eight and ten billion dollars for the current year and it is unlikely to be met. Foreign loans may at most cross $4 billion this year if supported by the US, Europe and GCC. So, it is a Catch-22 situation for the government as it does not want to go to the IMF for loans.
But it is more or less the same predicament for the US and Europe because they cannot afford to let Pakistan default or descend into a meltdown for it happens to be a frontline state in their war on terror and its support is crucial to the success of their long-term strategy and also Nato’s mission in Afghanistan. So, Pakistan must be rescued to enable it perform their task.
Pakistan became IMF’s customer for the first time in 1988 and was tasked to implement a structural adjustment programme during the first Benazir government. Since then there had been collapse and renewal of IMF programmes.
Later, during Musharraf era, the structural adjustment programme was renamed as Poverty Reduction and Growth Facility (PRGF) programme. (It was coined by James Wolfensohn, ex-WB chief, for he thought poverty reduction was an attractive slogan.).
The programme was initiated in December 2001, just two months after 9/11 and Pakistan, by taking a U-turn in its foreign policy had become America’s most favourite ally. All economic sanctions, resulting from 1998 nuclear test, were lifted and a fresh inflow of dollars began soon after. By the time, the programme drew to a conclusion in December 2004, seven reviews were undertaken by the IMF officials to declare it a success.