Vagaries of Consciousness
- The feeling of strangulation may be an overstatement
Secretary of State Mike Pompeo, in an exclusive interview with CNBC, criticised the idea of an International Monetary Fund (IMF) bailout for Pakistan: “Make no mistake, we would be watching what the IMF does. There’s no rationale for IMF tax dollars – and associated with that, American dollars that are part of the IMF funding – for those to go to bail out Chinese bondholders or China itself.”
This is an unprecedented statement from a secretary level official giving a view on the lending policy of the IMF. Curiously, within the division of functions, the matters relating to IMF are dealt with by the Department of Treasury. Secretary of State, on the other hand, deals with the World Bank affairs. It is not clear what has prompted Mr Pompeo to make such a statement. However, a clue may be contained in an article published by Centre for Strategic and International Studies (CSIS) by Mark Sobel, who has served as Deputy Assistant Secretary for international monetary in the Treasury Department and is familiar with IMF working. He was reflecting on the possibility of a new program and was quite disapproving of Pakistan’s past track-record of its dealings with the Fund. While recommending a highly frugal program, Sobel also warned IMF of the presence of Chinese loans in Pakistan’s external debt. He advised the Fund “to ensure that its resources are not used to bail out unsustainable Chinese CPEC lending”. This, then, could be the source of where the Mr Pompeo got his idea.
There are a number of issues, both technical as well as prudential, with this statement. First, the US undoubtedly is the largest shareholder in the IMF (16.52pc) and occupies a permanent chair in the Board of Executive Directors (EDs). The US ED is someone who works very closely with the office of the Deputy Assistant Secretary for International Monetary and Financial Policy in the Treasury Department. Thus, whatever concern the US would have about the Fund plans to work on a new program for Pakistan these can be conveyed through the standard procedure both in the Board as well as through informal interaction that EDs engage in with IMF management on a daily basis. What is more, one of the senior Deputy Managing Directors, David Lipton, is a former high ranking official of Obama administration, which again gives another channel to address American concerns. With so much access to work through the institution, it looks very odd to send out an adverse signal about Fund’s working through the media.
Second, IMF policies are set by its EDs within the framework of the Articles of Agreement and By Laws Rules and Regulations approved by the members. A member has a right to request to purchase its quota (borrow) when faced with the fundamental problem of balance of payment. The Fund program addresses the underlying issues that brought about the BOP problem and require policy actions that would create conditions to remove those problems. Its support in the meanwhile helps fill the so-called ‘financing gap’.
The Fund would make its own decisions and the US would very likely not oppose the program, for it doesn’t carry a veto
Third, the money is fungible and once disbursed to the borrowing country it cannot be traced as to its use. Thus to distinguish and trace the specific use of IMF resources is meaningless.
Fourth, notwithstanding the fungibility argument, IMF support to Pakistan, with only few exceptions, has been exclusively for BOP support and doesn’t come to the budget of the government even though it is counted as debt of the government. The money goes straight to the central bank and helps build reserves. It is treated as a benchmark for further build-up of reserves and therefore is not used at least during the program period for any other purpose.
Fifth, suppose the apprehensions expressed were somehow relevant i.e. the Fund support would help Pakistan payoff Chinese loans. China is a member country occupying a close third position in terms of shareholding of 6.06pc compared to 6.15pc of Japan, which is second. It is diplomatically awkward for one member to raise objection on another member’s debts being repaid by a country under a Fund program. The international debt management system makes full disclosure of what countries owe to each other. There is no requirement under IMF articles and various other guidelines for staff that while designing a Fund program only certain classes of loans and obligations would be taken into account. In fact, the Fund’s vigilance to ensure all creditors are paid is so efficient that when a tranche was due to Pakistan in June 2014, the mission chief dropped the bombshell that they were pulling out the paper from the Board agenda as Pakistan has failed to make a scheduled debt repayment to Sweden. The economic managers were panicked but discovered that the payment was made but no efficiently reported as such from the Swedish authorities to their ED in the Fund. It is a reasonable assumption that the Fund cares for all creditors without any distinction while helping countries to face BOP challenges.
Sixth, it should be pointed out that China has consistently provided financial support to Pakistan in a manner that there are positive transfers, which means the new disbursements, net of principal and interest repayments on the past loans, are positive. Accordingly, during the program period, given the large commitments that still need to be matured, there would be no negative transfers from Pakistan to China, and hence there would be no need for outside help for meeting Chinese obligations.
Seventh, Mr Pompeo was responding to a question of CNBC regarding a news story published in the Financial Times speculating that Pakistan authorities were to seek a new package of $12 billion from the IMF. The fact, as clarified to Reuters by IMF officials, is that Pakistan has not approached IMF for a new program nor has a dialogue started for this purpose. Accordingly, the statement is somewhat ill-timed or aimed at prejudicing the prospects of a new program.
Finally, many have felt that this statement is yet another example of the US indifference to multilateral institutions. The efficacy of IMF and its decision-making is criticised outside the system within which such apprehensions should be expressed. The reaction of Foreign Office of Pakistan is not surprising. Some strong language has been used as the US statement is termed as an attempt to strangulate Pakistan.
The feeling of strangulation may be an overstatement. Because the Fund would make its own decisions and the US would very likely not oppose the program, for it doesn’t carry a veto and decisions are normally made through consensus. In fact, it is not infrequent that EDs have concerns that are not considered appropriate to be raised within the broader mandate of IMF. Such matters are discussed off-line and most resolved amicably resolved.