IMF continues to lend us more even though we can’t pay back
According to the IMF report, CPEC related imports could reach 11 percent of total projected imports by 2020, equal to just over $5.7 billion, while inflows under the corridor will touch 2.2 percent of projected GDP in that year
“If you owe the bank $100 that’s your problem. If you owe the bank $100 million, that’s the bank’s problem,” said J. Paul Getty, an American industrialist.
During the recent debate regarding the pros and cons of China-Pakistan Economic Corridor (CPEC), an analysis from the International Monetary Fund (IMF) suggests that Pakistan’s economy is in dire condition.
The $51.5b project launched by Prime Minister Nawaz Sharif and Chinese President Xi Jinping is expected to boost investment and lift the economy’s potential output.
However, the repayment obligations might entail a possible risk.
According to the IMF report, CPEC related imports could reach 11 percent of total projected imports by 2020, equal to just over $5.7 billion, while inflows under the corridor will touch 2.2 percent of projected GDP in that year.
The government’s policy has been borrowing more to repay its current debt instead of adding value to manufacturing to beef up exports or expanding the tax net.
Pakistan’s weak trade competitiveness is the cause of exports remaining $10.2 billion below IMF projections for 2016.
“A delay in the completion of CPEC projects, as evident from the first year’s performance, and an inability of the government to mobilise revenues and rationalise expenditures can affect investment and hurt economic growth,” stated the World Bank in its biannual ‘South Asia Economic Focus Fall 2016’ report.
CPEC–related outflows are expected to increase the current account deficit as the outflows will be in form of loans received from Chinese Banks.
In short, Pakistan’s economy is currently drowning in debt and cash inflows from CPEC will only be able to save it in the long term, but IMF warns that it’s not guaranteed.
The question arises why International Financial Institutions (IFIs) like IMF, World Bank, etc, continue to lend to Pakistan despite the track record of falling short of reforms and not paying back loans.
“IMF lends to countries like Pakistan that are facing difficulties financially,” said Sakib Sherani, a former economic adviser to the government, while talking to DNA.
“Pakistan has completed the programs that are conditioned by IMF”.
For example, Pakistan met the IMF indicative target on Benazir Income Support Programme (BISP) which provides income to the poor.
“However, the conditions attached to IMF loans give the organisation authority over control of monetary and economic policies,” he added.
“Speculations based on evidence suggest that IMF is pressurised by the US government to lend more money to Pakistan.”
However, the government could not implement the policies that could meet IMF’s expectations for attracting foreign direct investment (FDI) and increase export revenue.
Despite the obvious record of Pakistan being economically unstable to repay loans, IMF continues to support its economy by injecting more funds.
“The reason why IMF continues to lend to financially distressed countries like Pakistan is because it is a fund, not a bank,” said Qais Aslam, economist and head of the PhD program at University of Central Punjab, Lahore.
After the economic crisis in Argentina, IMF decided that no member of the organisation will go bankrupt again, said Aslam.
Increasing tax collections to improve revenue and setting policies to focus on exports are key factors to stabilise Pakistan’s economy, said Sakib Sherani
“The organisation aims to help countries avoid a general economic crisis, to cancel the balance of payment deficit”.
Moreover, the funds distributed by IMF are not meant to be invested in revenue generating projects.
On the other hand, World Bank provides long-term development oriented loans, said Aslam.
In Pakistan, the civil or military policy makers are the ones who accept the conditions presented by the money-lending organisations, said Aslam. Most of the money is channelled out to political functionaries.
IMF reschedules loans with greater interests and in return it allows them to intervene in policy making.
A recent report showed that the public-sector organisations such as the Pakistan Steel Mills, Railways, and PIA are all incurring losses and have not been recorded in the current budget.
Moreover, Pakistan is not capable of investing in development projects funded by public-sector revenues since most of the inflows from loans are directed to finance day-to-day functioning.
Pakistan needs to create a conducive environment to encourage foreign investment and utilise public funds to ensure proper management of development projects.
Increasing tax collections to improve revenue and setting policies to focus on exports are key factors to stabilise Pakistan’s economy, said Sakib Sherani.
Pakistan’s economy can only rely on CPEC related inflows in the long-term but needs to make a shift in its economic policies to overcome the current financial crisis.
The government should prioritise creating a positive environment for business to thrive and strengthen the export industry to generate income that could reduce the country’s liability.
