Capitulating to the IMF

  • Is Pakistan a sovereign state?


Is Pakistan really a sovereign state? The question is relevant because the government seems to have ceded control of the economy to foreign entities. Both the finance minister and the governor of the State Bank of Pakistan are career officers of respectively the World Bank and the International Monetary Fund. Is the primary loyalty of these officers to their Washington-based institutions or to their country of origin? And, should we be outsourcing existential financial decisions to people with possibly divided loyalty?

It is useful to look at the history of these organizations. In some sense the IMF and the World Bank are dinosaurs. They are products of the Bretton Woods conference of 1944. Both organizations made good sense in the tattered world economy of the post-War period. The World Bank set about financing the rebuilding of Europe; while the primary purpose of the IMF was to promote international trade, which had all but collapsed during the war. The IMF’s role was to assist member nations to maintain stable exchange rates by providing short-term credit to support their currencies.

Trade rebounded. Over time fixed exchange rates gave way to floating rates. Markets replaced governments as the primary arbiters of the value of national currencies. As its raison d’être evanesced the IMF found itself out of a job. Similarly, with the reconstruction of Europe complete, the World Bank found itself in the same position.

The hired guns from the IMF and World Bank, who we have foolishly ensconced at the top of our financial pyramid, will not do what is essential for Pakistan

But overpaid international bureaucrats do not take kindly to the prospect of losing their jobs. The search was on for a new role for these institutions. In the IMF’s case, a confluence of events caused by the economic turbulence of the Arab oil embargo of 1973 led the institution to believe it had the answer: It would act as a glorified credit rating agency. Western banks replete with Arab oil money would seek the IMF’s imprimatur to invest this liquidity in the world’s poor countries. The IMF had found its niche. It has never looked back.

The arrangement works as follows: A poor country, due generally to mismanagement and corruption, finds itself in dire need of hard currency. Commercial lenders are unwilling to commit their funds without adequate safeguards. Enter the IMF. It offers to lend some of its own money, provided that the host government agrees to a set of economic ‘reforms’. These understandably seek to enhance the borrower’s ability to repay the money loaned. When a deal is struck, the IMF disburses its own funds. At the same time commercial lenders, now reassured that the borrower can repay, step in with additional funds.

Typically, the IMF’s own funds constitute only a small proportion of the borrower’s total debt. Commercial lenders provide the rest. Yet the IMF’s participation is crucial. If it does not ‘certify’ a country by its participation then that country effectively gets cut off from all other sources of credit.

The question we need to ask is: Are our national interests served by IMF mandated economic policies? Bear in mind that the IMF has a single overriding objective. This is to enhance the borrower’s ability to service its debts. On the other hand the government’s obligations to its people are multidimensional. These include poverty alleviation, price stability, employment, universal access to health care and education, reasonable (and yes, subsidized) rates for basic services. Clearly there cannot be an iota of congruence between the IMF’s singular objective and the obligations of the government towards its people.

It is also clear that the government, in order to fulfil its obligations, must have access to adequate funds. And here there is a problem: A significant chunk of our national income goes to servicing our illegitimate foreign debt.

So what should we do? Start by appreciating the dimension of the problem. Our external debt is $100 billion. Let’s assume that the average applicable yearly interest rate is five percent and that we decide to pay it back in equal annual installments over a period of 20 years. A simple back-of-the-envelope calculation shows that we would need to pay annual installments of $8 billion per year for a total payback over the 20 year period of $160 billion. Of which $60 billion would be interest and the balance repayment of principal.

Now consider that, according to the State Bank’s own estimates, we will run a trade deficit of $20 billion in fiscal year 2019. If we had a trade surplus we could theoretically have had the ability to pay back some of our debt. But we don’t. So the only way to find the $8 billion per year to pay back our existing loans is to take new loans. It becomes clear very quickly that we are in the financial equivalent of a black hole from which there is no escape.

While light cannot escape a black hole, we still thankfully have the ability to extricate ourselves from this crisis. Doing it is not easy and not without risk or unpleasant consequences.

The way out is what I call ‘structured repudiation’ of our external debt. This would have to be achieved through hardnosed negotiations with lenders– commercial banks and the international finance agencies. We would seek the cancellation of a substantial portion of the total debt– say about 50 percent. This would be in addition to interest rate waivers, revisions and extended terms. The message to lenders should be unrelenting: Take what we’re offering or walk away with only your principal.

These demands stand on strong moral grounds: The loans, or at least a substantial part of them, were made to corrupt governments who did not use them to benefit the people in whose name they took the money. Much of this money has vanished into thin air. Why now should the impoverished people of Pakistan be held liable for what can only be described as reckless bank lending? If the banks want their money back, let them get it from those who signed off on the loans. They will find them easily these days making the rounds of NAB and the accountability courts.

Further, the banks did not lend us this money out of the goodness of their hearts. They expected to make a profit. And as all banks know, there is always a possibility that loans are not returned. This is a risk that they take into consideration when they lend money. Lending the money was their mistake and they need now to swallow the loss.

Structured repudiation is not an end in itself. It is merely a starting point to give us the necessary financial space to put our house in order. The formula to do this is not rocket science. Slash imports, boost exports, invest in vital infrastructure, rejuvenate local industry by sharply raising tariff barriers, work on aligning the education system with the job market, the list goes on and on. The money for doing much of this will come from the savings that result from debt relief.

Structured repudiation must be done. We do it or we die. There is no other option. It should also be clear that the hired guns from the IMF and World Bank, who we have foolishly ensconced at the top of our financial pyramid, will not do what is essential for Pakistan. They cannot go against what has been coded into their DNA by the organizations who created them, and to whom they are ultimately beholden.

We are a proud nation of 200 million people. There is talent and initiative and creativity. There are natural resources galore. We can do this. Let’s go out and find the best people we have and put them in charge of bringing much needed change to this benighted land. They are out there. All we need to do is find them. We don’t need imported help.