Pakistan is among the very few countries in the world that is terribly entangled in the vicious circle of `debt for debt,' since past two decades because of the inability of its economic managers to manage the finances and due to the unaccounted expenditures by the successive governments during this period. This mismanagement has caused the country to seek debt from the International Monetary Fund for the 10th time in past 18 years, to pay for its other bilateral and multilateral debts. The result is that Pakistan 's foreign debt has climbed consistently and its people had to pay for the repayment of these debts through taxes and through the removal of subsidies.
The latest in the series of the so-called IMF rescue packages came last week when finance adviser Shaukat Tarin, who is also a banker, proudly claimed that he had struck a deal with the IMF for a $7.6 billion loan keeping the promise with the nation that he won't let the country default on its debts. The IMF loan-commitment came days after the Standard & Poor's rating agency lowered Pakistan's sovereign credit rating to a level below the default and was poised to review the rating once more in a couple of weeks to declare Pakistan bankrupt and unable to repay its debt. The entire PPP-led government claimed victory by securing the loan and in comparison cited nations like Iceland , Hungary and Ukraine , which also sought the lender's aid to come out of economic trouble.
The claims of the finance adviser and other government ministers and officials that their timely negotiations and interest ``saved the country'' from economic default carries little weight when seen in the context that, barring Shaukat Tarin who joined the cabinet few weeks ago, this government was responsible for overseeing macro-economic imbalances including the increase in twin deficits of current account and fiscal and depletion of the foreign exchange of reserves to the level equivalent to one month of imports. It is no use blaming the previous Pervez Musharraf government of mismanaging the economy as the foreign reserves in the past year declined by 75 percent to $3.5 billion, while the PPP government was busy in power politics for strengthening its hold on the government. The fact is that the country's economic crisis deepened after the government was paralyzed for more than six months because of political wrangling including the dispute over judges' reinstatement between the PPP and the PML(N) and the head-on collision with Musharraf. Once that crisis was over President Asif Ali Zardari campaigned for his slot for the presidency causing more controversy.
During all this time the rupee continued to shed its value against the dollar as the foreign reserves depleted at an extra-ordinary pace of a billion dollars a month and in October the rupee plunged to an all-time low. The balance of payments deficit in the first three months of this fiscal year widened to $3.95 billion as the inflows including from investment and privatization halted and given the present trend it seems that this financial year it will cross the record $14 billion of last year. The inflation, which in the past few months has hovered around a record high of 20 to 25 percent, is predicted to reach average 20 percent this year. Finance adviser Shaukat Tarin's Plan `A' and `B' failed miserably as a group of donor nations included in the Friends of Pakistan group declined to provide funds. Even the friendly countries like China , Saudi Arabia and United Arab Emirates refused to financially assist Pakistan because it did not trust the government of managing the funds properly. Tarin in his press conference last week said that Friends of Pakistan group had told the Pakistani government to first get an endorsement of its economic program from the IMF and then they will consider helping the country financially.
Even when the Friends of Pakistan group met in Abu Dhabi on November 17, two days after the IMF and Pakistan announced loan package, the member nations did not come out with any concrete financial package or pledges in terms of aid or investment, which further disappointed the investors and rating agencies. The failure of Abu Dhabi meeting can be gauged from the fact that at the end of the talks the Foreign Ministry issued a statement that did not carry commitments of assistance by donor countries, rather, the statement just mentioned that they pledged ``cooperation'' with Pakistan in different areas. The donor countries noted that Pakistan faced formidable challenges, and well coordinated international cooperation is needed to address those challenges, the statement said. ``They affirmed the need for the members of the Group to build strategic partnerships with the Government of Pakistan to promote economic development and financial stability, address energy needs, build institutions, and bring peace and stability in the region," according to the statement. The meeting adopted a "work plan" which included cooperation in energy, security, infrastructure and development and Pakistan will presents its requirements in the next meeting scheduled on January 13-16. A ministerial level meeting of Friends of Pakistan group may be scheduled in February, it said.
First of all, the November 17 meeting was supposed to be high level talks as the foreign ministry had initially indicated that President Asif Ali Zardari and finance adviser Shaukat Tarin would meet senior government level officials and ministers from donor countries, who would in turn pledge funds or investment to Pakistan. Zardari's trip to the meeting was canceled and even Tarin did not go for talks as the donor countries clearly mentioned that they won't pledge funds at all. Instead, an additional secretary from the foreign ministry headed those talks along with Pakistan 's ambassador to the UAE, bringing nothing but pretty words. Secondly, the multilateral lenders such as the World Bank and the Asian Development Bank refused to release funds that had been promised to Pakistan earlier on grounds that the usage of funds needs to be monitored by some agency preferably the IMF. The big question among the investors, lenders and donors at this point is whether the government is able to properly manage the funds, implement the IMF programme and those funds are not wasted in corruption and bad governance.
The IMF loan will help in stabilizing the economy only if the government shows the will to implement the Fund's program, one domestic investor, who did not want to identified, said. The foreign investors and overseas rating agencies will monitor whether the government is able to shore up its foreign reserves and cut the current account deficit and fiscal deficit as part of the IMF conditions for the loan, an economist said. The big challenge for the government is to reduce macro-economic imbalances, cut subsidies and increase tax to GDP ratio, only then Pakistan will be seen as implementing the IMF program, he said. The IMF will monitor economic developments on quarterly basis as the $7.6 loan is expected to be released in seven installments. Releasing each installment will be contingent upon whether the government implemented the IMF conditions in the previous quarter. As part of conditions for releasing the debut installment, the State Bank of Pakistan increased its key policy rate, or the benchmark interest rate by 200 basis points to 15 percent. It was the most increase in more than a decade and the fourth this year. The government is likely to implement more of such tough measures in future as it seeks to get next IMF loan installments.
These are certainly tough economic times for Pakistan , not because of the global recession but because of mismanagement and by not realizing the gravity of the situation in time. For instance, if any comparison has to be done, India did not seek the IMF help and it managed its liquidity crunch and lack of investor confidence through its own resources. Secondly if Ukraine , Iceland and Hungary are also negotiating a loan with the IMF and this is given as an excuse for Pakistan to go to the IMF, there more than 200 other countries in the world that did not seek the lender's help. The previous Musharraf government is certainly to blame for turning Pakistan into a consumer economy rather than producer's economy, but this government has also blame to share for mismanaging finances and not showing seriousness in tackling economy.
One reason, perhaps, that the political leadership isn't concerned about increasing country's debt to repay previous debt is that none of the top politicians, civil and military bureaucrats pay their legitimate taxes that are collected to repay debts. None of these elite group of rulers are hurt by increase in fuel, electricity and gas prices because either they enjoy the privileges of payments of their utility bills through the national kitty or they already have so much money that it doesn't hurt them. The people who get hurt from IMF loans is the majority middle class people, who pay taxes and utility bills, and that tax money isn't spent on their welfare but on repayment of debts.
Talking of paying taxes, the government claimed that President Zardari bore the expense of 242 people he took along with him to Saudi Arabia to perform Umra. Though this statement by the government is highly doubtful, even if it was to be believed then the president needs to declare his assets, how much tax he has paid in this country and what is his source of income. Otherwise how can he afford to bear the expenditure of taking 242 people for Umra?