There’s no doubt that another “large and long” IMF program will be “a disaster for Pakistan”, locking it into the dreaded “debt trap” and potentially turning it into a basket case “like Argentina”, as Dr Ashfaq Hasan Khan – senior economist, former FinMin advisor, and DG NIPS – very rightly noted in a set of recommendations on Pakistan’s Economic Crisis: Challenges and The Way Forward.
Yet I’m surprised that he thinks a smaller loan for a shorter duration, $3-4b over three years, while focusing on “investment from the SIFC (Special Investment Facilitation Council) platform and implementing reforms to strengthen the domestic economy instead of continually acquiring new debt to repay maturing debt”, is a better choice.
Somebody please correct me if I’m wrong in believing, very firmly, that such a course is no different from the “large and long” idea. If anything, the sooner we decouple from the IMF, the sooner lenders will stop rolling over our loans and the sooner even friendly countries will recall their billions parked in the state bank’s vaults to make reserves look pretty; and the sooner we’ll suffer another crisis of confidence – remember how the rupee plummeted when IMF froze the EFF and the Saudis and Emiratis held back their aid when Imran Khan went off script and reduced and froze petrol prices to blunt the no-confidence motion against his government?
If anything, it’ll only bring the “disaster” the good doctor is warning about closer.
Initiating and implementing reforms, boosting exports and curbing imports, and especially attracting solid foreign investment into the country is no doubt the textbook academic solution. But from the market’s point of view it’s only as realistic in these circumstances as the efficient market hypothesis, purchasing power parity, etc, equilibrating prices and exchange rates as all information magically reaches all participants in real time.
Traditional macroeconomic theory produces fine graduate and doctorate economic journals and papers, but it never works in complicated capital markets that Pakistan must now rely on to float bonds, stabilise the rupee and hunt for hot and long-term investor money to restore confidence in the local market. None of that is possible if the threat of default tanks investor confidence, which is exactly what will happen as soon as we’re not on an IMF program and creditors stop rolling over our loans.
Let’s not forget that Pakistan must pay back $24-29b before this fiscal is over, and the only reason the new finance minister said there was “enough reserve cover” was because of the certainty of another EFF (Extended Fund Facility) – the “large and long” variety that Dr Khan disapproves of – immediately after the SBA (Standby Agreement) that is about to end.
That means Pakistan is already deeply entrenched in the so-called debt trap. And since it’s crystal clear that the loans will roller over only as long as the country is on an active IMF bailout program, ditto for “assistance from friendly countries”, the D-word (default) will return to the headlines and Pakistan’s CDS (credit default swap) will go nuts the moment there is no Fund cover.
That, broadly, is why a three-year program instead of a five-year program will only bring “disaster” in around three years instead of five years.
There’s also the pretty obvious fact that three years is not nearly enough time to restructure production and manufacturing enough for the sea change in the export basket and revenue that will be needed for even international sentiment, much less investor confidence, to start improving. There’s also no way of “implementing reforms”, on our own, in that time. In fact, the only reason we’re seeing any “structural reforms” is because of IMF’s or-else threat, meaning it will – as it has in the very recent past – cancel the program and let the country tumble into default if any of its conditions is violated.
The simple, painful fact is that Pakistan is already hopelessly drowned in debt, and it is also very much a basket case. Now it needs to be engaged with the IMF to avoid repayment and limp along. But even this option will soon run its course. Because the Fund’s revenue targets make the government fall more on indirect taxation and squeeze the country’s large middle- and lower-income classes, especially the 40pc population hovering just above or below the poverty line.
Also, correct me again if I’m wrong, the new finance minister’s rather bold idea of taxing the wholesale, retail, real estate and agriculture sectors – who’ve always wriggled out of the tax net because they’re either always in government or close to the government – might present a very small, very fragile glimmer of hope for very long term and very slow improvement.
It’s still wishful thinking, but a lot of tax can and should come from these sectors if common sense tax law is applied to them, relieving the working classes buried under record inflation and unemployment. And that might just give enough fiscal room to negotiate slightly looser upfront conditions with the IMF.
But that’s only if – and it’s a very big if – the new finance minister can have his way. Otherwise, any course is more or less “disaster for Pakistan”, the only difference being the number of years before the noose of default tightens around its neck.
