AT PENPOINT
The Shehbaz coalition must be given credit for persistence. The IMF’s refusals should have made it realize that it was not going to get the last tranche of $6 billion ESAF, but the recent mini-budget, the lifting of import restrictions, as the interest rate hike made it clear that the government was not giving up.
The PM’s persistence paid off in the shape of a Stand-By Arrangement, which should see off the threat of default, and get friendly countries to lend the amounts pledged. This latest development provided another example of the IMF setting conditions in advance, and only disbursing the promised loan when the condition is fulfilled. That means that the IMF does not trust the government, as shown by its giving an SBA. That is serious. It should be pointed out that when Imran reneged on his government’s deal with the IMF, it was merely something Pakistan had done before. The problem is that the IMF conditions are bound to make for government unpopularity.
The governments concerned may feel the IMF is out to ‘get’ them, but actually, the IMF is merely doing what any prudent banker does: ensure the client can repay. Why does a country like Pakistan borrow from the IMF? Because it has to repay its project loans, and lacks the foreign exchange to do so. Those project loans should have led to greater development, thus exporting ability, and thus foreign exchange to repay those loans. That hasn’t happened, mainly because those loans were not meant so much to build export capacity, as to be embezzled by the country’s ruling elite. Yet those loans still have to be repaid with interest.
Among other things, the country turns to the money markets, which basically means the international banking system. When payments fall due, again the country needs foreign exchange. The simple solution is to borrow again, a sort of rollover, in which the principal and with interest may become a new, higher, principal figure.
These were never project loans, but they are meant to repay project loans, and depend on increased foreign exchange generated by projects. This is where the IMF steps in, and offers to lend the required amount. The country makes the payment, and continues to make imports, and what happens is that the debt is transformed. From commercial debt to banks, it becomes debt to the IMF.
The IMF wants to be repaid, because it is a bank, even though the word is not in its title. Instead of collateral, it wants to ensure the country can repay, so it dictates economic policy. The IMF is not in the business of development, though it is claiming to be moving in that direction, probably because it realizes developing countries cannot repay loans unless they develop.
Its conditionalities are severe. It has no problem with measures cutting back on growth, or causing suffering. It also claims it is a purely economic body, with no political agenda. This may be truer than for the World Bank, but the IMF has still been a tool of US foreign policy. It is easier for the USA to use the World Bank this way, for the Bank President is an appointee of the US President; the IMF MD is not. An appointee of the Executive Board, it is usually a European; the incumbent and her predecessor have also been women.
One flaw of the Charter of Democracy was that it did not include all parties, nor the establishment. That might also afflict a Charter of the Economy. The temptation to play politics on the economy might be too good to resist, what with a general election due this year. However, the need of all to get a deal with the IMF may not be so easily resisted.
However, the IMF remains a Bretton Woods institution, and since the MD always belongs to a US ally, it can work as a tool of foreign policy. Of course, in such a case, the country would really have to need it, as Pakistan does. The China-Pakistan Economic Corridor started at just the time that the USA began its trade war with China, as well as its great-power rivalry. One result has been the IMF’s overweening interest in Chinese loans to Pakistan, and its requirement that Pakistan not use the IMF loan to service its CPEC debt to China. The agreement with the IMF implies that, over and above the economic conditions, Pakistan has given the USA assurances about China. They remain unknown, but they are probably acceptable to China, being conveyed to it by COAS Gen Asim Munir when he visited China earlier this year.
The natural question is why the government is going to all of this trouble. Though the IMF’s terms are onerous, they are still better than the terms available on the international money market if the lenders know their borrower has been turned down by the IMF. It should be remembered that the lenders need their loans secured. All the recent talk of default has made lenders skittish about letting Pakistan have any money: a country has to be in a bad way if it approaches the money markets to borrow to avoid a default. The practical result is that loans are only offered at prohibitively high interest rates; thus making the prospect of a default in the near term more likely.
In short, countries and banks both seek the IMF’s ‘Seal of Good Housekeeping’, as it was called by Shahid Javed Burki when he was caretaker Finance Minister in the 1996-1997 caretaker Meraj Khalid government. Friendly countries have linked their loans to Pakistan being on an IMF programme; in other words, they want the knowledge that Pakistan wouldn’t take all their money and waste it.
The IFIs generally, and the IMF particularly, have been criticized for becoming credit rating agencies. Credit rating agencies are not obtrusive, and certainly do not dictate policy. They let the entities they rate go to the devil in whatever way they want.
Whether credit rating agencies or something more, the IFIs have so far not helped any country turn around. That means that while they have identified structural reforms, they have not forced them to be carried out. It is not that they cannot. However, it almost seems that they are more inclined to retain the structural reforms as a stick to beat the government over the head with, rather than actually implement. Or maybe the structural reforms work?
One effect of all of these recent ups and downs has been that there has been increasing talk of a Charter of the Economy. One major reason why it makes sense is that all the parties have had to deal with the IMF. All have done (or tried to do) business with it, even the PTI took its time doing so. None can claim that it has a different economic policy from the others.
Perhaps it makes sense to take out of the economic debate those issues which need continuity. Parties cannot be left to make populist criticisms of economic policy (which means demonizing the IMF) when they have no alternative. There will be a hidden advantage to the Charter. It will also provide the IFIs a series of what are the red lines they cannot cross. Manifesto promises will have to be commitments to amend the Charter, which will mean taking the other parties on board.
One flaw of the Charter of Democracy was that it did not include all parties, nor the establishment. That might also afflict a Charter of the Economy. The temptation to play politics on the economy might be too good to resist, what with a general election due this year. However, the need of all to get a deal with the IMF may not be so easily resisted.
