Huzaima Bukhari & Dr. Ikramul Haq
Near to complete 73 years of independence, our elites want to celebrate liberation from colonial rule after pushing the country into debt quagmire. This paradox depicts what Zulfikar Ali Bhutto highlighted in his book, Myth of Independence. What makes the situation more painful is the fact that every time a new loan is obtained, those in power express jubilation as if an extraordinary goal has been achieved. The clearance of last tranche of current arrangement with International Monetary Fund (IMF) on December 26, 2019 was commemorated like August 14, 1947. The same was the practice of all earlier governments. This is indeed the worst manifestation of economic subjugation and tragically all the governments, civil and military alike, have no shame in incarcerating the nation in a debt prison.
In 2016, in Trapped and enslaved, The News on Sunday [Political Economy], June 5, 2016, the dangers of rising debt were highlighted and in 2020, the situation has worsened. The six budgets presented during 2013 to 2018, by Pakistan Muslim League (Nawaz) [PMLN] had one common characteristic: burdening the economy with burgeoning debts. Faithfully obeying commands of the International Monetary Fund (IMF) under US$ 6.4 billion bailout package, the PMLN accumulated unprecedented external debt. In December 2019, the coalition government of Pakistan Tahreek-i-Insaf (PTI), saying prior to power, “we will never “beg”, got US$6 billion from IMF and said “it was a great “achievement”—though the conditions imposed were the most stringent in the history of IMF-bailouts since 1958 [See box].
The PTI Government secured over $13 billion in foreign loans in the fiscal year 2019-20 alone! It was the second highest in history—we are now borrowing mainly to repay maturing external debt. During the previous fiscal year, Pakistan received gross loans of $13.2 billion from bilateral and multilateral lenders including, the IMF and commercial creditors, according to a report, quoting data compiled by the Ministry of Economic Affairs.
We received $29.2 billion in foreign loans in the past two years that include $26.2 billion by the PTI Government since coming to power in 2018. Out of this, $19.2 billion was taken just to repay the maturing external debt and the remaining was added to the “external public and publicly guaranteed debt”. For the current fiscal year 2020-21, the cost of external debt servicing is estimated at Rs. 315 billion, even after securing about Rs. 50 billion temporary relief from the G20 group’s temporary relief on debt servicing. In fiscal year 2018-19, Pakistan borrowed $16 billion, including balance of payments support from Gulf countries, and returned $9.1 billion worth of loans. In fiscal year 2019-20, the gross foreign loans stood at $13.2 billion and repayments amounted to slightly above $10 billion.
Bilateral creditors disbursed $629 million in the last fiscal year against the budgetary target of $480 million. China gave $488 million in bilateral loan against earlier estimate of $402 million. Multilateral creditors disbursed $5.54 billion in loans in the previous fiscal year. The Asian Development Bank provided $2.8 billion, exceeding the annual target of $1.7 billion. However, out of the $2.8 billion, its budgetary support loans amounted to $2.3 billion. The IMF disbursed loans of $2.84 billion, including $1.4 billion in emergency financing in response to Covid-19. The Islamic Development Bank disbursed $869 million under the oil credit facility against the estimate of $1.1 billion. The World Bank released $1.32 billion against the annual estimate of close to $1.2 billion. The Asian Infrastructure Investment Bank (AIIB) gave $508 million in loan.
IMF Agreements (1958-2019)
Since 1958, Pakistan signed 16 programmes with IMF. On December 8, 1958 the military government signed one-year Standby Arrangement (SBA), which it terminated prematurely in nine months. The second SBA was signed on March 16, 1965 and concluded on March 15, 1966. Yet another one-year SBA completed on May 17, 1973. The fourth SBA, signed on August 11, 1973, ended on August 10, 1974. The fifth one was on November 11, 1974 and concluded on November 10, 1975. The sixth was signed on March 9, 1977—it was terminated exactly after one year. On November 24, 1980, an Extended Fund Facility (EFF) was concluded which lasted for three years—ended on November 23, 1983. After a gap of five years, two simultaneous programmes, Structural Adjustment Facility (SAF) and SBA were signed on December 28, 1988. Both continued beyond the agreed timeframe and ended in 1990 and 1992, respectively. The ninth programme, again a one-year SBA, was signed on September 16, 1993 but was terminated prematurely on February 22, 1994. The 10th programme comprised two separate facilities—SAF and EFF—signed on February 22, 1994 for a period of three years. However, both the facilities were terminated much before maturity—on December 13, 1995. The 11th SBA was signed on December 13, 1995. It ended on September 30, 1997. The 12th programme was of two separate facilities, the Poverty Reduction Growth Facility (PRGF) and an EFF. Both were signed on October 20, 1997 and continued till October 19, 2000. Under the 13th programme, another SBA was signed on November 29, 2000 and continued until September 30, 2001. The 14th Extended Credit Facility/PRGF was signed on June 12, 2001 and terminated on May 12, 2004. A three-year SBA was signed on November 24, 2008 but was prematurely terminated on September 12, 2010 after Pakistan could not initiate tax and energy reforms. The PMLN signed agreement in September 2013 and successfully completed it on August 4, 2016. Under the PTI Government, IMF Executive Board approved the 39-month-$6-billion EFF on July 3, 2019.
Like the previous Pakistan Muslim League-Nawaz (PML-N) government, the PTI administration also relied on short-term foreign commercial loans. Against the budgetary estimate of $2 billion, it took $3.4 billion in foreign commercial loans. Two Chinese financial institutions, China Development Bank ($1.7 billion) and Bank of China ($500 million), provided about two-thirds or $2.2 billion of total foreign commercial loans. Dubai Bank extended $564 million, Ajman Bank $300 million, Citibank $148 million, Standard Chartered $27 million and Suisse Bank AG $205 million. The Government plans to seek $15 billion in gross foreign loans during 2020-21 for debt servicing and building foreign currency reserves. Out of the estimated external borrowing of $15 billion, nearly $10 billion will be used to return the maturing loans, excluding interest payments.
Decades of dependence on debts has made Pakistan a weak and vulnerable State. On concluding talks with IMF, the PMLN government proudly announced: “this is the first time we have successfully completed the programme in 15 years…”
The detailed story of our sordid foreign-debt subjugation and its ramifications were highlighted in Debt, taxes and self-reliance, The News on Sunday [Political Economy], January 13, 2019. The burgeoning fiscal deficit and ever-increasing debt burden are not isolated phenomena. These are related to lack of will to undertake fundamental structural reforms, enforce fiscal discipline, crackdown on parallel economy, increase tax collection, abolish perks and benefits of the privileged, dismantle rent-seeking structures, ensure rule of law and good governance and stop monstrous losses of Public Sector Enterprises (PESs).
Managing high fiscal deficit coupled with massive debt burden is the toughest challenge faced by all the governments. The obvious and undisputed solution is substantial increase in resources and drastic reduction in spending, but it is easier said than done. For the last many decades, our fiscal policy has remained under immense pressure owing to perpetual failure of underperformance of Federal Board of Revenue leading to ever-increasing fiscal deficit and debt-servicing, rise in wasteful expenditure and losses of PESs—just to mention a few.
For retirement of debts, concerted efforts are required that are based informed decisions arrived at as a result of research and debate with an executable plan. Resource mobilisation through export-led growth should be given the top priority priority. For this we need infrastructure and human trained capital, growth of small and medium sized firms in the industrial and agricultural sectors for producing value-added exportable surplus. For revival and growth of industry, large corporations with equity stakes for the poor should be established through public-private partnerships. This would set the stage for a structural change that could help achieve inclusive growth for the people and by the people which is presently confined to the elites only leaving the country in deep debt trap.
The writers, lawyers and authors, are Adjunct Faculty at the Lahore University of management Sciences (LUMS).