Huzaima Bukhari & Dr. Ikramul Haq
After 73 years of independence, our leaders in power want to celebrate liberation from colonial rule after pushing the country into a deep debt trap. 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, second of current arrangement with International Monetary Fund (IMF) on December 26, 2019, was commemorated like August 14, 1947. The same was the practice in all earlier governments. This indeed is the worst possible manifestation of a subjugated mind—tragically all the governments, civil and military alike, has forced the nation to remain incarcerated in the debt prison.
In 2016, we wrote an article, Trapped and enslaved, The News on Sunday [Political Economy], June 5, 2016. In 2020, the situation is no different, rather worse. All the six budgets presented by the last government of Pakistan Muslim League (Nawaz) [PMLN] form 2013-2018 had the common characteristics, with main emphasis on ensuring economic enslavement through burgeoning debts. PMLN faithfully obeyed commands of the IMF that gave US$ 6.6 billion bailout package.
According to a statement issued by the IMF, its Executive Board on December 19, 2019 completed the first review of Pakistan’s economic performance under the Extended Fund Facility (EFF). The completion of the review has allowed Pakistan to draw Special Drawing Rights (SDR) 328 million (about US$ 452.4 million), bringing total disbursements to SDR 1,044 million (about US$ 1,440 million). It may be remembered that IMF Executive Board approved the 39-month, SDR 4,268 million (about $6 billion at the time of approval of the arrangement, or 210 percent of quota) Extended Fund Facility (EFF) for Pakistan on July 3, 2019. For the coalition government of Pakistan Tahreek-i-Insaf (PTI) saying prior to election “we will never “beg” was a great “achievement” and the conditions imposed by the IMF were the most stringent in our history of having bails outs from IMF since 1958 [See box].
It is a matter of official record that the PTI Government secured over $13 billion in foreign loans in the fiscal year 2019-20 alone! It was the second highest amount in history and making things more painful is the reality that we are now borrowing “to repay maturing external debt and cushion the shrinking foreign exchange reserves”. During the previous fiscal year, we 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.
In nutshell, Pakistan received $29.2 billion in foreign loans in the past two years that include $26.2 billion by the PTI Government since August 2018. Out of this, $19.2 billion was just to repay the maturing external debt and the remaining was added to the “external public and publicly guaranteed debt”. The resultant increase in debt-servicing as repayments contracted as new foreign loans, increased substantially. For the current fiscal year 2020-21, the cost of external debt servicing is estimated at Rs. 315 billion though we have secured over $300 million or about Rs. 50 billion temporary relief from the G20 group’s moratorium 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. The Ministry says we did not have any option but “to borrow to repay maturing loans and stabilise foreign currency reserves that dipped below $10 billion in May 2020 after the outflow of hot foreign money of over $3 billion”.
According to report, “the withdrawal of hot foreign money, on the one hand, exposed the ill-planning of the State Bank of Pakistan (SBP) and on the other highlighted the fragility of foreign exchange reserves that were built on the back of foreign borrowing. The dip in foreign exchange reserves triggered panic borrowing by the economic managers of the PTI Government. Resultantly, the Government “started borrowing from the commercial, bilateral and multilateral creditors exceeded the budgetary target due to the dip in SBP’s foreign currency reserves, low inflows under the Saudi oil facility and the decision not to float Eurobonds valuing at $3 billion. The PTI government, like its predecessor, has also been unable to fully capitalise on non-debt creating inflows like exports, remittances and foreign direct investment”, the report adds.
Bilateral creditors disbursed $629 million in the last fiscal year against the budgetary target of $480 million. The utilisation of Saudi oil facility remained low at around $770 million against the target of $3.2 billion. 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 (ADB) provided $2.8 billion, exceeding the annual target of $1.7 billion. However, out of the $2.8 billion, the ADB’s budgetary support loans amounted to $2.3 billion including a billion dollars for the crisis response facility. The IMF disbursed loans of $2.84 billion, including $1.4 billion in emergency financing in response to Covid-19. The Islamic Development Bank (IDB) 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.
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. Commercial loans are considered expensive due to their short maturity period and relatively higher interest rates compared with the official bilateral and multilateral credit. 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 has also planned to seek $15 billion in gross foreign loans in the current fiscal year 2020-21 for debt servicing and building foreign currency reserves in the absence of non-debt creating inflows. Out of the estimated external borrowing of $15 billion, nearly $10 billion, or two-thirds, will be used to return the maturing loans, excluding interest payments.
Decades of dependence of local and foreign debts has made Pakistan a weak and vulnerable State—though every government keeps on harping the mantra of having nukes and an unparallel ‘strategic location’. On concluding talks with IMF, the PMLN government proudly announced: “this is the first time we have successfully completed the programme in 15 years and the sixth in its 58-year relationship with IMF.” The detail story of that sordid subjugation and what happened thereafter was highlighted in Debt, taxes and self-reliance, The News on Sunday [Political Economy], January 13, 2019.
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 was successfully completed. The current one by the PTI Government, after second tranche is continuing but without certainty due to Covid-related extraordinary situation and fundamental differences on certain issues with the IMF .
Managing high fiscal deficit coupled with massive debt burden is the toughest challenge faced by our economic managers. 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, Pakistan’s fiscal policy has remained under immense pressure owing to perpetual failure of underperformance of Federal Board of Revenue (FBR), continued security related outlays, rise in wasteful expenditure and greater than targeted subsidies, losses of Public Sector Enterprises (PES) etc. Other alarming elements remained high fiscal deficit, sluggish exports and high imports.
The burgeoning fiscal deficit and ever-increasing debt burden are not isolated phenomena. These are related to lack of political will to undertake fundamental structural reforms, enforce fiscal discipline, crackdown on parallel economy, increase tax collection, abolish perks and benefits of the ruling elites, eliminate wasteful expenses, dismantle rent-seeking structures, ensure rule of law, and stop reckless borrowing and ruthless spending.
Resource mobilisation should be given priority to build infrastructure, facilitate growth of small and medium sized firms in the industrial sector and small farms in the agricultural sector for an employment intensive and equitable economic growth process. To end economic apartheid, large corporations with equity stakes for the poor can be established through public-private partnerships. This would set the stage for a structural change that could help achieve economic growth for the people and by the people which is presently confined to the elites only.
The writers, lawyers and authors, are Adjunct Faculty at the Lahore University of management Sciences (LUMS).