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THE view is gaining currency here in Washington D.C. that Pakistan needs to be cut off from all sources of concessional multilateral and bilateral financing to be taught a lesson in reality.
The view is advanced by people from all walks of life. Many are Pakistanis themselves, who have come to believe that three decades of regular and constant bailouts by the IMF have given rise to a sense of entitlement within Pakistan that has prevented the country from taking the steps necessary to learn to stand on its own feet.
The view is also held by many Americans, especially those with input in the government’s foreign policy. Particularly on Capitol Hill, it’s hard to find a member of Congress who takes a positive view of Pakistan, and believes that America should expect anything good from a continuing engagement with us.
Such views have not seeped into the president’s decision-making circle yet, primarily because none amongst them is willing to advise that the government run the risk of creating an economic crisis in Pakistan at such a delicate time.
Additionally, the view finds some currency within the country as well. It has even been echoed by senior economists previously associated with state institutions who feel that the IMF should keep away in order to teach the country a lesson in economic management.
Others who have also held high office agree. Although none of them use the words, they advocate a kind of ‘shock therapy’ for Pakistan of the sort that was administered to Russia and Eastern Europe in the early 1990s. Letting the country drift into a crisis, they argue, is the only way to awaken its elites and leaders to the responsibilities of running a country.
Most recently, the view has been argued forcefully in a new book by Hussain Haqqani, the former ambassador who represented Pakistan in Washington D.C. before falling victim to a dubious set of charges in an incident called ‘Memogate’.
The book is titled Magnificent Delusions, and it’s a magnificent read.
Haqqani draws on archival material culled from the archives of the National Security Agency as well as the State Department and other government sources to argue that America and Pakistan have been trapped in what he calls “parallel narratives”, where they are telling themselves different things about their relationship with each other.
All the ‘aid’ that America has poured into Pakistan over the years has built little other than a sense of entitlement amongst Pakistanis, argues Haqqani.
The book deserves a comprehensive review, but suffice for now to say that another powerful voice has been added to the chorus, bringing historical depth to the whole debate. Nothing will change in Pakistan, these people are arguing, unless Pakistanis are left to face the full spectrum of the consequences of their own actions.
I do not share this view. At least not yet. Despite the fact that it’s held widely by many people around me, and especially those whose opinions I hold in high regard otherwise, this view in my opinion is wrong and irresponsible.
My reasoning is simple: killing the patient is not the cure. Pakistan is already under ‘shock therapy’ on a variety of fronts, and piling up one more will almost certainly push the country over the edge.
What troubles me about this view is that it is built entirely on deductive reasoning. ‘How else are we to break the cycle of dependence?’ one person asks. ‘How will the political class awaken to its responsibilities otherwise?’ asks another.
It’s true that the status quo is untenable as it stands and must be reformed. But each time I’ve asked the adherents of this view to please explain how an abrupt interruption in all multilateral inflows will play out, they have presented a picture that is in stark contradiction to the facts.
Something along the lines of a serious balance of payments crisis was indeed brewing in November 2008, and some of us might recall how the financial system had begun to shut down as liquidity drained out of it at a terrifying pace.
Only a timely and rapid arrival of IMF funds ‘backstopped’ the whole affair, but the truth is we don’t really know what state of affairs we were sliding towards had those funds not arrived.
The stock market had already been shut down, and so had mutual funds. The inter-bank market had also largely shut down, and a bank failure was not too far away, with rupee withdrawals facing a rising chance of being frozen.
That was the first time we faced such a crisis. With a majority of our financial system in private hands, and without deposit insurance, nobody knows how far the panic would have spread and how much damage it could have done.
There were good reasons to move fast in those days, and good reason for the IMF to frontload the disbursement of its money.
The rapid drainage of liquidity from our financial system is the biggest threat to the country’s economic stability in the new world of private sector ownership and open capital controls.
In 1998, right after the nuclear tests, the country faced a similar drainage of funds from the financial system, and in the absence of any international bailout, had to freeze all withdrawals from foreign currency accounts.
Ten years later, in 2008, after large-scale privatisations in the banks and huge growth in the stock market, the drainage of liquidity happened across the board beyond just foreign currency accounts, and this time the financial system as a whole began to jam up.
These are not forces to be toyed with. I know it’s frustrating to see the status quo in Pakistan, but wishing a financial crisis upon the country at this crucial juncture when it is struggling with a democratic transition and a militant threat is not responsible advice.
The writer is a business journalist and 2013-2014 Pakistan Scholar at the Woodrow Wilson Centre, Washington D.C.
Twitter: @khurramhusain
