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PAKISTAN did not enter a world of globalised capital flows on the heels of an economic crisis.
India had its balance of payments crisis in 1991, Bolivia and Poland were frontrunners in ‘shock therapy’, later applied to many other countries as well. Many other countries were forced to seek a rescheduling of their external debt in those years, and implement a package of reforms as a consequence.
Pakistan had no game-changing economic difficulties in those years. The balance of payments remained tight, but the level of reserves did not change appreciably.
There was one major reason for this: our external difficulties were underwritten by assistance from the advanced economies of the world, in return for our role in what was called the Afghan jihad at the time.
There was one large rescheduling of our external obligations in 1981, and no more after that till 1999, proof that in spite of volatile current and capital accounts, the country’s credibility with its external creditors was underwritten by powerful friends.
Some might find this description a bit puzzling. After all, aren’t the ’90s remembered as a decade of sanctions, of living practically on the edge of default? Given this, how can someone argue that our reserves were actually underwritten by outside powers?
The underwriting was done primarily through the IMF, and the amounts given were always just barely enough to keep the country afloat. And that’s what you get when you seek outside powers to underwrite your reserves: you get kept on a tight leash, which can be yanked at any moment.
This support had two important consequences. Their respective crises forced developing countries in other parts of the world to band tightly together, to develop trade relationships with their neighbours. Intraregional trade grew with spectacular speed in the decade of the 1990s, with South Asia as one of the few places where this did not happen.
For the other regions — Africa and the Middle East — one can debate how and why these regional patterns did not materialise. But for South Asia the answer is relatively simple. India is a large enough economy to stand on its own and never saw much of an economic necessity in reaching out to its neighbours.
Meanwhile, Pakistan — which would have been the real beneficiary of expanded trade ties with its neighbours — was too busy pursuing geopolitical objectives to worry about economics.
Here is the first consequence of having had our reserve level underwritten by others: we were freed from the burden of finding our way in the new world that was emerging all around us, and as a result never put in place the reforms that would have been necessary to attract foreign capital.
The bulk of the foreign capital that Pakistan attracted in the 1990s came via two major channels: the foreign currency accounts and investments in the energy sector.
The first saw the build-up of huge vulnerabilities since they were mostly short-term deposits, meaning they could be withdrawn at a moment’s notice. Given that most amounts had already been borrowed by the government and spent, there was no guarantee that the banking system could honour even a small run on these accounts.
The energy sector investments registered as reserves initially, but once they were up and running and the profits had to be repatriated and oil had to be imported, it turned out they were in fact foreign exchange liabilities.
In 1995 and again in 1996, the country flirted with a foreign exchange crisis. In both cases, a steep devaluation followed by harsh revenue measures helped pull back just long enough till outside money arrived.
But in 1998 the lid was blown and the massive unsustainability of the entire enterprise was laid bare when the foreign exchange accounts saw a massive run and had to be frozen, while the energy companies were pushed into a coercive renegotiation of their tariffs.
This time outside money did not arrive, as a penalty for conducting our nuclear tests, resulting in the first rescheduling of our external debt obligations since 1981.
Other countries had their crises too during this decade. Let’s recall that Mexico had a meltdown in 1994 that required a $40 billion bailout (the largest ever at that point in time). Later of course, East Asia took the mother of all bailouts with its currency crisis in 1997.
But in both cases — Latin America and East Asia — the countries of the region emerged stronger, and even more tightly knit together than they were in the decade past.
Pakistan on the other hand, only emerged from its one game-changing crisis thirstier yet for foreign exchange. The tight leash returned in 2000 with a tiny amount of money from the IMF, just enough to last six months.
Our thirst was slaked only by the arrival of massive quantities of external support following 9/11. No meaningful reforms had been implemented, proof of which is the economy’s continuing inability to accumulate reserves or generate revenues without external support.
The consequences of eschewing a regional link-up have been enormous for Pakistan. In a world where more and more countries began to learn how to seek their economic well-being from transnational private capital flows, we remained dependent on multilateral money, or complex forms of borrowing like the foreign currency accounts.
As a result, we have squeezed an increasingly rigid fiscal apparatus for incremental revenues, relied on rentier terms for private capital to generate investment and growth, spent our national savings to pay for consumption, squandered our natural endowments like water and gas to compensate for loss of competitiveness elsewhere, etc. The list is endless.
All the while, the most natural step to take was to start normalising trade relations with our neighbours. The terms of trade we could build after that would have been a far more reliable foundation for our economic future than the fistful of dollars that our geopolitical games keep us searching for.
The writer is a business journalist and 2013-2014 Pakistan Scholar at the Woodrow Wilson Centre, Washington D.C.
Twitter: @khurramhusain
