Why Pakistan should leave the IMF programme
Pakistan has formally conveyed its decision to the IMF that it does not wish to enter into a successor agreement with the Fund on the completion of the current PRGF programme at the end of 2004.
This decision has evoked two kinds of responses - one that of relief that we will no longer be subjected to the harsh conditionalities of the Fund and second that of disbelief that the country is not yet ready to shed off this yoke and even if this is done it will only be for a temporary duration - in other words, it will not be sustainable.
As I had earlier written a paper in January 2001 on "Why Pakistan had to adopt the IMF programme?" providing the rationale behind Pakistan's decision to go through that route, this paper, written three years later, attempts to outline the reasons which have now prompted us to terminate financial arrangements with the IMF. In order to understand these reasons in the proper context, we should begin by asking the following questions:
a) When does a country approach the IMF? b) Why did Pakistan approach the IMF? c) What did Pakistan get out of the agreements with the Fund? d) What are the factors that call for exit and are they sustainable? e) What is it that we will be able to do differently?
The IMF is a cooperative institution of developing and developed countries which was established at Bretton-Woods in 1945 to provide stability to international financial system. Unlike its twin, the World Bank, which is a long-term development partner of developing countries, the IMF comes into action only when a country faces dire financial difficulties. Thus, its assistance is for temporary and limited duration and not for longer term.
A prolonged association with the IMF shows that the economy is suffering from chronic ailment and has not been able to come out of the woods. This carries a stigma in the international financial markets which become reluctant to provide financing to such IMF dependent economies. The sooner a country is able to sever its financial programmes from the IMF, the better would it be in signalling that the economy has become normal and healthy.
A normal healthy and well functioning economy does not approach the IMF for financial assistance. It is only when an economy is in a crisis situation or likely to hit a crisis in near term, the authorities invite the IMF to engage in negotiations for a possible financial package that can be quickly disbursed over a given period of time to overcome or avert the crisis.
The occasions for such a recourse arise (a) when the country is having serious current account imbalances and is unable to meet its external payment obligations out of its own generated resources including the normal flows from external sources such as Foreign Direct Investment (FDI), disbursements of loans, etc. or (b) when the external debt obligations falling due immediately are in excess of the country's capacity to pay.
This occurs mainly when commercial creditors refuse to roll over maturing debt or demand high roll-over premiums, or (c) when a country has been hit by speculative attack on its currency (particularly under a fixed exchange rate) and is depleting its foreign exchange reserves rapidly to avert that attack or (d) when the banking sector or financial sector suffers from a systemic failure and the depositors' money is at risk or a combination of these and other factors.
The examples of Mexico, Russia, East Asian countries, Turkey and Argentina in the late 1990s can be used to illustrate one or the other of the above described motivating factors for their approaching the IMF.
Most African countries have been prolonged users of IMF resources - reflecting the unhealthy state of their economies. In Asia, Pakistan, Philippines and Indonesia have been approaching the Fund for assistance more frequently and for longer periods than other countries. India entered into an agreement in 1991 but exited the programme a few years later as it recovered from the crisis situation. China hasn't approached the IMF as it has a strong and healthy economy.
There were three main motivations behind Pakistan's decision to approach the IMF in 2000 (i) as the country was almost on the brink of a default on external payments, we needed quick infusion of funds to sustain and support our balance of payments situation, (ii) to find a permanent and durable solution to our external debt problem.
Instead of approaching the IMF every three years or so and obtain a rescheduling of our flows, we were determined to seek a stock reprofiling that will align our debt payment capacity with the new profile of payments, and (iii) to restore the lost credibility of Pakistan in the international financial community as Pakistan was called a one-tranche country. We used to enter into agreements and draw down the first tranche and seldom fulfilled all the obligations and conditionalities contained in the agreement.
It was quite clear from the beginning that this will not be an easy ride and the people of Pakistan will have to suffer pain in the short term. But the idea was that after going through this tough period of tribulations and avoiding the crisis situation, the country will be able to stand on its own feet and regain its national sovereignty in economic decision making.
We won't have to run to the IMF or the US government every now and then with a begging bowl to bail us out of one crisis or the other. This was the objective with which the stand-by agreement of 2000 and the poverty reduction and growth facility (PRGF) agreement of 2001 were negotiated with the IMF.
Pakistan has been able to establish its credibility as a serious player in the international financial community by drawing down eleven successive tranches from the IMF without any delay or interruption over a period of three years. This is an unprecedented record in the history of economic management of Pakistan and has led to the upgradation of Pakistan's credit rating from selective default in 1999 to B2 in 2003, almost a universal appreciation of our track record by bilateral and multilateral creditors and has opened the way to accessing credit from the international markets at affordable price.
As the IMF agreements remained on track and the performance was impressive, the Paris Club - a group of officials of bilateral creditors - agreed to re-profile the entire stock of external bilateral debt of $12 billion on a long-term basis. The grace period for the re-profiled debt was fixed at 15 years and the repayment period was extended to 38 years. Thus, in net present value terms, the stock of the debt was reduced by one-third.
This treatment was exceptional and only four other countries have received such a generous package. Pakistan will no longer be obligated to have future agreements with the IMF to seek debt rescheduling. In one go we have been able to find a permanent and durable resolution of our bilateral external debt by cutting back our stock of bilateral debt. Those who argue that debt reprofiling has simply postponed the D-day are sadly mistaken. The payments due after next 15 years in relation to the country's earning capacity will be minuscule.
The IMF's financial assistance combined with that from the World Bank and Asian Development Bank in the form of quick disbursing concessional loans provided the cash flow in the initial years to meet our balance of payments obligations. The substitution of concessional loans for hard-term loans from these institutions was part of our debt reduction strategy. This infusion also helped restore the confidence of other private commercial creditors and slowed down flight of capital by resident Pakistanis. The slow build-up of foreign exchange reserves from less than a $1 billion in 2000 to $3.2 billion by June 2001 also stemmed the speculative attack on rupee and calmed the foreign currency markets.
It is fair to surmise that Pakistan was able to achieve all the three objectives it had set out for itself in approaching the IMF in the year 2000. There is no denying the fact that the post-September 2001 developments have immensely helped strengthen Pakistan's external sector but the sacrifices made by ordinary Pakistanis in meeting the harsh conditionalities of the IMF should not be ignored or overlooked. Had there been no September 11 it would have taken another two more years to achieve the results we have witnessed in 2002/03. September 11 did help accelerate the process of economic recovery and external sector viability.
At least six compelling reasons can be advanced in support of the exit strategy. In the following paragraphs these factors are elaborated and also the elements of their sustainability are pointed out.
1) A positive structural shift in external account of the country has been achieved. Pakistan's payment capacity has become stronger and sound.
(a) Debt re-profiling, early payments of expensive debt, substitution of concessional for non-concessional loans from international financial institutions (IFIs), have radically reduced the burden of debt servicing from 66 per cent of foreign exchange earnings in FY00 to 25 per cent in FY04 and even lower in FY 05 and thereafter. New debt contracted is at concessional rates, highly selective and the rate of debt growth is quite low. Thus, there is very little danger of the country getting back into a debt trap.
(b) Workers' remittances are being routed through official banking channels and adding to the supply in the foreign exchange market. As the number of workers emigrating overseas is expanding every year and net migration back to Pakistan is expected to remain low - this source of foreign exchange earnings is expected to remain stable at $3.5 billion annually if not higher.
It may be recalled that throughout the 1990s Pakistan received $3 to $3.5 billion annually from non-resident Pakistanis through different channels - foreign currency deposits, kerb markets and official banking - at different times. But the amount of annual flows remained unchanged although the delivery channels varied throughout the last 12 years.
(c) Trade gap is gradually declining and the exports' coverage ratio of imports is rising. Four years ago, the trade imbalance was $2 billion or 3.4 per cent of the GDP. In the last fiscal year this imbalance had come down to only $400 million or 0.6 per cent of the GDP. Export growth will receive a further boost from the demise of Multi-Fibre Agreement (MFA) in 2005. Policies in favour of export promotion are endorsed by all political parties in Pakistan and these are likely to remain in place.
(d) Foreign exchange reserves have been built up by the State Bank of Pakistan largely through non-debt creating flows and will help the country meet any unanticipated exogenous shocks such as rise in oil prices, poor harvests, depressed world demand, etc. The risk that these will be depleted because of the payments of borrowed resources and foreign currency deposits which accounted for the reserve build-up in the past has been eliminated. Foreign reserves have been acquired by mopping up current account surpluses over the last three years and are free from any encumbrances.
(e) A substantial amount of liquid reserves provides a strong backing for low cost market borrowing without conditionalities. If and when financing is needed to meet some short-term mismatches or requirements then we will be in a position to access international markets at favourable terms. This has been demonstrated by the recent successful entry of Pakistan in the international bond market where blue chip investment houses and fund managers subscribed to the Pakistani bond at fine pricing.
(f) Telecommunications, oil and gas and hydroelectric power generation provide attractive avenues for increased foreign direct investment in the country. The very positive response to the award of two cellular licences attests to this trend.
(g) Privatization of large public sector enterprises will generate net positive earning in foreign exchange over the next few years. These earnings can be invested productively to generate a stream of annual income in foreign exchange.
(2) Fiscal deficit has been reduced to 4.4 per cent and will be further reduced to 3-3.5 per cent thus obviating the need for large scale borrowing from either domestic or foreign sources. Fiscal deficit reduction has been built on the basis of solid and durable footings such as:
(a) Debt servicing as proportion of government revenues is on a declining course and will free up space for development spending on infrastructure and social services. Four years ago, debt servicing claimed 66 per cent of government revenues. This year, this ratio has significantly declined to 31 per cent and the future projections show it will attain 25 per cent.
To be concluded
HMS Choudri: crusader for peace
Vice-Admiral Haji Muhammad Siddiqi Choudri, who passed away on Friday, had the distinction of being not only the first Pakistani to command the Pakistan Navy, but also in fact the first Indian to be commissioned (in 1932) into the executive branch of the Royal Indian Navy (RIN). As far as one can recall, before him only one other Indian (a Parsi officer) had the honour of being granted a commission (engineering branch) in the Naval service, the officer cadre of the executive branch of the RIN until then reserved for British officers or personnel seconded from the Royal Navy for service in India.
Choudri Sahib, as the younger naval officers generally called him, had most of his early training in England and specialized in the gunnery branch. He held various appointments both at sea and with land-based naval formations before and after the Second World War. At the Japanese surrender ceremony in Japan at the end of the war he was given command of the two-ship formation that represented the Royal Indian Navy. At the time of partition, Choudri Sahib happened to be the senior-most Indian officer and was involved in the division of the RIN's assets between India and Pakistan.
After independence, his early years with the Pakistan Navy were spent in service abroad or at sea and it was only in the 50s that he was assigned command of the Royal Pakistan Navy. The navy at the time was extremely short of ships and training facilities and Admiral Choudri had to start building the country's navy from scratch.
It was by no means an easy task, not only because he did not receive the most willing cooperation from the British officers who were still serving in the Pakistan Navy in a fairly large number. A bigger hurdle was the paucity of funds as the army was given the major share of money and an exceptionally large share went into the building and expansion of the young air force.
It is unbelievable how slow the authorities at the top were in comprehending the value of the navy to a country which had a preponderant coastline and also had to cope with the unusual geo-political situation of its two halves being divided by more than a thousand miles and the only link between the two halves being the sea.
Generals Iskander Mirza and Ayub Khan who had the dominant voice in working out a policy for the country's defence and in the allocation of resource were obsessed with the odd concept of the defence of the eastern wing lying with the west. The blatant disadvantage consequently suffered by East Pakistan became too obvious during the 1965 war when East Pakistan was left to fend for itself.
Admiral Choudri was only too well aware of the difficulty of defending the eastern wing in the event of hostilities between India and Pakistan and from the outset laid great stress on the critical importance of providing East Pakistan with virtually a self-supporting naval setup by building a modern naval base in Chittagong.
But he received little support from his colleagues in the army whenever the matter was taken up at the higher level of the administrative echelons. As a result, Admiral Choudri was unable to see his plans becoming a reality on the ground, leaving the people of East Pakistan with a perpetual feeling of being left out in the cold where the nation's defence was concerned.
Not unexpectedly, the demand for an adequate naval base for East Pakistan featured in all of the negotiations for their political rights by the leaders of the eastern wing.
Before the showdown in 1970-71 the shifting of the naval headquarters to East Pakistan prominently featured in Shaikh Mujib's 'six points' but by then it was obviously too late to do anything about it.
Admiral Choudri's differences with the people who mattered in drawing up the future defence policy of Pakistan came to a critical point with Gen Ayub Khan's rise to power; he had scant regard for the admiral's capabilities or for his insistence on the strengthening of East Pakistan's capacity for its own defence. Their acute differences on policy matters and clash of personalities led to Admiral Choudri offering to relinquish the command of the navy, an offer which Ayub Khan received with an obvious sense of relief.
However, even after his departure from the navy, Admiral Choudri continued to promote the cause of making the people aware of the critical importance of Pakistan's maritime defence. He set up the Pakistan institute of maritime research and strategy in Karachi and held many seminars to promote its objectives. Indeed, my last meeting with him was at a presentation that he had sponsored on the question of confidence-building measures between the navies of Pakistan and India for defusing tensions between the two countries in the interest of a peaceful maritime environment in the region.
The main feature of the seminar was an excellent presentation by retired Rear Admiral Hasan Ansari on the basis of research he had conducted jointly with a retired Indian naval officer, Rear Admiral Vohra, with regard to the specific irritants in the way of resolving disputes in the area of maritime defence. At least one of the outstanding bilateral issues identified in the research, the nagging dispute over Sir Creek, is slated for resolution by the governments of the two countries when their top-level negotiations take place.
Despite his age (92) and extremely poor health, Admiral Choudri sat through most of the discussion. Towards the end when he looked alarmingly unwell, his son, Rishad, pushed his wheelchair out of the hall - but quietly, without interfering with the proceedings. Choudri Sahib was a crusader for harmony and the importance of moral values to international peace up to the end.
Some shocking deaths deepen sorrow
Sometime in the 70's, in this "beloved" city, there was, one recalls in the midst of all this sorrow and shame of today, a little girl Tarranum Aziz of the Federal B Area, who was kidnapped and murdered. Yes, that is all one remembers now, and while newspapers carried the story, there was anger and resentment in the city.
There was a deep disappointment, as to how could anyone kidnap and kill a little girl aged four or five. That is how little she was. Her photographs, that newspapers carried, symbolised her obvious innocence. This city and society, both have come a long way since then. Has it been a journey into still deeper sorrow.
Truly, much to mourn and deeply this week, as one ruminates into the shocking murder of Sassi, 5 and Hajra 8, two sisters, the details of which are so well-known by now, and in which five policemen have been "booked." Just pause at the age of the two girls; five and eight. Think of the barbarity and insanity that appear to have taken over. Think of the life-long sufferings of the families concerned, and their subsequent emptiness. How does a family live with this sort of a tragedy? How does the society explain this crime; monstrous crime without the slightest doubt.
I will return to this sadness of the murder of the two little girls, but let me mention another news report, with which in fact the week began. A noted professor had reportedly attempted suicide by shooting himself, and eventually after a short stay in the hospital he breathed his last. But from the facts that were reported, there was much to contemplate. And once again in tears. Is this a land of sorrow? asked a colleague, who's love of poetry is often a source of comfort and consolation, when life's troubles torment.
Reading the details of this well-known doctor, who appeared to be residing alone in Defence, with his family abroad, brought back memories of the "tragic death of an old professor and his wife in their house in Malir, Karachi," in December 2003, not too long ago. In that case, the story was that the death occurred due to "starvation," presumably caused by long delays in the release of pension and other dues from the Sindh education department.
(Let us not overlook or underplay the agony and the harassment that can be caused by delayed government pensions, another aspect of our lives). That this retired professor, residing in Malir, had taught hundreds and hundreds of students, many of whom must have done well in life - is a passing painful thought.
A colleague, who was very disturbed by the "suicide" that the doctor committed in the city, talked about the need for returning to the joint family system. He was vehemently critical of the way Pakistan's urban society had "aped" the West, by opting for smaller families, and nuclear families at that. Without the support structure of the developed societies, we have taken on the problems of the Western family structure, and given up the best of the family togetherness that we have held onto for generations. In a way, we had the worst of both the worlds, he contended, adjusting his newly-acquired spectacles!
But let us return to the "ruthless" murder of the two little girls, which has once again exposed, not only the way we live, but also the way in which we are governed. It makes citizens wonder at the kind of police we have, and that for all the effort that has been made (?) and all the campaigns that have come and gone, the reality of the police force, in particular, and that of officialdom in general, is far from what the demands of decency dictate.
While one hopes that justice will be soon done, and the guilty will be given, without delay, the punishment that is their due, let us note that the people, countrywide, have reacted angrily and intensely. There has been bitter street protest, and in private conversations there has been the usual and not so cynical expression of alarm at the way in which our values are eroding, and how those, whose job it is to protect human life, to safeguard our interest, to ensure that we live within the domains of security, are becoming the cause of peril, death. Shame really.
Widespread indeed is the condemnation of the brutal murders, wherein it has been termed as a "failure of the authorities to protect the people's lives," according to a report on Friday in this daily. Political leaders attended the soyem of the girls, and various leaders, including Benazir Bhutto, Altaf Hussain, and others expressed their candid condemnation of the killings and condoled with the parents and the families, to share their grief.
It is necessary to mention the news report that Dawn carried on Feb 26, in which it was said that "CM seeks judicial probe into the girls' killing, and that "confusion, fear grip police department." This story, as one read, was disturbing, though there was nothing that was intrinsically new, said one resident of this city. He said that this was the way in which the police had been functioning for decades, and this was what required to be changed. But when would that happen, we wondered as we conversed, treading into deeper sadder terrain.
One does not need to comment on or reproduce the details of how the police is reportedly working, except one paragraph, which reads like this "Official sources said that the police had been politicised and demoralised by the steps being taken by the police higher ups." Politics, demoralisation?
The autopsy report has confirmed that the Gadap girls were murdered. One died due to a blow on her head, and the other was shot to death. Even as I write, I am horrified, even terrified, and it makes one wonder how safe are even children in this society.
The deal that children, especially those of the poorer sections of the society, receive at the hands of adults is scary, nightmarish, and reflect well on the nature of this society. For all the Jashne Baharan that we have had, our reality is sordid, bloody. For all the Valentine's day and the Basant that we have celebrated, the truth about how suffering is getting intensified is something that needs to be thought out.
Almost every day there are stories of men or women who commit suicide. Take the two who committed suicide as reported on Feb 26. A 40-year-old man in Nazimabad (Paposhnagar) hanged himself to death from a ceiling fan at his home. He was unemployed. Now that is a vast subject itself. An unemployed man. Oceanic hell.
The other person was an 18-year-old girl, also hanged herself from a ceiling fan in Orangi, reportedly in a fit of "depression." Police concerned gave no reason for the suicide. That's it. A handicap with such brevity of reporting is that the human details of a death under such circumstances are never explored, and made known.
And its here that one is reminded of what Joseph Stalin said: "A single death is a tragedy, a million death is a statistic." This quote is given in a detailed study on "trend of suicide in Pakistan," which focuses Karachi in particular, with an attempt to create an awareness on a worrying and agonising trend. Somehow it did not get the attention that it deserved, remarked this resident of Gulistane Jauhar, Tariq Zuberi.
It is relevant to quote from this detailed research paper, which said: "In Karachi, the major reason for a suicide is the feeling of the insanity of living. This feeling is connected with the situation of a certain society, particularly with the economic instability, ideological mess, unemployment, lack of infrastructure, poverty, eroded personal relations, and over-estimation of public moral norms. Psychologists call this phenomenon "anonymity in a crowd." In other words, it is a situation where a person feels terribly lonely, having a lot of friends, relatives and colleagues."
So what has one focused upon today. Murder of little girls, after one of them was perhaps assaulted, suicide, and the reported way in which the custodians of the law have functioned in the Gadap case. This land was tormented by a sorrow it could do without. A sorrow born of "injustice."