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The IMF carousel

April 25, 2013

GOING by the words of the interim finance advisor to the prime minister, Shahid Amjad Chaudhry, it appears that a bailout package of some sort is waiting on the other side of the elections.

On his return from Washington DC, where he had gone to attend the spring meetings of the International Monetary Fund and the World Bank, a routine affair held every year and attended by finance ministers and central bankers from all around the world, Mr Chaudhry said the IMF is “keen to engage with the new government” and help in providing the assistance required for meeting all external debt obligations.

According to the advisor, the IMF is offering $5 billion in a quick disbursing loan called the extended fund facility that carries a higher interest rate compared to the stand-by arrangement the last government took out in November 2008. What this would essentially mean is that Pakistan would take out another loan, on higher interest rates, to repay the one that was taken in 2008.

This would buy us another few years at least, until the $5bn have been digested, and another balance of payments crisis begins to loom.

A pattern is now unmistakably clear. Something is broken in the bowels of Pakistan’s political economy, as a result of which the country keeps getting washed up on the shores of a balance of payments crisis. Each time this happens, money arrives from abroad, usually through the IMF, and pulls the country back into the water.

For a short period of time, which varies depending on the amount of the bailout, all seems fine. Then once more, the reserves begin hitting all-time lows, the financial sector begins to twitch uneasily, the rupee begins to falter, talk begins to swirl about the central bank’s ‘firepower’ and noises begin to be made about another bailout.

This pattern has been repeating itself with predictable rhythms for almost a quarter century now. Of course, the broken political economy has been around a lot longer, but the repeated approaches to the IMF really began with the structural adjustment facility of 1988.

Every new government is extended a bailout of some sort, sometimes a large one like in November 2008 which lasted the entire period of the PPP government, and at other times a small one like the stand-by given to the Musharraf regime in 2000, which was barely enough to take the country forward for another six months.

Of course, the Musharraf government, which was in the dog house in its first three years, became the beneficiary of the mother of all bailouts in 2001, not only through the IMF, but also because of a generous renegotiation of all Paris Club debt obligations.

But always, as if on cue, the bailout money runs out and the crisis resurfaces. Not only that, it also takes the same form every time — a rapid drainage of liquidity from the financial sector which necessitates extraordinary administrative measures, while emergency liquidity is pumped into the system from the central bank, and the government goes on a crisis call to the IMF.

As predicted by almost everyone, this time is no different. Nobody in the world wants to see instability in Pakistan at a time when Nato is preparing to extricate itself from its ruinous war in Afghanistan. If basic stability can be purchased in Pakistan for a mere $5bn, then so be it. A small price to pay.

Of course, the addiction to foreign bailouts breeds its own dysfunctions. Everybody remembers clearly how the PPP government behaved towards the economy in its first few months, seeing the approaching balance of payments crisis through indifferent eyes, comfortable in the assurance that outside powers will never let the country sink, that external help will arrive before anything untoward happens.

The repeated operation of this cycle of bailouts has created a political economy of its own, a set of perceptions which holds that it is the job of outside powers to keep the economy on an even keel, that it is the job of the donor community to govern the country. For the rulers, whether civilian or military, the deliverables of government comprises politics and politics alone.

The quarter-century legacy of repeated recourse to foreign-funded bailouts includes the withering away of domestic expertise in economic management. Sakib Sherani has written ably about the emptying out of all serious economic expertise from the Planning Commission, whose best minds have gone over to the World Bank or the IMF (‘Managing the economy’, Dawn, Jan 27, 2012).

Today the government lacks the capacity to even articulate a clear line on crucial national issues like the power crisis or dwindling gas reserves, or tax reform or anything else for that matter.

Where a clear line can be developed, the government lacks the muster and capacity to see to its implementation, as in the Federal Board of Revenue reforms that have languished for at least a decade, if not longer if one were to trace the beginnings back to Vito Tanzi’s advice on value-added tax in the late 1970s.

The withering away of all state capacity for reform, for governance, for addressing the country’s economic ills, is a direct consequence of heavy donor community involvement that Pakistan has become addicted to. Of course, no donor can fix this problem for us. The solution has to come from within.

An attitude has taken hold that the matter cannot be fixed, that the minds of those in power cannot be changed, that the dysfunctions are too deep and that are too many vested interests clinging on like barnacles that would prevent any rectification.

It’s a tempting view, and perhaps by retirement I might be seduced by its fatalistic allure. But not yet.

The writer is a Karachi-based journalist covering business and economic policy.

Twitter: @khurramhusain