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IMF loan to induct needed discipline
Comment
Abdul Sattar
Editor, Foreign Affairs
Even more than billions of dollars to avert imminent default
Pakistan desperately needs expert advice to break the habit of
living beyond means and independent supervision to prevent corrupt
practices that drain off public resources into personal pockets of
indiscriminate exploitative elite. International Monetary Fund alone
has the financial means, intellectual capability and international
credibility to undertake multi-dimensional missions worldwide to
rescue states from consequences of improvident economic polices.
Impressed by its performance affluent states have decided to
increase IMF’s resources with Japan taking the lead to contribute a
hundred billion dollars so that it can play an even more effective
role to rescue economies sucked into the vortex of the current
global crisis.
The loan of $ 7.6 billion likely to be approved by the International
Monetary Fund executive board later this week will not only enable
Pakistan to service the international debt and provide fiscal space
for orderly transition to self-reliance but hopefully also induct
desperately needed fiscal discipline and remedial measures to stem
the country’s descent into bankruptcy. Pakistan was brought to this
humiliating plight by Government’s abysmal failure to take timely
measures to rectify domestic and external imbalances between
earnings and expenditures and stem the drain that was manifest in
rapid decline of on foreign exchange reserves from $ 16 billion in
October 2007 to less than $ 7 billion in October 2008. Also for a
whole year the State Bank of Pakistan did nothing to prevent flight
of capital and enforce laws prohibiting illegal transfer of foreign
currency by private sector exchange dealers.
IMF’s supervision will also reassure foreign friends and benefactors
who were reluctant to provide cash or credits to Pakistan because of
its record of fiscal indiscipline, bad governance habitual, failure
to balance income and expenditures, tolerance of corruption and
transfer of illicit assets outside the county. The benefit of doubt
friends gave to Pakistan in the past was no longer deserved after
the so-called National Reconciliation Ordinance promulgated by
General Pervez Musharraf in 2007 which gave amnesty to persons in
high places who were charged with crimes of corruption and
government even withdrew cases where foreign bank records testified
to accumulation of illicit funds. When our state in effect set its
seal of approval on malpractices it was natural for friends to
withhold charity likely to be abused to feed bad habits. We
therefore deserve to be closely watched and supervised so that the
assistance extended to Pakistan in future will be utilized for
legitimate purposes.
The agreement with IMF will regenerate confidence. IMF loans are
invariably subject to conditions that a borrower has to accept. The
funds it provides can only be used for specified purposes and the
recipient must also implement programmes which not only address the
causes of the problems a country faces but also ensure build up of
capacity for repayment of the loan. In the past Pakistan acquired
notoriety as a one-tranche country because after receiving the first
installment it failed to implement its solemn pledges. As a result
IMF terminate transfer of further funds. Only once, during Shaukat
Aziz’s tenure, Pakistan abided by the conditionalties of IMF loans.
Still IMF is not taking good performance for granted. According to
indications it will also appoint experts who will not only assist
Pakistan in devising efficient policies but also continuously
monitor utilization of the loans for agreed purposes. Mercifully the
possibility of abuse or diversion of loan to illegitimate ends will
be prevented. IMF is not like our public sector banks which were
pressured to give loans to influential people who later used their
influence to secure write-offs.
The main objectives of the IMF loan are stated as restoration of
confidence of domestic and external investors by addressing
macro-economic imbalances while protecting the poor from hardship
and preserving social stability through a well targeted social
safety net. The loan is expected to save the country from serious
balance of payments difficulties and default on existing liabilities
in foreign exchange.
Unlike World Bank and Asian Development Bank loans which usually
have long maturities, the IMF loan will be repayable in five years.
Although the interest rate of 3.5 to 4.5 percent is concessional,
the loan of $ 7.6 will add about two billion dollars a year to
Pakistan ’s debt servicing burden during 2011-2016. Since the
servicing liability on the existing debt burden of an estimated $ 50
billion is already about $ 3 billion a year, the IMF loan will raise
the annual liability to $ 5 billion a year.
It is high time Pakistan once again embarked on determined effort to
stabilize its debt burden. In 1999 the government decided on a
strategy to break the debt trap. Although constrained by multiple
nuclear and democracy sanctions, it embarked on rigorous austerity
so that the debt burden was not allowed to exceed the inherited
figure of $38 billion. Unfortunately the example then set is not
valued by the present government.
