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The key challenge

Until last week, some Pakistani economists were opposed to any fresh borrowing from the IMF. Ironically, this lot included some key state office-holders who claimed that Pakistan had sufficient exchange reserves to plug the ever-present trade deficit, and for backing up the rupee.

Indeed, borrowing from the IMF dilutes the sovereignty of the borrowing state, but to avoid that the state has to radically improve its economic management that today’s politicians rarely do. The PPP regime in power since 2008 deserves a medal for its (deliberate?) failure in this context.

What did Pakistan do with the funds obtained under the last Stand-By Arrangement (SBA) with the IMF, is worth asking those who oppose borrowing from the IMF. That facility should have been used as the confidence-building reserve and the economy should have been restructured. Was that done?

According to Finance Minister Ishaq Dar, “Resources from the previous loan were not utilised efficiently with the result that sufficient reserves are not available to service them… public debt has increased to Rs 14.5 trillion as of June 2013, and almost Rs 2 trillion thereof was built up last year.”

Thereafter, he adds that the PML-N government has inherited a broken economy, Pakistan is saddled with huge payments – courtesy liabilities incurred by the previous regime – has to retire the existing IMF loan, and exchange reserves are wholly inadequate for doing all this.

What he conveniently overlooked was the fact that during the term of the PPP regime, PML-N was a part of the parliament and, surely, what he is discovering now isn’t a secret. What exactly was his party doing then; was it silent only to protect a corrupt democratic set-up?

As for borrowing, almost every time Pakistan borrowed from the IMF, it failed to fulfil the terms on which the IMF provided the funds. This has been the profile of conduct of the democratic as well as dictatorial regimes, but democratic regimes failed more miserably.

Borrowing isn’t a sin; what makes it a sin is the waste of borrowed resources instead of generating from them economic benefits exceeding their value. Dar now confronts the challenge of doing just that – restructuring the “broken” economy to deliver those economic benefits.

The PML-N regime has made big promises – in the next three years, as a percentage of the GDP, pushing up economic growth from 3.6 to 5.5 percent and tax revenue from 8.8 to 11 percent, lowering the fiscal deficit to 5 percent from 8.8 percent at present and public debt to 59.1 percent from its present level of 63.5 percent.

All these are 3-year targets. Not surprisingly, according to Dar, the IMF and Pakistan “have reached an agreement for a 3-year programme of at least $5.3bn under an Extended Fund Facility”. The “3-year” part in both implies that borrowing from the IMF guided the setting of targets.

The list of IMF conditionalities in the draft agreement is long and yet to be finalised before it is presented to IMF’s Executive Board for consideration and approval by early September, but the agreement’s approval will be subject to timely completion of prior actions by Pakistan’s administration.

That list includes fiscal consolidation, containing inflation, resolving the energy crisis and circular debt, larger social safety nets, restructuring and privatising state-owned entities, building up exchange reserves to stabilise the rupee, and reforming financial services, corporate governance and business climate to promote investment.

IMF’s Jeffrey Franks said that the programme is focused on economic growth and stability for which some difficult decisions would be necessary, and hoped that other IFIs too would increase their support since only half of Pakistan’s requirements would be met by the IMF.

Indeed that is the kind of help Pakistan needs, but for that the IFIs need a “Letter of Comfort” from the IMF. As for bilateral borrowing arrangements, so far, only China has shown its willingness to help in a big way, as reported by the media during the Pakistani PM’s visit to China.

China could assist Pakistan during the term of the PPP regime but it didn’t because it did not, and rightly so, trust the PPP regime. With Nawaz Sharif in charge of the state affairs, the Chinese feel more at ease because they expect greater transparency in governance.

For the PML-N regime, besides ensuring transparency in state affairs the other big challenge is containing terrorism because the backlog of mal-governance (PPP’s legacy) is the main obstacle to Pakistan’s access to both IFI funds and foreign investment flows.

China can’t forget how the (Chinese-built) Gwadar port was handed over to Singapore, and its plan to mine Thar coal and generate power there from, dig out metals from Saindak mines, and set-up the Nundipur power plant, were blocked by Pakistan’s politicised bureaucracy.

China has again shown its readiness to help Pakistan in many ways, but expects that the IP pipeline will not only be built but extended to Kashgar, and Gwadar port too will be connected to Kashgar by rail and road – projects that may again be blocked by the bureaucracy.

While the PML-N regime’s desire to check corruption and encourage competence in state affairs (so far via advertisement for top jobs in state-owned enterprises) is visible, containing terrorism seems beyond its capacity, which is a worrying sign for everyone.

Even the Chinese – ready to further develop the Gwadar port, resume metal mining, help plug the power gap (including by tripling the capacity for its generation from nuclear plants), repair and build highways as well as dams – are concerned over security arrangements.

We must accept that Pakistan confronts an organised destabilisation effort (surest way of isolating it) and terrorist outfits have external backing. Some of their backers may have changed their policies on Pakistan but these outfits now don’t listen to their backers.

Often the security agencies act after a tragedy occurs; it shows that they lack pre-emptive capacities. This points to a co-ordination gap between intelligence networks (or is it something else?), slow speed and low expertise for reacting among the security services, and dearth of detective and protective gadgetries.

Plugging these gaps should be the top priority, attention to which is grossly insufficient. Unless this mega issue is addressed and its results become visible – preventive action that forestalls terrorist activities – investor confidence in security arrangement won’t go up.

Presently, over 15,000 Chinese technicians, engineers and experts are working in Pakistan, and the projects referred to above would bring in many more. Worrying over their safety is justified on the part of China’s government. It is obligatory for Pakistan to meet this demand. Let us not forget that some Chinese workers were kidnapped and even killed.

A B Shahid, "The key challenge," Business Recorder. 2013-07-09.
Keywords: Economics , Economic system , Economic policy , Economic issues , Economic crisis , Economic growth , Economic activities , Economic planning , Liabilities incurred , Economic benefits , Energy crisis , Corporate governance , Nundipur , IMF