Should The IMF Let Pakistan’s Economy Fall Apart?

Led by Imran Khan, one of the finest all-rounders to have ever played the game, Pakistan was staring at a dreadful exit from the cricket world cup of 1992. Barring Zimbabwe, the team had lost to West Indies, South Africa, and India. In the latter half of the group stage, Pakistan registered wins against hosts Australia and New Zealand and also defeated Sri Lanka in a close encounter. What got Pakistan to the semi-finals and eventually the World Cup trophy, however, was a single point they had earned from a match abandoned by rain against England. At 24/1 in eight overs, England was chasing a low total of 75 in 50 overs. The rain gods had descended over Australia to bless “kaptaan” Imran Khan.

Khan is all set to lead Pakistan once again, this time in a much larger capacity. Backed by an army in what international experts call a ‘sham election’, Khan’s Pakistan Tehreek-e-Insaaf party (PTI) emerged as the single largest party.

Watch: Imran Khan Sworn-In As Pakistan’s 22nd Prime Minster, Navjot Singh Sidhu Seated Beside POK President

With over 3,500 candidates vying for the 270 seats in the National Assembly, Pakistan’s recent national election is best described as chaotic. Over 55 million people voted (out of the 106 million registered) in the exercise – only the second time an orderly transfer of power was conducted in Pakistan since its inception in 1947.

The success of Khan’s PTI can be attributed to several factors. First, it was the sustained disappointment of the population with the conventional parties. Both the Pakistan Muslim League (PML) and Pakistan Peoples Party failed to gain any traction among the young population. Second, Khan’s promises of providing 10 million jobs, carving out a new province in Southern Punjab, and helping the otherwise-stagnated industries of Pakistan resonated with the voters.

However, it was the support of the Pakistan Army, the infamous Inter-Services Intelligence (ISI), and the elites of the country, including sports and media celebrities, that enabled Khan’s ascent. During the campaign, there was an extensive crackdown against civilians, bloggers, and journalists. Pakistan’s oldest newspaper, Dawn, faced severe censorship for reporting against judicial activism and the military establishment. Its sale was restricted across the country, and the military warned several other media groups for their actions online, labelling them “troll accounts”.

More than the politics, it is economics that is failing Pakistan. The Khan government faces a trade deficit of $37.7 billion. Already, in the last seven months, the currency has been devalued by over 15 per cent and is expected to go down further. A bulk of the trade deficit is with China, and poor scheduling of bills from China Pakistan Economic Corridor (CPEC) has added to the misery of Pakistan.

In May earlier this year, Pakistan borrowed $1 billion from China apart from another $3 billion in loans from Chinese banks pertaining to CPEC. In the last two years alone, Pakistan has borrowed in excess of $7 billion from China. Currently, loans from China alone account for 10 per cent of Pakistan’ foreign debt while 42 per cent debt accounts for loans from institutions like the International Monetary Fund (IMF).

Pakistan’s reliance on external borrowing has roots in the Cold War era. India’s proximity to the Union of Soviet Socialist Republics (USSR) and Pakistan’s to the Persian Gulf enabled the United States (US) to invest heavily in Pakistan. Along with the aid from the US in the 1960s, Pakistan was able to negotiate the Indus Water Treaty with the help of the World Bank.

For the US, Pakistan has been more of an accessory than an ally, aiding them as per their convenience. In 1965, the US discontinued their aid to Pakistan. The absence of any critical US support during the 1971 war against India enabled Pakistan to pursue nuclear weapons, further straining their relations with the US.

After the Soviet invasion of Afghanistan in the 1980s, Pakistan received heavy monetary inflows from the US, even serving as the base for their operations in their proxy war against the USSR in Afghanistan. Again, after the attacks of 9/11, the state was helped with billions of dollars in aid by the US to combat terrorism. Even after carrying out an elaborate operation to eliminate Osama bin Laden, the US continued its aid to Pakistan, extending the latter’s dependency on external financial support.

In 2009, the then-secretary of state Hillary Clinton said Pakistan posed a mortal threat to the security and safety of the US. At the start of this year, US President Donald Trump tweeted against Pakistan, saying the US had been foolish in helping the state with over $33 billion after the attacks of 9/11.

Apart from the US, Pakistan’s reliance on the IMF has added to its current misery. From 1988 to 2008, Pakistan was the beneficiary of 12 IMF programmes, 11 of them being scrapped in between. Apart from the generous aid from the US in the past and China in the present, Pakistan has been a part of 21 IMF bailouts. There are reports already of Khan needing another bailout programme amounting to $10 billion to stabilise the economy.

A study by IMF’s Independent Evaluation Office (IEO) conducted in 2002 went into Pakistan’s elaborate history of bailouts with the IMF. First, the IMF was only seen as a short-term solution to cater to the balance-of-payments crisis Pakistan finds itself in time and again. Thus, no IMF programme could look at long-term sustainable solutions through a series of complex reforms. Second, a lack of collaboration with the World Bank resulted in the absence of any reforms in administration, civil services, state enterprises, or even taxation. Thus, the public expenditure in Pakistan was not only mismanaged but hard to validate. Third, IMF’s bailout programmes enabled Pakistan to consider other avenues for financing. Therefore, a long period of disruption between any two IMF programmes was seen as a critical risk. Last, each bailout from the IMF coincided with a new government at the helm, especially during the 1990s. Thus, every new government was given some benefit of doubt to introduce reforms, a factor Khan would like to cash on.

Historically, Pakistan has been helped with easy waivers and bailout programmes, as the IEO study shows. Thus, state leadership has found no incentive in mobilising domestic human and natural resources. Both civilian and military rule has relied on the elites for their financial and political support. There has been no expansion of the tax base, tax reform, or other economic reforms to overcome the prolonged crisis.

With each bailout, the government sponsors elaborate infrastructure projects at the cost of expensive loans, adding to the debt. Another crisis is created, another bailout follows, and the economy is left in a never-ending crisis loop. Obsolete industries are unable to exit the economy; water and energy shortages prevail. Pakistan suffers from constant power shortages with the private and government power producers’ debt amounting to $8.2 billion (one trillion Pakistani rupees).

Taking into consideration this crisis loop, the warning of US Secretary of State Mike Pompeo is not entirely misplaced. Stating that an IMF bailout could not be used by the state to pay off Chinese loans, Pompeo told CNBC that the US would be watching if Pakistan is helped with a $12 billion bailout.

Should the IMF let Pakistan’s economy fall apart by declining a bailout?

First, there is the question of moral obligation. Khan’s PTI government will be seen as an unconventional political leadership, given how it has been placed between PPP, PML, and military rule. While countries like India would like to give Khan’s government a chance, the IMF and other financing institutions would be obligated to give the new prime minister a fair shot at ushering critical reforms to stabilise the economy.

A bailout, if and when it happens, will not be enough for Khan’s government. As per an IMF report earlier this year, the current-account deficit and the balance-of-payments crisis warrants the need to double up on external financing. Given most of these debts originate from CPEC, a $62 billion Chinese investment, Khan would have to restructure the taxation system in Pakistan, increase the tax base, and find ways to curb the increasing Chinese debt, a move that may not go down well with his urban youth base in cities like Karachi. The external finance needs may increase from $21.5 billion (7.1 per cent of the GDP) to $45 billion (9.9 per cent of the GDP) by 2023.

There is also the question of the Chinese economic slowdown, and, given the volatility, the Chinese economy may itself be affected due to the excessive building boom and unregulated credit growth. Should China slow down further, Pakistan would be faced with impaired exports, poor FDI prospects, and hindered growth on the CPEC front. Worse, many infrastructure projects in CPEC may fail to take off, thus leading to a cutback in employment opportunities for the people, and pulling Pakistan deeper into the Chinese debt trap.

Should the IMF back out of another programme, the Chinese are sure to step in, ensuring Pakistan stays afloat for now. But China would not want to adopt another economically rogue state after North Korea. At some point, the chickens will come home to roost, and the debt will have to be repaid. Khan can’t ignore the Chinese, for reasons pertaining to the economy and geography, and he can’t do without an IMF bailout either.

The ship of Pakistan’s economy struggles to manoeuvre the giant iceberg of debt, and unlike 1992, there are no gods to bless Imran Khan this time. Pakistan’s economy may survive with another bailout for a few more years, but its economic sovereignty has already fallen apart.

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