IMF package, Pakistan and CPEC, Dr Shabir Choudhry
London 05 August 2018
Imran Khan also made many lofty claims about economy, and that he won’t take any rescue package from the International Monetary Fund. Even before Imran Khan takes office, his Finance Minister to be is busy working out a strategy, as to how to approach and get a favourable package from the IMF.
American opposition to IMF bailout
The new government of Imran Khan, with a begging bowl in hand and chin down, will approach the IMF and seek a rescue package of $12 billion from the IMF. This is how Imran Khan’s New Pakistan will start its life in Pakistan.
Unlike the previous IMF bailout packages, the new package of $12 billion will have some strict conditions attached to it, because America and some other countries are not happy with Pakistan’s certain policies, especially related to religious extremists and militant groups.
Former US Under Secretary of Defence, Jed Babbin, while talking about the IMF new bailout package for a nuclear Pakistan, said it will be a bad idea. He thinks nuclear Pakistan is ‘not a model of stability’.
In his article published in ‘Washington Post’ on the subject he wrote:
‘Pakistan’s economy is in shambles due to large-scale corruption and a growing debt crisis. The money it owes other nations and non-Pakistani entities is more than 30 percent of its GDP partly because of the extensive loans it has received from China to build parts of CPEC’. 1
He thinks the IMF will certainly help Pakistan to avoid defaulting, but should they do that, he asks. His rationale is:
Pakistan is ‘continuing support of a variety of terrorist networks through its infamous Inter Service Intelligence agency, ISI. Among the terrorist groups Pakistan supports are al Qadea, the Taliban (also supported by Russia and China) and Lashkar-e-Taiba, which massacred more than 160 people in Mumbai, India, in 2008. Osama bin Laden hid for years in Abbottabad, Pakistan. It’s inconceivable that ISI wasn’t responsible for his concealment. 2
He says President Trump terminated military aid to Pakistan because ‘it refuses to cease supporting terrorist networks with money, fighters and intelligence information. But there is no action we, or any other nation, can take to stop Pakistan’s religiously-based support for terrorism. Why, then, shouldn’t we block another IMF bailout? 3
In support of his contention, Jed Babbin further writes:
‘The second reason not to bail out Pakistan is China growing de facto colonization of Pakistan through CPEC…. China is conducting what some call “debt trap diplomacy,” through which Pakistan is becoming so indebted to China that it will be compelled to follow China’s policies in Southwest Asia and beyond. In fact, the debt trap has already been sprung with the eager assistance of the Pakistan’s government, ISI and army’. 4
In this regard, statement of American Secretary of State Mike Pompeo is alarming. Already, due to President Trump’s policy, Pakistan is back on the ‘grey list’ of Financial Action Task Force, which will create enormous problems for Pakistan. Mike Pompeo cautioned all concerned that:
Any potential International Monetary Fund bailout for Pakistan’s new government should not provide funds to pay off Chinese leaders.
The American Secretary of State asserted:
“Make no mistake. We will be watching what the IMF does. There’s no rationale for IMF tax dollars, and associated with that American dollars that are part of the IMF funding, for those to go to bail out Chinese bondholders or China itself”. 5
The American Secretary of State appears to be very concerned about the Chinese designs in the region, which they want to implement under cover of economic help or the CPEC. This concern is also shared by some other countries, who think that China is heavily investing to build infrastructure in countries which are economically weak with intention of using them for political and strategical reasons.
Mike Pompeo expressed his concern in the following words:
‘Beijing has already gained control over a port in Sri Lanka, an island country that bestrides key international shipping lanes. It has invested in Pakistan's Gwadar Sea Port that could give the Chinese military access to another facility west of India’. 6
The US Secretary of State said,’ "We aspire to a regional order - independent nations that can defend their people and compete fairly in the international marketplace. We will help them. We will help them keep their people free from coercion or great power domination." 7
In reply to the statement of US Secretary of State, Pakistan’s interim government Foreign Minister Abdullah Hussain Haroon strongly rejected the statement, and called it ‘completely inappropriate’. He further said:
“It is the stated position of this government that it is totally wrong to link any IMF package with CPEC. Third parties cannot weaken our collective resolve to make CPEC a success story.” 8
Abdullah Hussain Haroon also commented that ‘how relations between the US and Pakistan can improve when the Financial Action Task Force is throttling Pakistan’s neck’.
Do IMF programmes help Pakistani economy?
The CPEC related projects have resulted in enormous imports of Chinese equipment and materials, and have caused immense problems for Pakistan’s current account deficit. Although China has provided few billions more to keep Pakistani economy floating, but that is insufficient as Pakistan needs $6 billion to pay in loans by December 2018. Of course, Pakistan has other financial commitments too.
Referring to the statement of American Secretary of State, one Pakistani economist said, it was not warranted, and advised the government to take it seriously, because America has considerable influence in the IMF.
In my opinion, America may not be able to stop the IMF bailout package, but they can apply pressure to attach harsh conditions. People need to think why is it that Pakistan has to go back to the IMF again and again.
Are the IMF packages designed to create more problems for Pakistani economy or help to resolve economic problems?
It is believed that the IMF programs are designed in such a way that they supress productivity and growth potential. Experts of the IMF control certain aspects of the economy, and tell the Finance Minister what to do with the economy. How much tax they should increase; or on what items price should be increased, and how much devaluation of the Pakistani rupee should be made.
In other words, to a large extent, they control economy which effects governance and sovereignty. This time they will be able to direct Pakistani government what should they do with the borrowed money; and how it should be spent. They may be able to tell Pakistan to stop or halt certain CPEC projects as they are not productive in judgement of the IMF experts.
It means the new Prime Minister of Pakistan, which talks big, and has no experience of governance at all, will face serious financial problems right from the start. With time, he will learn that making allegations and criticising others is the easiest part; governance and facing challenges and resolving difficult problems require skills, patience and stamina.
In view of the expected harsh conditions, some Pakistani economists are suggesting that Pakistan should look for alternatives.
Are there any alternatives? There are none, in my opinion. In difficult times, Pakistan usually runs to China, Saudi Arabia and UAE. Saudi Arabia and UAE are not in a position to provide this amount. China is, but China has already given out far too much; and it won’t be wise of Beijing to give more to Pakistan for unproductive things, especially when they know the country has serious balance of payment problem.
People of Pakistan need to understand that if they get a rescue package from the IMF, it will be a loan, which will surely come with certain harsh conditions. This loan and the attached conditions will surely hurt Pakistani economy. This loan has to be paid back with interest. On top of this loan, Pakistan has other financial obligations; and at times, the country has difficulty in paying loan instalments.
It must be noted that lion’s share of the loan will go in debt servicing and defence obligations.
Pakistani economy is already in a disarray. Exports are down and imports are too high. To make matters worse tens of thousands of Pakistani and Azad Kashmiri expatriates working abroad, especially in the Middle East are being sent back. This will also hurt economy, as Pakistan won’t get valuable foreign exchange.
Nadeem Ul Haque, a former Deputy Chairman of the Planning Commission of Pakistan, and a former senior resident representative of the IMF in Egypt and Sri Lanka, says:
Pakistan, after all, is an IMF addict. The country has already spent 22 of the past 30 years in a dozen different IMF bailout programs. No American, IMF, or Pakistani official has any incentive to reform Pakistan’s structural economic problems, and so the cycle of bailouts continues. 9
Once in office, leaders are more interested in satisfying demands of their followers, providing them jobs, funds and what else is needed. Additionally, they spend more time on propaganda to fool their own people by painting rosy picture for them, rather than taking tough decisions which are needed to resolve real problems of Pakistan.
Funds provided by IMF, or by some other institutions are not always spent to stabilise the economy of the country. The IMF data reveals that there had been 21 IMF bailout programmes with Pakistan since 1958. There have been 14 such programmes since 1980. Question thinking people of Pakistan should ask, have these programmes resolved the problems the Pakistani economy was facing? Or they only managed to make some cosmetic changes to justify these bailout programmes.
In my opinion, they do not tackle the fundamental problems facing the economy; and which are holding back the progress. The result is after some years they go back to the IMF.
21 IMF programmes spread over 60 years (1958 to 2018) means, on average, after every 2.9 years Pakistan had to seek the IMF help. Is that something to be proud of as a country? There will be many who will accuse Hindus and Jews for all their problems, as if all Pakistanis are completely innocent and pious. All their wrong doings are because of other bad people.
Mr Nadeem Ul Haque while talking about the new IMF bailout package says:
‘New IMF funding will no doubt lead Khan’s government to repeat past mistakes. It will cling to artificial exchange rates, while avoiding reforms that could actually plug leakages in state-owned enterprises’. 10
Many economists believe that some CPEC projects have potential to boost the Pakistani economy, especially if the investment is sound. The danger, however, is that the interest rates on some of the projects is far too high for the Pakistani economy to pay back.
It is suggested that the IMF may seek assurance from the leaders of the opposition as well, as they did during the time of Moeen Qureshi in 1994. Both Benazir Bhutto and Nawaz Sharif had to give assurance to the IMF that they will honour the conditions of the bailout package signed by the interim government.
Mark Sobel who is a Senior Adviser with the Simon Chair in Political Economy at the Center for Strategic and International Studies in Washington, notes in the following words:
‘Pakistan’s economic failings are well documented. For decades, Pakistan’s real per capita income growth has lagged many peers. Budget deficits are frequently large. Revenue as a share of GDP is low due to widespread tax evasion; a failure to tax the well off, including in the agricultural sector; and fiscal federalism woes. Much spending goes to defense, squeezing resources for more productive uses, such as education and investment’. 11
In his opinion the Pakistani currency is overvalued which result in balance of payment problems. Also, the economy is extremely susceptible to frequently changing oil prices. There are energy problems and insufficient privatisation, which adds to the problems.
The last IMF programme three - year Extended Fund Facility ended in 2016. This programme did make some progress but it must also be taken into consideration that Pakistan at that time benefited from very low oil prices; and the IMF’s ‘targets were not ambitious’. Pakistan’s economic health started to deteriorate soon after the IMF programme was over, although some economists think the CPEC funding helped to sustain the decline.
Pakistan needs to make progress in tax collection; and control its imports. The budget deficits must also be brought under control. Mark Sobel thinks the IMF must demand accomplishment of certain prior actions on structural reforms to deal with ‘Pakistan’s low-growth trap’. In order to make a positive move forward, Pakistan must:
1. Resolve financial problems in the energy and agricultural sectors;
2. Encourage privatization and ensure it is properly carried out;
3. Take strict and viable actions to improve governance; and root out corruption.
Mark Sobel suggests:
· The IMF must stand ready to halt disbursements at the first sign of problems.
· The Fund must also ensure that its resources are not used to bail out unsustainable Chinese CPEC lending. The fund needs to have at its fingertips comprehensive data on all CPEC lending—its terms, maturities, and parties involved. Chinese lending should be on realistic terms and consistent with Pakistan’s sustainability. Otherwise, China should reschedule or write down its loans, sharply reducing the value of its claims. 12
Nadeem Ul Haque, who is a former Deputy Chairman of the Planning Commission of Pakistan and a former senior resident representative of the IMF in Egypt and Sri Lanka, expressed his disappointment with the IMF programmes. Together with the existing inept tax policies, the IMF experts force Ministry of Finance ‘into unplanned spending cuts without any real reforms, despite the obvious negative effect this has on growth’. At times, funding for public services like health, education, police and railways are cut to the bare minimum.
Mr Nadeem Ul Haque, while writing on the IMF bailout programmes asserted:
‘The short-term focus of these programs ensures that reforms will be postponed, and that obsolete industries will not be allowed to die. Meanwhile, education goes underfunded, energy and water shortages grow more frequent and severe, economic imbalances worsen, and the government’s policymaking capacity continues to erode. Rapidly achieving stable macroeconomic indicators is all that matters, even if doing so accelerates social and political decay’. 13
Future of CPEC
The new government will have to continue with the CPEC projects, not because they are beneficial to Pakistan, and will boost the economy; but because the army establishment wants its continuation. No matter who started the CPEC, and who has sacrificed for it, bitter fact is that the CPEC has become army’s beloved baby. They will make every effort to ensure that their ‘adopted baby’ is cherished, protected and adequately looked after.
The new government will not do anything to jeopardise more than $60 billion investment. The powerful establishment will urge the civilian government to have closer ties with Beijing. In view of the Pakistani establishment, and in view of many ordinary folks, the CPEC is essential for the survival of Pakistan.
This becomes more indispensable when relationship between Islamabad and Washington is frosty; and there seems to be no visible signs to ease the tensions between old ‘buddies’.
This means the new government of Imran Khan cannot and will not change the course of the CPEC; and will try to take credit for certain achievements which, in reality won’t be his accomplishment. However, it is possible that Imran Khan will also try to improve relations with Washington as Pakistan cannot afford to be on wrong side of angry and irritated superpower.
To pacify and win friendship of America, especially when America is ruled by President Trump, Pakistan will have to make some serious compromises, and abandon certain aspects of the old policies. If they fail to do that, and try to hoodwink Washington again, there can be serious repercussions.
There is an open trade war between America and China; and Pakistani leaders can be drawn in to this. It may be in China’s interest that relationship between Washington and Islamabad remain frosty, as that will make Pakistan more dependent on Beijing.
China, at one time, was closer to Sharif brothers, but as political landscape of Pakistan was changing they also established their contacts with other political leaders of Pakistan. Dhruva Jaishankar, a foreign policy fellow at Brookings India said:
“We may continue to see a gradual trend of Pakistan drifting closer to China and more distant from the United States.” 14
In view of fast changing geo political situation, Pakistan desperately need sincere and powerful friends. Pakistan can rely on China, but Pakistanis need to learn that in international relations, there are no permanent friends or foes. Relationship between states are based on national interests; and national interest and alliances do change with time.
Pakistan needs to improve relations with neighbours. Also, they must strengthen their ties with Saudi Arabia and other Gulf States. In difficult time, institutions like The Islamic Development Bank can also extend helping hand.
One doesn’t need to be a genius to understand that President Trump doesn’t like the CPEC or One Belt One Road, of which the CPEC is an essential component. President Trump does not like rise of China. Economically and militarily strong China can challenge America in future. In view of the above scenario, and trade war between China and America, President Trump will do everything short of a war to hurt the CPEC.
America can influence IMF bailout package, which in turn can have a considerable impact on the CPEC projects. Furthermore, America can influence fate of Pakistan and the CPEC by twisting arm of Financial Action Task Force. Pakistan is already on the FATF ‘grey list’; and this can create considerable political and economic problems for Pakistan.
If Pakistan does not abandon their past policies to the satisfaction of the FATF, then Pakistan’s name can slip down to the ‘black list’. This ultimately, means more problems for Pakistan and the CPEC.
Writer is a renowned writer and author of many books. He is also a senior leader of UKPNP and Chairman South Asia Watch, London.
Email: Drshabirchoudhry@gmail.com Twitter: @Drshabir
11. Pakistan, the United States, and the IMF
July 30, 2018, https://www.csis.org/analysis/pakistan-united-states-and-imf