Leadership, nation-building and ‘trysts’ with IMF — I: A classic case study of ‘missed opportunities...’

Nation-building requires visionary leadership with a strong sense of purpose and tenacity to succeed; unfortunately, such a leadership has eluded Pakistan in the past. Pakistan is the sixth most populous country in the world with a large youth bulge and unlimited potential. Unfortunately, however, it is a classic case study of ‘missed opportunities and errors of omission and commission’ by an inadequate leadership to realize, nurture and harvest a prosperous future for the teeming millions. It is an excruciating tale of a country that is a habitual user of IMF lending having availed as many as 22 programmes since its birth in 1947.

Pakistan has obtained a bailout involving a standby arrangement 12 times, an Extended Fund Facility (EFF) 6 times, an Extended Credit Facility (ECF) 3 times and a Structural Adjustment Facility (SAF) 1 time. With the exception of a few, most of the programmes were unsuccessful and Pakistan earned the reputation of being a one-tranche country. Successive governments and leaders failed to carry out the necessary reforms needed to keep the economy on a path of sustainable development. Consequently, Pakistan has emerged as one of the laggards in the race of nations.

The fall of the Berlin Wall on November 9th 1989 signaled the end of the Cold War and the beginning of a new era of globalization, with survival of the fittest as the criteria for success. The era of free markets had begun and countries across the world scrambled to reform their systems to cope with the emerging competition for domestic and global markets. Most countries undertook reform programmes to enhance the role of markets. They successfully curtailed the role of government in planning, control and production activities involving the so-called ‘commanding heights of the economy’. Margaret Thatcher in Britain and Ronald Reagan in the US led the drive which spread with strong, competent and focused leadership in Germany, East Asian countries, India, Africa, Russia and Eastern Europe.

In the three decades since the collapse of the Berlin Wall, and the commencement of globalization, Pakistan’s reform efforts have failed to create a sustainable competitive economy. The decade of the nineties has been described by some economists as a wasted decade devoid of any meaningful reforms. Starting in 1989 and ending in 1999, PPP and PML-N played musical chairs and successively formed governments four times, one after the other, availed bailouts from the IMF eight times and had a dismal record of botched up reforms at the altars of populism, nepotism, cronyism, patronage, intrigue and corruption. Hardly traits of visionary leadership.

When PML-N government was deposed by the then army chief, Gen Pervez Musharraf, on October 12, 1999; it left behind an economy that was in shambles. Interest rates exceeded 20 percent, domestic and international investment had disappeared. A decade of anaemic growth averaging around three percent per year, coupled with rising inflation and high unemployment, had led to rising poverty levels. High current account and fiscal deficits had pushed public debt to GDP ratio to an explosive 106 percent. Pakistan credit ratings nose-dived and the country was in selective default on its external debt. The 1990s had elapsed, with economic indicators of Pakistan resembling the bankrupt economies of most Highly Indebted Poor Countries (HIPC) clearly a wasted decade for the country and its people.

Musharraf was ill-prepared for handling the economic crisis and ordered a crackdown on bank and tax defaulters, a step that gravely exacerbated the economic crisis. However, after muddling along for sometime a comprehensive eight-point debt reduction plan and reform agenda were formulated and implemented which gave some handsome results. Fiscal and current account deficits attained sustainability, economic growth started to revive and from 2004 to 2007 GDP growth averaged over seven percent, peaking at 8.6 percent in 2005.

Pakistan’s had become the fastest growing economy in Asia after China’s. The country was branded as the top ten reforming countries in the world by the World Bank and one of the ‘next eleven’ emerging economies after the BRICS by Goldman Sachs. The size of the economy grew three-fold from around sixty billion dollars to 180 billion dollars. Tax revenue grew three-fold under a self assessment scheme from around five billion dollars a year to 18 billion dollars a year. Increase in credit to the private sector that had annually averaged around sixty billion rupees in the nineties, jumped to over 400 billion a year. Investment to GDP ratio that had plunged to 15 percent in 1999, crossed the 20 percent mark in 2006.

Foreign investment that had averaged around half a billion a year in the nineties peaked at $ 8.4 billion in 2006, Foreign exchange reserves that had plunged below a billion dollars in 1999 topped $17 billion by 2007. The debt to GDP ratio that had exceeded 100 percent in 1999 came down to 56 percent in 2007 with growth in external debt reversed the external debt stock reached $42 billion by 2007 and external debt and liabilities (EDL) declined from 52 percent of GDP at the end of 2000 to 26.3 percent of GDP by End-March 2007. Exchange rate stabilized around 60 rupees to the dollar. Pakistan international credit ratings moved up from CCC and Selective Default to B+ by 2006.

Overall, the eight-point reform agenda to deal with Pakistan’s debt trap had been successful. Public-Sector Entities (PSEs) such as PIA and the Pakistan Steel Mills had turned profitable, the abandoned Ghazi Barotha project was rejuvenated and completed. The Neelum-Jhelum project was launched with self-financing without support of the donors, a telecom revolution was ushered in, major banks were revamped and privatized, the State Bank of Pakistan (SBP) was reformed and strengthened, powerful Higher Education Commission (HEC) was established to rejuvenate the Public Universities, budgets for education and health were expanded a Competition Commission of Pakistan (CCP) was established. The idea of market economy reforms, deregulation, privatization and liberalization had finally found firm roots in Pakistan.

On March 23, 2006, Pakistan successfully issued US$ 500 million new 10-year Notes and for the first time, US$300 million new long term 30-year Bonds in the international capital markets. This transaction represented the first international 144A bond issued by Pakistan since 1999. Global Depository Receipts (GDR) of around a billion dollars were issued (of MCB and OGDC) and listed on the New York stock exchange. This was the crowning achievement of reforms that in six years had taken a bankrupt economy in selective default to becoming a darling of the global emerging markets investors by 2006.

In spite of the intense political instability generated by the Lawyers movement, Pakistan successfully issued on May 24, 2007 a new US$ 750 million, 10 year note at a premium of 2.0% over US treasuries. The issue was oversubscribed five times with the largest ever order book of US$ 3.7 billion amassed for Pakistan. In June 2007 Pakistan also issued $750 million GDRs of United Bank Limited. This indicated Pakistan’s strong macroeconomic stability and its ability to raise international capital market financing at very competitive rates on a regular basis.

It seemed that twenty years after the collapse of the Berlin Wall, Pakistan was finally catching up with hi-growth emerging economies of the world. There was still a lot to be done in further deregulation, promoting competitive markets, reforming and privatization of the PSEs and strengthening private sector development but Pakistan had definitely crossed a development threshold and there would be no turning back even with a new Government.

The passions generated by the assassination of Benazir Bhutto on December 27, 2007 propelled the PPP led by Asif Ali Zardari sufficiently enough to clinch victory in the upcoming general elections and Yousaf Reza Gillani was sworn in as the new Prime Minister of Pakistan on March 2008. Ishaq Dar of PML-N was sworn in as his Finance Minister as a show of solidarity between the PPP and the PML-N.

The new government started to reverse many initiatives of the previous government. All ongoing external capital market transactions were cancelled at a time when the world was facing an exceptional increase in oil prices and this decision deprived Pakistan of several billion dollars of vital external capital inflows at a time when escalating oil payments were depleting SBP reserves at the rate of a billion dollars a month. By June 2008 Oil prices had exceeded 150 dollars per barrel. With plunging foreign exchange reserves, the stock market started to fall precipitously and the government foolishly tried to stop the rot by shutting down trading. This generated chaos in the market and it went into a free fall.

Headline inflation rose to 25 percent in October 2008. External current account deficit widened to about $14 billion or 8½ percent of GDP and Fiscal deficit rose to 7.6 percent of GDP. Gross reserves declined from $ 16 billion to $ 11 billion, In the meantime the government was desperately negotiating with the IMF and entered into a new and the largest standby arrangement with the IMF on November 8, 2008.

By this time the PML-N which had long parted ways with the PPP, launched a traders protest against the IMF reform programme particularly the imposition of a Value Added Tax (VAT) that needed serious documentation of the economy. The protests rumbled on and managed to derail the IMF programme and PPP finally abandoned the agreement on September 30, 2011. The self-assessment tax system was rolled back signaling the return of FBR coercion that had a chilling effect on investor confidence with the result that tax collection fell to 12% of GDP.

The 18th amendment was passed on April 10th 2010, coupled with the NFC award which had become effective on July 1, 2010, fiscal transfers to the provinces ballooned at the expense of the federal budget which became unsustainable. Power sector continued to drag the economy down and to cope with the power deficit in piecemeal fashion sans reforms, the PPP government tried to induct dubious rental power plants on exorbitant rents which became scandalous and ended up being scrapped by the courts.

The economy was stuck in a downward spiral. Credit to private sector decreased to around Rs. 95 billion from the highs of Rs. 500 billion a year in 2007. Pakistan’s public debt of ? 6,500 billion in 2008, increased by 135% and became ?15,096 billion by March 2013. Investment fell from 20 % of GDP to 15% of GDP, External debt increased from $42 billion in 2007 to $61 billion in 2013. The performance of the PSE’s declined sharply and Steel Mill and PIA started to bleed profusely. GDP growth dropped to an average of 3.5% The country which had one of the highest growth rates in Asia in the preceding four years had become the sick man of South Asia by the time the PPP government ended in 2013.

PML-N formed the new government in June 2013 and by September 2013 a new $6.6 billion three-year Extended Fund Facility was signed. Reflecting the state of the economy, the Programme entailed aggressive targets of fiscal deficit reduction from 8.8 percent of GDP in 2013 to around 3½ percent in 2016. The current account deficit was expected to stabilize at around 2 percent of GDP reflecting fiscal consolidation and exchange rate depreciation. It was projected to be fully financed by capital inflows.

Comprehensive commitments were made to revamp the energy sector and permanently eliminate circular debt. In the medium term, creating a wholesale competitive power market was agreed to. It also committed to a time bound strategy for 65 PSEs to either privatize them, restructure which the government may wish to retain in the public sector, or close nonviable firms. It promised to develop medium-term action plans to restructure Pakistan International Airlines (PIA), Pakistan Steel Mill and Pakistan Railways. The action plans would include partial privatization of companies through initial or secondary public offerings. Finally, it committed to seeking technical assistance (TA) from the IMF and the World Bank to develop a Medium Term Debt Strategy (MTDS).

The programme was reformist on paper but most of the reform commitments were not fulfilled. The programme had the dubious distinction of obtaining the maximum number of performance waivers from the IMF. The government deliberately wasted billions of borrowed dollars in shoring up the value of the rupee and depleting the foreign reserves of the SBP. The exports that had peaked at $ 25 billion in 2010 declined to $20 billion by 2018, imports ballooned and trade deficit exceeded $ 35 billion precipitating a balance of payment crisis. A large capacity of IPP projects with high upfront tariffs were inducted that would rapidly increase circular debt.

The net result of the policies was that as the term of the government expired in June 2018 external debt approached $100 billion and the public debt to GDP ratio was moving rapidly to cross 100%, substantially higher than the limit allowed by the debt limitation law, circular debt expanded on an exponential path and exceeded a trillion rupees. Trade deficit exploded and current account deficit reached 20 billion dollars. With foreign debt repayments of $ 10 billion due immediately the country faced a Gross Financing Gap of $30 billion - almost 10 percent of GDP - with no arrangement in place. A time-bomb was ticking to explode on the arrival of next government.

It was deja-vu all over again. Thirty years after the collapse of the Berlin Wall Pakistan was back to square one. History was repeating itself, A PML-N government bequeathed a debt trap for its successor in 1999, now twenty years later another PML-N government with the same experienced PM was leaving another debt trap for its successor, only this time the amounts were much larger, the IMF considerably tougher and the political price of the debt fallout much more intensive.

(To be continued)

Copyright Business Recorder, 2020