We are back at the so-called ‘concessional’ window of the lender of the last resort. But then, the International Monetary Fund (IMF) is not an investment bank; it is more of a commercial kind. The Fund lends mostly for balance of payments support purposes; that too against tangible collaterals. Wrapped in strict conditionalities, these collaterals force the borrowers to enforce ever-escalating users’ charges and ever-mounting regressive indirect taxes of all kinds oppressively squeezing the entire nation, but affecting mostly the have-nots and pushing them in the process further down into the darker recesses of poverty trap.
The objective of the conditionalities is to enforce strict austerity, but invariably, stagflation results seriously denting the very purpose of the loan and causes in the process further deterioration in budgetary as well as current account deficits creating the need to return once again to the lender of the last resort. That is what we have been doing over the last 40 years but still failing to get rid of the twin trap of debt and poverty.
While most of the 23 such programmes that Pakistan had signed with the Fund had ended after the release of the first tranche (that is why Pakistan has been called one-tranche country) those few that were completed had only caused the debt to mount further, poverty to deepen ever more and having only rudimentary structural reforms undertaken.
And this story has been repeated again and again by all the completed programmes. Indeed, one can detect a tiresome repeat of the results of the 3-year, $1.69 billion Extended Fund Facility programme signed in 1980:
Starting from 1987, Pakistan was to mobilise an additional sum of nearly 400 million dollars annually for six years for servicing the loan obtained in three annual instalments, the last of which was disbursed before the end of calendar year 1983.
The loan had carried an interest rate of eight percent. More importantly, the loan was extended to Pakistan on the condition that it would bring about structural changes in the economy in accordance with the fund’s own prescription.
Independent economists had warned at the time when the loan was being negotiated that the Fund’s ostensible austerity programme would only enhance the country’s debt burden and further reduce its capacity to attain a modicum economic self-reliance.
And indeed, when the cost-benefit ratio was calculated at the end of the programme in 1983 it was found that Pakistan’s debt burden had jumped by about 2.4 billion dollars; meanwhile, payment of interest on the loan at the rate of eight percent had already begun. But the story did not end there. Its moral lies in the impact of the three-year economic stabilisation programme on the national economy.
As a first step towards implementing this prescription, a three-year public sector investment programme for the years 1981-82 to 1983-84 covering the investment plans for the Federal and Provincial governments, as well as of the public sector enterprises was prepared and launched. It was also decided to transfer increasing responsibility to the private sector for various operations in public sector’s domain, such as sweet water tube-wells and distribution of fertilisers and seed. With respect to public sector industries, it was decided to divest an additional six or seven units to appropriate private buyers. In the case of WAPDA, it was planned to increase the tariff by 10 percent by the end of 1980 and another 10 percent by July 1, 1981. These steps were expected to enable WAPDA, beginning 1982-83, to finance at least 40 percent of average capital expenditure on electricity operations made during the preceding three years. The programme had envisaged the simplification of procedure for approving private sector investment projects. In this connection, it was planned to reduce the number of levels of administration involved in the clearance process and a limitation and redefinition of the scope of examination by the CVPCC (Central Investment Promotion and Coordination Committee).
On the revenue side, it was decided to progressively raise the levels of fees and charges for services provided by the Government to “at least cover the costs” in order to reduce “cost-price distortions and add to the budgetary resources”.
It was thought that through these measures the Government, while increasing public sector savings and investment in real terms, will also be able to cover the gap between expenditure and revenues and to limit recourse to financing from the domestic banking system to about 2 percent of GDP on an average annual basis over the programme period. It was also envisaged to restrict the average annual growth rate of domestic liquidity to 14-19 percent. This containment was expected to allow enough scope for the banking system to meet the expanded credit requirements of the private sector.
The programme had envisaged elimination of budgetary subsidisation over the next few years. The subsidy on fertilisers was decided to be eliminated over a five-year period, while the subsidies on wheat and edible oil were to be held constant or reduced in nominal terms during the programme period.
The first objective was to raise the share of resources devoted to investment from 16.5 percent of GNP during 1979-80 to about 17.3 percent by 1982-83. The evaluation report, however, estimates that the share of the resources devoted to investment had declined to 14 percent of GNP by the end of fiscal 1982-83. The second objective was to increase the ratio of gross national savings to GNP from 12 percent to 14 percent by 1982-83. According to the evaluation, the domestic saving effort was only eight percent at the end of fiscal 1982-83. The third objective was to contain inflation to an average annual rate of 10 percent by 1982-83. According to the evaluation report in the final year of the programme, the inflation rate had declined roughly around 6 percent per annum.
This figure was, however, disputed by leading businessmen who put the inflation rate just before the beginning of the 1983 at about 30 percent and some said that during the first nine months of the year the rate of inflation declined to around 11 percent as a result of decline in the imported component of inflation because of worldwide recession and since March that year the rate of inflation started flaring up once again.
The fourth objective was to reduce the ratio of current account deficit to GNP to below 4 percent by 1982-83 from 5 percent during 1979-80. However, according to the evaluation report, the balance of payments current account deficit was estimated at 1.3 billion dollars during 1982-83, the final year of the programme. On the basis of this the ratio of current account deficit to GNP (estimated at around 25 billion dollars at current prices) had expanded far beyond the targeted 4 percent and much more than the 5 percent benchmark.
The fifth objective was to finance the current account deficit exclusively through long-term loan on concessional terms and direct investment inflows by the end of a five- to six-year period.
However, Pakistan had to borrow about 350 million dollars in the second year of the programme from commercial banks which carried tough conditions and a very high rate of interest. In the last year, too, the country was looking for about 250 million dollars from the commercial market.
These short-term borrowings were negotiated for the ostensible purpose of paying for urgent imports of essential goods. But in actual fact, these amounts were used for covering partly the widening negative gap in the balance of payments position.
Meanwhile, the public sector investment programme for 1982-84 was lost sight of due to financial constraints - domestic and external. The energy plan of the programme, too had failed to take off for the same reason. Petroleum production, which was to have gone up from around 10,000 barrels a day to around 20,000 barrels a day, was stagnating around 14,000 barrels a day. The consumer prices of the petroleum and petroleum products were pushed up in accordance with the IMF prescription, thereby increasing the difficulties of the common man, a sacrifice from which he had nothing to gain.
Natural gas production, too, showed no improvement and the hope for increase in domestic connections by one-half during the Plan period had remained just a dream. Similarly, there was no improvement in edible oil production. As a matter of fact, its imports had gone up steeply. Indeed, the whole plan appeared to have failed to take off, leaving the country with nothing but an addition to its debt burden.
Copyright Business Recorder, 2021
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