Poor reflection of economic history by policymakers

‘A World Bank study of 177 sovereign external and domestic debt defaults found that five years after successful defaults, governments had reduced their debt-to-GDP ratio by 24-34 percentage points, and effective interest rates on government debt had fallen by as much as two percentage points.

Consider Sri Lanka’s gradual return to positive growth and increased market optimism after defaulting in April 2022: its ten-year government bond yield was 13.3% on August 30, 2024, compared to 32% in November 2022.’ – An excerpt from a September 25, Project Syndicate (PS) published article ‘Pakistan should restructure its debt now’

When Pakistan’s policymakers took the route of International Monetary Fund (IMF) soon after its birth in early 1950s, it was not as much of a wrong turn, as when it re-entered into IMF programmes since late 1980s – to not only become a frequent user of IMF resources, but to also remain a ‘prolonged user’ in the next three decades, where a country becomes a prolonged user when it remains in IMF programme(s) for seven years or more in a decade.

It was because IMF operated in a very low level of neoliberal economic policy, and lack of financialization, and low level of deregulation and monetary austerity meant lesser financial crises, and low level of price shocks, especially in terms oil prices. This was not the case in the 1980s, which marked a reversal of environment due to quick perpetuating policy of Neoliberalism.

Hence, while neoliberal economic policy perpetuated the issue of twin deficits, and debt distress since the late 1980s, it also led to frequent recourse of the country to IMF programmes, also because economic policy was overall neoliberal-oriented, even when outside of the IMF programme, because of the deep influence of ‘Chicago boys’- styled policymakers on economic policy.

Moreover, the gap between initial interaction with IMF and then later on in the late 1980s was also because of the ‘New Deal’ type of policies, where lack of financialization globally meant that even though inequality increased during the 1960s and 1970s, money nonetheless remained within the domestic economic system, and there were some reasonable level of fruits of ‘trickle down’, since money continued to remain re-invested into the real economy.

Sadly, though the economic thought process of Dr. Mahbub-ul-Haq, as indicated in his book ‘Reflections on Human Development’ whereby economic progress was seen more than just an increase in real GDP (gross domestic product, or simply national income), as the country was put on the road to Nordic-styled welfare state although at quite a slow pace.

Pursuing the objective of creating, albeit reluctantly, a social democratic-styled welfare state by striking a healthy balance between capitalistic, and socialist policies, the policy was followed in a lukewarm way, whereby the policy titled undesirably more towards the extremes of capitalism in the 1960s, while it was more socialist than required in the 1970s.

This is unfortunate to say the least, because both under the Ayub and the Bhutto eras the overall ideological underpinnings of both the leaders were aimed at taking the country towards being a welfare state; especially given Dr. Haq as finance minister during the 1960s served with the welfare-oriented mindset – a fact well established in his writings both independently, and in terms of his collaborative work with economics Nobel laureate Amartya Sen –and reflected in the talks/interviews of Zulfiqar Ali Bhutto, who was highly (and rightly) impressed with the social democratic policies of the Scandinavian countries, and wanted to implemented once in political power.

In an interview in 1969, he said in an interview: ‘My party believes in giving Pakistan not only democracy, but with democracy, economic justice as well. I want to end this Buffalo Bill capitalism and Jesse James capitalism, that doesn’t mean I am going to eliminate private enterprise all together…’

It is quite strange then that the reflection of economic history – both domestic and internationally – of all main political parties, Pakistan Peoples’ Party, Pakistan Muslim League- Nawaz (PML-N), and Pakistan Tehreek-e-Insaf (PTI), along with military rule, have not reflected properly about the serious misgivings of neoliberal policy, both inside or outside of the IMF programme, and the benefits of social democratic policies, as practiced for instance in the Scandinavian countries.

It is sad to see that time after policymakers have favoured IMF programme time and again. For instance, it would have been better to go for debt reprofiling/restructuring, and have a social democratic policy programme, bringing, in turn, a healthy balance better aggregate demand-, and supply-side policies, and overall between capitalistic and socialist policies, especially in a world where over-financialization, and heavily inclined market fundamentalism oriented policies have weakened aggregate supply, and have exposed the country too much to external shocks.

In this regard, the same PS published article ‘Pakistan should restructure its debt now’ indicated: ‘In July, Pakistan reached a staff-level agreement with the International Monetary Fund on a record 25th program, in yet another attempt to kick-start economic growth and development as the country lurches from crisis to crisis.

But the new IMF programme, which will likely be finalized once Pakistan secures “adequate” assurances from major creditors that its outstanding loans will be rolled over, fails to address a much more fundamental problem: the country’s unsustainable debt.

Interest payments on public debt consumed an estimated 68% of Pakistan’s revenue in the 2022-23 fiscal year, and its debt-to-GDP ratio was more than 80%, compared to less than 40% in Bangladesh, which gained independence from Pakistan in 1971.

The IMF estimates the country’s total external-financing needs will total roughly $128 billion over the next five years, with every year’s needs exceeding even optimistic forecasts of its foreign reserves. To restore debt sustainability, Pakistan would need to restructure its internal and external obligations, as Sri Lanka is currently doing.’

Copyright Business Recorder, 2024