DAWN - Opinion; 12 July, 1998
Counting on a bail-out?
By Shahid Kardar
WHEN the IMF mission arrived in Pakistan the other day the scene that must have greeted them would have been that of a dithering government, rudderless and directionless, totally unprepared for the implications of the momentous decision that it took on May 28, its massive torso headless whose different parts are moving in an uncoordinated fashion, presiding over a populace totally confused, uncertain and extremely anxious about their own future and that of their children.
This mission is now being asked by the finance minister to cobble together a bail-out plan and prepare a case that will enable the government to access IMF funds under ESAF, currently suspended on the instructions of the G-8 countries.
Over the last few days, the finance minister has been particularly vocal on the subject of potential debt default, repeatedly emphasizing the need for restoration of IMF support to stave off a financial crisis.
He is openly acknowledging that since debt-servicing requirements during the first quarter of the new fiscal year would be higher than in subsequent quarters, default is imminent if multilateral agencies fail to release the promised funds. He has good reasons for expressing this concern.
On the one hand, adequate alternative external inflows, like swap funds, home remittances and foreign currency deposits have more or less dried up. In the case of swap funds, the State Bank has simply refused to repay maturing deposits, asking for their roll-over or substitution.
On the other hand, the liquid foreign exchange reserves with the State Bank are only good to pay for just four weeks of imports. Without external assistance, these meagre reserves would be wiped out in no time. Hence, the latest in the never-ending flow of circulars issued by the State Bank requires prior permission from it before almost any transaction involving a foreign exchange remittance can be conducted (they might as well have told us to ask the State Bank before venturing to the toilet).
In fact, the latest set of requirements even goes beyond the long forgotten Foreign Exchange Manual of yesteryear. You can see the gleam in the eyes of the dinosaurs that have stalked the corridors of the State Bank of Pakistan from pre-historic times, as, on the eve of the next millennium, they try to run a huge complicated economy with the instruments of the 1960s!
Having admitted that sanctions threaten to impede the inflow of around $1.5 billion of the expected external assistance to meet the country's requirements for foreign exchange, the finance minister has classified the deferment or stoppage of multilateral aid, and particularly disbursements from committed loans, the most pernicious and worrying aspect of the sanctions. It is another matter that this statement does not square with the oft-repeated official pronouncements of all is well, that the economy is being well managed, that the sanctions would not hurt, that assistance has been secured from friendly Muslim countries and that the begging bowl has been broken.
What goes unexplained is how, within a few days of these claims, the situation could have turned so serious.
He is particularly upset that, whereas the government has fulfilled its commitments and met the targets and performance criteria set by the IMF under ESAF for the period ending June 1998, the Fund is stalling the disbursement process.
In fact, on some key issues the government seems to be running ahead of the milestones of the programme; for instance, the benchmarks for the balance of payments and for inflation have been bettered and the GST has been extended to the retail level this fiscal year, as against the scheduled target date of June 1999.
Whereas the finance minister insists that the reasons for the environment having turned sour are external, over which the government has no control, no independent assessment of Pakistan's current predicament would consider the economic crunch a creation of sanctions. Why then is he placing the entire blame at the doors of the international financial institutions and giving the International Monetary Fund just three weeks to come with a rescue package? Or else, to paraphrase him, we would be forced to review our debt servicing obligations, if not suspend debt repayments altogether.
Why is he making public declarations that the country will go bankrupt if it does not receive $1.5 billion, if, we are to believe officially circulated rumours, friendly Muslim countries have already promised $3 billion? Is it that commitments of such magnitude have not yet been made by our Muslim friends, or have they categorically told us that no such funds are forthcoming, or is this cautioning of the world community part of a strategy to get them to provide the funds if they do not want to be blamed for the feared domestic ramifications of an economic upheaval here?
One school of thought within these multilaterals questions the wisdom of bankrolling Pakistan, yet again, out of a crisis of its own making, accumulated through years of profligacy what then was the IMF team doing here? Ostensibly, it was carrying out an assessment of external resource availability, the nature and urgency of the economic crisis and the price tag of a bailout.
On the face of it, it is in the short-term interest of both the IMF and the World Bank to prepare a rescue package for Pakistan, and quickly. But they would not, after SE Asia and the convulsions that both Japan and Russia are going through, and the fears of the possible devaluation of the Chinese yuan, want another crisis on their hands in Asia.
Moreover, the IMF has been seeking funds from the US to beef up its equity. The US Congress could get extremely upset if it were to discover that Pakistan has defaulted. It would pull up the IMF for poor management, holding it responsible for frittering away its resources by financing countries that do not manage their resources well, thereby weakening their case for additional funds.
Also the international community cannot afford to let a country with nuclear weapons go bankrupt especially one with fire-eating weapon brandishing extremist mullahs of different hues waiting to step into the shoes of the totally discredited ruling elite.
This means that even if we go under before the bail-out plan becomes operational, it would be in the interest of the IMF not to record our failure to settle our debt obligations on the due date as arrears in its books, i.e., the default would not be recognized in the books of the IMF until the rescue package is firmly in place. But for such a plan to become a reality a minimum requirement would be for us to sign Comprehensive Test Ban Treaty and NPT immediately.
However, one royal foul-up has complicated matters. The government has lost not just a fair amount of sympathy, but also potential lenders for accessing credit on less onerous terms. That happens to be the termination of the contract of a Canadian sponsor of an IPP (independent power producer) and similar notices to 8 others involving US and Japanese investors, the World Bank as guarantor, and 140 foreign banks who financed these projects.
How this factor will affect the nature of the bail-out package and the conditionalities that will be attached to such funding is difficult to predict, except that these are likely to be harsher than might have been the case without the episode involving the IPPs.
Moreover, although there is growing domestic demand within the US to water down, if not altogether do away with, economic sanctions, the legal and political difficulties for the US administration to steer an exercise involving a major reversal of its policy on non-proliferation and the repeal of existing domestic legislation (the Glenn Amendment), will not be easy. Although they do not want to push Pakistan into becoming a rogue state, the US administration cannot be seen to be rewarding such an act especially after we had rejected the attractive package offered by them for not detonating the bomb.
They would rather have us sign Comprehensive Test Ban Treaty and then let the G-8 countries release the funds through the IMF and the World Bank. It may not be possible for them to roll back the sanctions in time. But then time is a pretty scarce commodity when it comes to Pakistan.
However, even if there is a timely bail-out, it will only be enough to keep us afloat they now want us to pay a price for our actions and merely succeed in postponing yet again the overdue task of economic reconstruction and painful reforms (including greater transparency of, and cuts in, defence expenditure), but this time by simply a few months.
Our problems have been around for some time. Gross mismanagement in recent times has simply exacerbated the rapid build-up of crises. The nuclear tests carried out in May and the first whiff of sanctions have merely hastened the economic collapse and brought us to our knees - such is the degree of our economic vulnerability.
The cauldron is full and boiling, and, unfortunately, there is little evidence that the government has either the will to undertake the necessary reforms, or the capacity to get its act together for its different arms to work in unison through a coordinated set of policies.
After several years of following this country's political fortunes, one has reached the rather depressing, but inescapable, conclusion that to avoid the political, social and economic meltdown that stares us in the face, we will require a different quality of leadership from that the one that this highly corrupt, totally inept and socially bankrupt ruling elite can throw up.