Tag: pakistan debt

A Potential Debt Trap in Nepal

If the government of Nepal is not too careful with debt trap diplomacy, it might face a similar fate to Sri Lanka and Pakistan.

If the government of Nepal is not too careful with debt trap diplomacy, it might face a similar fate to Sri Lanka and Pakistan.

The deadly plane crash in Pokhara which killed all 72 people on board put the spotlight on the nearby international airport. The airport was built with assistance from China through the Belt and Road Initiative and has been controversial due to confusion over its financing.

It is alleged that through the Initiative, China’s debt diplomacy could be converted into ‘debt trap diplomacy‘, which involves sponsoring significant infrastructure projects in developing countries with unsustainable loans and then exploiting the debt to exert influence over those governments.

Aside from the Pokhara International Airport, Nepal has just completed the construction of two major projects Gautam Buddha International Airport at Bhairahawa and Chobhar Dry Port in the capital, Kathmandu.

None of these expensive projects have been operating effectively. If a project’s business strategy is ineffective or established without rigorous preparation, it conveys a very negative message to the international community and future generations. This is why extreme caution is required when funding such projects with borrowed money. The quality of governance is another issue to be seriously considered while racking up debt.

The risk here is that a country’s national debt could become too high when Nepal needs heavy investment in quality infrastructure. When that happens, spending without proper calculation of income or direct contribution to the national output can be disastrous. As a result, increased interest payments can divert funds from other much-needed government projects, or there is a less private investment because of high-interest rates. Budgets are tightened and confidence in the economy weakens.

For the fiscal year 2022-2023, Nepal’s government is only permitted to raise a maximum of 256 billion Nepalese Rupees (about $2 billion) in internal loans. The decision to limit external borrowing comes at a time when several countries, including Sri Lanka, were facing debt distress.

Despite Nepal’s debt level, which has doubled to 2 trillion Nepalese Rupees (from$7 billion to $15 billion) in 2018-19, it still has room to increase foreign debt acceptance by around 12%. This has tripled in almost six years. Nepali officials have also become more cautious in accepting loans from China, requesting grants instead of loans for projects under the Belt and Road Initiative.

Governments often face uncontrolled government debt due to factors such as recessions, high military spending, social spending and a fall in tax revenue. There are various ways to deal with this, usually by reducing government spending which means cutting programs or raising taxes. Nepal’s main source of revenue is import duties which means it’s forced to take on debt to finance development.  The risk, as research suggests, is that debt spent with poor governance can further inhibit economic growth.

On top of this, high debt can lead to inflation as the government may be tempted to print more money to pay off its debts, decreasing the value of its currency. This can hurt exports and decrease the standard of living for citizens, who are now facing higher prices for goods and services.

In extreme cases, the country may even face a debt crisis and require a bailout from the international community, further eroding its economic and political independence. The government’s capacity to respond to upcoming economic shocks, such as a national and international recession or natural disaster like the 2015 Gorkha earthquake is also hampered by a high national debt level because it may lack the resources to finance a stimulus package or necessary investments to maintain daily lives of the people.

Rational and responsible spending and borrowing strategies are essential while the national economy is still recovering from two global shocks — the COVID pandemic and the Ukraine-Russia war.

If the quality of governance and political instability remain the same, any additional debt burden should be avoided, or proper spending capacity and the quality of governance improved. Otherwise, Nepal could fall off a debt cliff.

Dr Ramesh Paudel is an Associate Professor of Economics at the Central Department of Economics, Tribhuvan University, Kathmandu, Nepal. Ramesh’s interest in research includes but does not limit to macroeconomic variables’ impact on the economy, issues of landlocked economies, structural transformation, foreign direct investment, human development issues and other aspects of development economics.

Additional reporting and contribution by Subin K.C. Subin is a postgraduate student at the Central Department of Economics, Tribhuvan University.

Originally published under Creative Commons by 360info.

As Pakistan Gallops Towards Debt Default, Its ‘Unbreakable’ Bond With China Is Under Stress

Europe was ruined by war, but Pakistan fell on its knees because of its own doing.

An exam question for Central Superior Services aspirants: what’s higher than the Himalayas, deeper than the seas, stronger than steel, and sweeter than honey? Well, dear candidate, any hesitation suggests your patriotism level needs checking in Rawalpindi or Aabpara.

Every flag-waving Pakistani knows Pak-China friendship is the only answer. Next, what makes the China-Pakistan Economic Corridor a game changer? Obvious! New industries will sprout, existing ones will hum away, exports will shoot through the roof, Gwadar will become the next Dubai, all debts will be paid off, jobs will be galore, and the sun shall shine forever.

These dreams lie punctured as Pakistan gallops towards debt default. CPEC started in 2013, with $62 billion spent to date. But now debt-ridden Pakistan is casting around for loans to pay older loans. Whoever will give – and on whichever terms – is to be heartily embraced. The ‘unbreakable bonds’ of Pak-China friendship are under stress.

According to IMF data, China holds roughly $30bn of Pakistan’s $126bn total external foreign debt. This is thrice its IMF debt ($7.8bn) and exceeds its borrowings from the World Bank and Asian Development Bank combined. So why is mighty China awaiting the green signal from American-led IMF before releasing some relief? Shouldn’t it at least reschedule Pakistan’s debt? Or, better, wipe it off?

Let’s face it: these are naïve hopes. Chinese capitalism – like any other capitalism – is about profit, not philanthropy. In Marketing-101, a budding businessman learns how to sell water to a drowning man. Banking-101 tells you how to identify desperate debtors. Law-101 is about dealing with defaulters.

Chinese companies, state or private, are like other companies. Being under their government’s instructions to view Pakistan as a strategic ally, they understand Gwadar gives entry to the warm waters of the Persian Gulf – those which allegedly attracted USSR into invading Afghanistan. But they tread cautiously; Pakistan is not the world’s best place to park your capital.

New ventures are therefore few and even these are low-tech. A plant in Hub manufactures excellent Hui Cheng beer. Elsewhere: a cellphone assembly plant, automobile spare parts made here and footwear made there, a microfinance bank, etc. Plus, farmland has been acquired for vegetables to be shipped to the Chinese market.

Ah, but what about hi-tech stuff like nuclear technology? There’s a 50-year history of Chinese nuclear help to Pakistan, both open and clandestine. Without that, Pakistan’s atomic bomb and the 1998 nuclear tests wouldn’t have happened. Still, there was a substantial Pakistani element to the bomb.

That’s not so for nuclear power reactors! Bombs were hi-tech until the 1960s, but not thereafter. Reactors, however, are complicated beasts. The two Hualong HPR-1000 plants ($7bn apiece) known as Kanupp-2 and Kanupp-3 have all their core components designed and manufactured in China. Even the fuel comes from China. PAEC’s role is merely supportive. Under Chinese supervision, it undertook the civil works, installation and operation of the plants.

Compare with Chinese involvement in Singapore which, like Pakistan, is a former British colony. This island is 42 times smaller population-wise and 1,093 times smaller area-wise. But last year, FDI in Singapore was $92bn compared to $2bn for Pakistan. Its economy attracts American and Chinese giant companies for semiconductor design and manufacture, communications, robotics, financial technologies, business and professional services, etc.

These staggeringly large differences cry out for an explanation.

First, Singapore is peaceful while Pakistan is violence-wracked. Terrorism – a byproduct of earlier official encouragement to ‘jihadi’ groups – is sweeping through the country once again. Notwithstanding a special force of 10,000 for protecting Chinese workers in Pakistan, they live in fear.

A string of blasphemy-related lynchings – including that of a Sri Lankan factory manager – has increased their worries. When added to the cultural distance and language barrier, this severely limits mingling between Chinese and locals.

Second, Singapore’s laws are obeyed in letter and spirit, whereas in Pakistan laws are made to be broken. In this low-trust business environment, under-the-table deals are as common as legal ones. Since opacity in CPEC dealings is justified as a national security need, we cannot know the level of kickbacks.

Graffiti celebrates CPEC on the walls of Pakistan. Credit: Zofeen T Ebrahim

Graffiti celebrates CPEC on the walls of Pakistan. Photo: Zofeen T Ebrahim/File

Third, Singapore has a workforce that is hard-working, highly skilled, and adaptive. This is untrue for Pakistan. Hence the virtual exclusion of Pakistanis at the design and engineering level from major CPEC projects executed on Pakistani soil. Earlier promises crumbled away for this reason.

CPEC was built around a fatally flawed premise. It presumed that infrastructure – roads, bridges and electricity – alone will create growth and jobs. This is like assuming abundant water, soil, and fertiliser will yield a rich harvest. But the crucial input is seed – human capital. And here’s where things went awry.

Pakistan certainly has people as bright and talented as anywhere. But because of an education system gone berserk, it offers only low-grade human capital to industry. Because indoctrination was promoted over knowledge and skills, we are stuck with an ocean of unemployable youth.

Sending 30,000 Pakistani students to China for higher studies has failed to generate human capital. From former students who have returned with a degree in hand, I hear shocking stories. Most Pakistani students in China opt to game the system and cut corners, not learn or achieve.

In engineering and hard sciences, few are properly equipped for any but the shoddiest of Chinese universities. Of course, there are always honourable exceptions.

As talk turns towards debt traps and comparisons with Sri Lanka, anxiety and anger is growing. But calmness is needed lest an earlier folly be repeated. Delusions that Pakistan’s staunchest friend was America – and the supplier of its every need – ultimately shattered the relationship with its “most allied ally” of yesteryear. That need not – should not – have happened.

China is probably guilty of short-selling us – most independent power producer deals are considered a scam. So are tax exemptions to Chinese companies. Duty-free imports from China have driven many local manufacturers to bankruptcy. But it was our trumpet blowers who sold to us the nonsense of CPEC as a Marshall Plan for Pakistan. Europe was ruined by war, but Pakistan fell on its knees because of its own doing.

Pervez Hoodbhoy is an Islamabad-based physicist and writer.

This article was published in Dawn on February 18, 2023, and has been republished with permission. Read the original here.

China Will Support Pakistan in Stabilising Its Financial Situation: Xi Jinping

The two leaders reaffirmed their mutual commitment to the China-Pakistan Economic Corridor and agreed the project is of strategic importance.

New Delhi: China will continue to support Pakistan as it tries to stabilise its financial situation, state media quoted President Xi Jinping as saying on Wednesday, November 2, during a visit by Pakistan‘s Prime Minister Shehbaz Sharif to Beijing.

Sharif, who arrived in Beijing on November 1 on a two-day official visit, was one of the first leaders to meet Xi since he secured in October a third term as leader of the ruling Communist Party.

According to News International, during a meeting with Sharif, Xi assured continued financial support to Pakistan, including the Mainline-1 railway and the Karachi Circular Railway project, which come under the China-Pakistan Economic Corridor (CPEC).

The two leaders reaffirmed their mutual commitment to the CPEC and agreed the project is of strategic importance, the report added.

China and Pakistan should accelerate the construction of infrastructure for the Gwadar Sea Port, Xi told Sharif during their meeting at the Great Hall of the People, Reuters reported.

The developments and projects in Pakistan, a longtime Chinese ally, are part of Xi’s Belt and Road Initiative to improve China’s road, rail and sea routes with the rest of the world.

Also read: At SCO Meet, India Reiterates Opposition to China’s Belt and Road Initiative

Sharif also thanked Xi for China’s invaluable assistance to Pakistan’s relief, rehabilitation and reconstruction efforts in the wake of the devastating floods, which caused it an estimated $30 billion or more in losses.

They also discussed that a peaceful and stable Afghanistan would promote regional security and economic development and agreed that CPEC’s extension to Afghanistan would strengthen regional connectivity initiatives.

According to the Express Tribune, Sharif invited Chinese companies to invest in the government’s solar power project aimed at generating 10,000-megawatt electricity.

China said that it is willing to deepen cooperation with Pakistan in areas including the digital economy, e-commerce, photovoltaic and other new energy sources, Reuters reported.

Pakistan had been struggling with a balance of payments crisis even before devastating floods hit the country this summer.

It was expected to seek debt relief from China, particularly the rolling over of bilateral debt of around $23 billion.

China’s central bank and the National Bank of Pakistan have signed a memorandum of cooperation recently for the establishment of RMB clearing arrangement in Pakistan, in a bid to facilitate the use of RMB for cross-border transactions by enterprises and financial institutions in both countries, Reuters reported, citing the People’s Bank of China (PBOC).

On Tuesday, Indian external affairs minister S. Jaishankar reiterated India’s opposition to the Belt and Road Initiative, pointedly noting that any connectivity project should respect the territorial integrity of nations and international law – a reference to the CPEC passing through areas of Pakistan-occupied Kashmir.

(With inputs from Reuters)

Cash-Strapped Pakistan Secures $ 800 Million in Debt Relief From G20 Nations: Report

During the past seven months, 14 countries ratified their agreements with Pakistan, which has provided fiscal space of US $ 800 million to Islamabad for the time being.

Islamabad Cash-strapped Pakistan has secured US $ 800 million worth of debt freeze deals from 14 members of the G20 while it still awaits ratification by the remaining six countries of the grouping, including Saudi Arabia and Japan, according to a media report on Sunday.

Pakistan owes US $ 25.4 billion to the group of 20 rich nations, as of August this year. On April 15th, the G-20 nations announced a freeze on debt repayments from 76 countries, including Pakistan, during May to December 2020 period, subject to the condition that each country would make a formal request.

Pakistan along with 76 other poor African countries had qualified for the G-20 debt relief initiative, announced in April this year for May-December 2020 period, to combat the adverse impacts of the COVID-19 pandemic.

During the past seven months, 14 countries have ratified their agreements with Pakistan, which has provided fiscal space of US $ 800 million to Islamabad for the time being, The Express Tribune reported, quoting government sources. In addition to these 14 nations, two other countries had also approached to extend debt relief to Pakistan.

According to official documents, Pakistan has not yet finalised the debt rescheduling modalities with Japan, Russia, Saudi Arabia, United Arab Emirates and the United Kingdom.

Although these six countries have not yet ratified the debt relief related agreements, these G-20 members are expected to conclude the deal before end of next month, said a senior official of the Ministry of Economic Affairs.

He said that Pakistan was not making repayments to these six countries too, on the understanding that these members would eventually sign-off the deals.

Pakistan was expecting a total US $ 1.8 billion temporary debt relief from the members of G-20 nations for May-December 2020 period, according to the Ministry of Economic Affairs. This included US $ 1.47 billion principal loans repayments and US $ 323 million interest on the loans.

Also read: Why India Should Support an SDR Issue by the International Monetary Fund

The economic affairs ministry’s estimates had shown that Pakistan can get US $ 613 million worth of temporary relief from Saudi Arabia, US $ 309 million from China, US $ 23 million from Canada, US $ 183 million from France, US $ 99 million from Germany, US $ 6 million from Italy, US $ 373 million from Japan, US $ 47 million from South Korea, US $ 14 million from Russia, US $ 1 million from the UK and US $ 128 million from the US.

So far, Pakistani authorities have entered into 27 debt rescheduling agreements with about 16 countries, the report said.

The maximum relief was expected from Saudi Arabia to the tune of US $ 613 million for May-December period, it said. Japan was also expected to provide US $ 373 million relief. However, agreements with these nations were still pending the final nod.

Russia is also expected to ratify the revised terms by end of next month, which once ratified could provide temporary relief of US $ 14 million, the report said.

Saudi Arabia has also not extended the US $ 3 billion financial assistance package and has already prematurely withdrawn US $ 1 billion that Pakistan paid back by arranging another loan from China. Pakistan may also payback US $ 1 billion next month to the oil-rich kingdom, a year ahead of Pakistan’s expectations.

Meanwhile, the Economic Coordination Committee of the Cabinet on Friday approved to make another formal request to the G-20 nations for extension in debt relief initiative for another six months, the report said.

This time, the Ministry of Economic Affairs has estimated that Pakistan can potentially get relief of US $ 915 million, including US $ 273 million in interest payments during January-June 2021 period.

The maximum relief of US $ 385 million is expected from China, followed by US $ 211 million from Japan, US $ 104 million from France, US $ 53.6 million from Germany, US $ 65 million from the US, US $ 12 million from Saudi Arabia, US $ 7 million from Russia and half a million dollar from the UAE.

In case, Japan and Saudi Arabia also delay the relief under the second phase, the net benefits may come down to US $ 685 million in the second phase, said the sources.

Will Pakistan’s Twenty-Second Package from the IMF Really Help?

Islamabad is facing a challenging economic environment and a weak external position.

Pakistan has had more IMF programmes than all other South Asian countries combined, and none of the earlier twenty-one programmes appear to have left a lasting impact on its profligate bureaucracy and political leadership. The country’s budget deficit has remained stretched and there was no reform in increasing the tax base. 

The latest bailout package is worth $6 billion, of which immediate disbursal, upwards of $1 billion, has been completed, while the remaining is due in the next three years.

The IMF’s fiscal programmes have shown remarkable effects on the economies of some countries. Yet in the case of Pakistan, there have mostly been negative effects. One of the main reasons for this is the non-compliance to the conditions agreed to at the time of obtaining the loan. Critical institutional and governance constraints also deter sustained growth.

Pakistan’s macro-economy

Islamabad’s debt and liabilities have peaked to a record 40.2 trillion Pakistan rupees (PKR), dangerously exceeding the size of its economy, equaling 104.3% of the Gross Domestic Product (GDP), a first in two decades. In 2000, the total debt and liabilities were equal to 106% of GDP. 

Also read: FATF Arm Finds ‘Critical Gaps’ in Pakistan’s Actions Against Terror Groups

Ironically, this dangerous threshold had been crossed during the first year of the government of Prime Minister Imran Khan, who has long remained very critical of the Pakistan People’s Party (PPP) and the Pakistan Muslim League-Nawaz’s (PML-N) economic policies that led to massive piling up of the debt. Exactly a year ago, Imran Khan’s Pakistan Tehreek-e-Insaf (PTI) government – after seeking electoral support on the basis of a new economic strategy of sustained growth through human development – approached the IMF for a bailout package.  

Pakistan’s performance remains weak when compared to the rest of South Asia. Exports have hardly grown and development expenditure has been falling with a growing layer of aid-funded NGOs in a quasi-welfare state. The question is what plagues the Pakistani economy.

In the case of Pakistan, IMF’s programmes have mostly resulted in negative effects. Photo: Yuri Gripas via Reuters

Restricted fiscal space

Pakistan suffers from debilitating revenue shortages which stand at PKR 3.8 trillion, hardly sufficient to meet the expenditures estimated at PKR 5.5 trillion in Budget FY2018-19. Government expenditure has been growing at a phenomenal rate, with the consolidated federal and provincial expenditure data indicating that actual government expenditure for FY2018-19 was around PKR 7.1 trillion. FY2019-20 budgeted PKR 7.288 trillion, indicating that growth in fiscal expenditure (BE over AE) is only PKR 188 million (2.6%). Such a small increase, if adhered to would imply near-zero fiscal impetus to a stressed low consumption economy.

State Bank of Pakistan’s latest data indicates that the government borrowed PKR 1.367 trillion from July 1 to Aug 2, 2019, as against net debt retirement of PKR 20.2 billion during the same period last fiscal year. 

With banks parking their money in risk-free government securities in huge sums, the private sector has found no space to borrow from financial institutions since the beginning of this financial year.

Constraints in widening the tax base

The Federal Board of Revenue’s (FBR) tax to GDP ratio has sunk to just 9.9%, which is significantly lower than the 11.1% level that the PML-N government left Pakistan with. Lower taxes portend yet lower GDP rates for Pakistan.

Recently, Pakistan’s FBR attempted to initiate documentation drives to bring small scale traders, shopkeepers and undocumented sectors under the tax net. This un-regularised retail sector’s tax compliance and contribution to Pakistan’s economy is woefully marginal – a mere 0.25%, despite contributing 20% to the country’s total GDP and only 10-15% are legally registered. To widen the tax net, last month, the FBR introduced a simplified tax regime for traders, a fixed tax regime for small shopkeepers and a scheme for issuing business licenses to undocumented sectors.

These proposed measures of formalising the economy have already taken a toll on economic activity, given strong reaction through calls for strikes and shutdowns. At this stage, a settlement between the trade bodies and FBR appears uncertain. 

The All Pakistan Traders Association has called these proposals ‘anti-business’ and have called for a long march in Islamabad on October 28-29. Traders claim that despite being labelled as ‘simplified’, the new tax regime is anything but, with various slabs within each category. They have demanded a simple tax regime with only one annual return. 

Also read: Pakistan’s Economy at Critical Juncture, Needs Bold Reforms: IMF

The revenues earned by the PTI government’s tax amnesty called the ‘Assets Declaration Scheme’ earned roughly PKR 55 billion ($350 mn) was far below expectations, even though the number of tax returns increased to two million, the highest ever in Pakistan.

What is more troubling for the PTI government is that those holding undeclared assets held under false names categorised as ‘benami’ availed of this tax amnesty in large numbers. Now the government claims to be initiating a belated crackdown against benami assets.

The large-scale misuse of ‘Iqama’, work permit based residential status, by many Pakistani nationals from the United Arab Emirates (UAE) has also surfaced. Pakistan’s Geo News made a startling revelation that 7,000 super-rich Pakistanis had acquired properties in the UAE by violating national law in the past eight years.

The prospect of being blacklisted by the FATF has spurned the State Bank of Pakistan into action. Photo: Reuters

Attempts to raise dollar reserves

Khan’s PTI government is using an old, oft-used, developing-nation, method to raise savings by issuing a ‘dollar-based saving scheme’. The idea, floated by the State Bank of Pakistan (SBP) proposes to lower pressure on the dollar buying by issuing US dollar denominated certificates for deposits in rupees, on prevailing exchange rates. People’s trust in the local currency has already been shaken due to over 50% devaluation of local currency against the US dollar since January 2018 (PKR 146 from PKR 110 to $1). 

Response to the scheme is lukewarm as yet, but if it takes off, it would strain Pakistan’s dollar reserves more when interest payments are made.

Foreign reserves of Pakistan are supported not by exports but by loans from friendly nations. Earlier this year, China provided $2.5 billion in loans to Pakistan to boost its foreign exchange reserves, which at $8.12 billion (as on March 1, 2019) was below the minimum level that the International Monetary Fund (IMF) and the World Bank (WB) prescribe. Pakistan has struggled to maintain reserves that are not currently sufficient to provide cover for even two months of imports, despite receiving $4 billion in loans from Saudi Arabia and the UAE.

Attempted reform in the public sector

In the practical beginning of an end to fiscal federalism, one of the structural reforms that the Pakistani government has initiated is giving the heads of federal ministries full autonomy to independently utilise development and non-development funds of all departments and projects under their control, and in effect disbanding the Financial Advisers’ Organisation (FAO). This should ideally reduce the red tape in the implementation of public sector development projects and schemes.

In an effort to improve the productivity and potential of state-owned enterprises, the PTI government has established the ‘Sarmaya-e-Pakistan Limited’ (SPL), a holding company to turn PSUs around by eliminating losses. 

In FY 2017-18, cumulative losses of these state-owned enterprises crossed PKR 1.1 trillion (14% of AE). SPL is expected to gradually take over the management of these enterprises and would fast-track the restructuring of 20 loss-making public sector entities, apart from placing ten new companies in the fast-track privatisation list. 

Power sector companies, particularly distribution companies and even large profit-making entities, like the National Bank of Pakistan (NBP) and State Life Insurance Corporation of Pakistan (SLIC), are also in the consideration zone for privatisation.

However, these grand schemes soon lost steam when some members of the SPL Board tendered their resignations, alleging lack of interest from the top level of the government to undertake any serious efforts to revive loss-making state-owned entities.

Pakistan’s Prime Minister Imran Khan has sought an IMF bailout. Photo: Reuters/Naseer Chaudary

Serious threat from FATF 

Pakistan currently figures on the FATF ‘grey list’ and is up for a final review of its status at the FATF plenary meeting in Paris next week. The alarming prospect of being blacklisted by the OECD-based FATF has spurred action on part of the SBP, which is trying hard to ensure compliance with international banking regulations. The SBP imposed over PKR 184 million worth of penalties on four commercial banks in July 2019 for compromising rules related to anti-money laundering and foreign currency exchange operations. 

Pakistan’s National Counter Terrorism Centre has seized several properties of UN-designated terror organisations, like the Lashkar-e-Toiba (LeT) and Jaish-e-Mohammad (JeM). However, as The Wire reported, FATF’s global reviewers are quite unsatisfied with progress.

IMF’s past facilities have failed to reform

The PTI government has been attributing the privations faced by the people of Pakistan to harsh IMF conditions.

Previous IMF programmes for Pakistan have consistently failed, even in achieving their claimed objectives of growth combined with reduced inflation through financial ‘stabilisation’. Some theorists have assessed that evidence shows that IMF programmes harm human development, they not only fail to bring reform, but act as a shield protecting Pakistan’s ruling class from the need to reform. Experts concur that investment by, and future expectations of, the private sector are determined not just by stable exchange rates and low inflation, but more fundamentally by the institutional structure of a country, particularly contract enforcement institutions and the control of violence in society. 

Inflation is unlikely to be resolved through IMF conditionalities like high interest rates, reduced public expenditure and exchange rate depreciation, as past experience shows, because in developing countries inflation is triggered by cost-push factors such as the prices of fuel, electricity and food. In Pakistan’s case, there are additional physical constraints to growth beyond the financial sphere, such as a shortage of electricity, gas and water. Prices will, in fact, increase as exchange-rate depreciation will increase the rupee prices of imported industrial inputs and in the attempt to cut down the fiscal deficit.

Also read: Is the US-Pakistan Transactional Relationship Back on Track?

The Pakistani state has always managed to obtain waivers for structural slippages during its implementation of IMF bailout packages. This should be understood in combination of unilateral US, Chinese, Saudi aid plus IMF and World Bank programmes, which provide Pakistan with what can be called “geo-political rent”. Unlike in other cases, the bailout package for Pakistan is not based solely on economics but has ‘implicit geo-political/security deliverables’ or implications based on the understanding of Pakistan and USA, its main donor and ‘explicit economic conditionalities’ of the IMF.

These unstated geo-political conditionalities have in the past diverted the economic reform substance of the bailout, resulting in no restructuring of the economy. 

Unhappiness is spreading?

Meanwhile, resentment amongst common people is rising. Clamour against runaway inflation, lack of employment, shortage of essential commodities and higher utility prices, has reached the streets of Pakistan. This unhappiness, within just one year of a new government, is sure to explode as soon as the opposition manages to overcome its recent reverses, with most of its leaders in prison for various allegations (true and false) in money laundering cases.

To his credit, Khan has tried to address all that plagues the economy; be it the need to widen the tax base, the need to regulate benami assets, the reform of sick PSUs, the fact remains that the pace and intensity of a reformer’s zeal are missing. And, Pakistan’s historical environment of inept governance, unaddressed structural weaknesses, a chronically weak tax administration, lack of fiscal consolidation, large public debt and rising number of loss-making state-owned enterprises, amid a large informal economy, remain. 

Vaishali Basu Sharma is a consultant with the Policy Perspectives Foundation.