Pakistan and the IMF: A Relation of Trust, An Article By Henri Ghesquiere, Senior Resident Representative in Pakistan
September 23, 2003Pakistan and the IMF: A Relation of Trust
By Henri Ghesquiere, Senior Resident Representative in Pakistan
Reproduced with permission of Business Recorder
September 23, 2003
One month from now, the 24 Executive Directors of the International Monetary Fund, who represent 184 countries, will likely meet to review Pakistan's recent economic progress. Chances are they will approve a disbursement of about $240 million--one more milestone in Pakistan's economic revival which began four years ago. The approval will be a further nod of encouragement for the Government to persist with its strategy of sustained high economic growth and poverty reduction.
Yet, in Pakistan mistrust of the IMF's intentions abounds. Its three initials evoke economic pain. Many consider the Fund uncaring. They look with incredulity when I assert that the Fund has only one goal in Pakistan: to help the country achieve its full economic potential.
When Pakistan's Government asked financial support from the Fund nearly four years ago, the country stood at the brink of default on its foreign debt. Hardly any international donor or creditor, private or public, was prepared to provide financing unless the IMF led the way by putting its money in Pakistan. When that money came imports kept flowing into the country, averting a crisis of possibly massive bankruptcy and layoffs and even more grinding poverty.
Did Pakistan end up in the clutches of a greedy lender? Hardly. The most expensive debt of Pakistan to the IMF carries an interest rate of less than 2.5 percent per year and the bulk is lent at 0.5 percent, well below the rate of return which domestic bondholders and investors in savings certificates demand from their Government. The money that the IMF lends has been entrusted to it by the governments of its member countries and the Fund has a fiduciary responsibility toward their taxpayers. The low interest rate is meant to help the Government of a borrowing country that courageously confronts its deeper economic problems. The economic policy measures that are a condition for IMF disbursements aim to strengthen that economy--for the benefit of its citizens--and to allow repayment to the IMF and make the money available to other member countries in temporary difficulties.
Unsustainable economic policies, not sudden misfortune, brought Pakistan to the IMF. Throughout the 1980s and `90s, economic policies had a fatal flaw: public expenditures, often ill-conceived, exceeded revenue collected by a wide margin. Persistently large budget deficits trapped Pakistan into a spiraling public debt which by 2000 exceeded the economy's total annual production. The growing burden of paying interest on this debt compressed critical outlays for health and education and left the infrastructure crumbling.
The government that assumed power in October 1999 candidly took stock of what ailed the economy. It designed a coherent economic strategy, in which fiscal discipline, external debt relief, reform of institutions to facilitate private economic activity, and enhanced expenditure for better quality education and health all mutually reinforce each other toward the goals of sustained high economic growth and poverty reduction. Subsequent interaction with stakeholders put emphasis on the role of women, employment creation, and the environment. Key Pakistani personalities, starting with President Musharraf, articulate this strategy with the conviction of home-grown ownership, not IMF imposition.
The sustained implementation of this strategy offers the best hope for Pakistan to raise the standard of living of its people durably. Many now take the macro-economic stability and the renewed confidence in the value of the rupee for granted without crediting the fiscal discipline that made the turnaround possible. Support from bilateral donors or the return flow of capital in the form of worker remittances would not have reached their current magnitudes without policy persistence by the Government.
IMF staff are sometimes considered impatient, unaware of the time it takes to build consensus for transforming economic institutions in decay or to change deep-rooted mindsets that obstruct good governance. Yet, procrastination in implementing reform policies delays their benefits. The result may be a sustained economic rate of growth of only 5 percent instead of 6 percent or higher--a major setback in personal well-being over time.
In turn, the people of Pakistan are impatient, understandably so, to see an end to abysmal poverty. Middle-class income earners strive to meet the aspirations of their families. The strategy being followed is potent and will achieve its goals but not instantaneously. Private investors will commit resources and create employment opportunities when they are confident that the strategy will endure. Doubling the yield per acre in agriculture and empowering the poor by giving them the skills to participate in productive activities will take time. The process should be shortened by enhancing the effectiveness of public service delivery in health and education through better motivated public servants and focused social safety transfers.
By late 2004 Pakistan's three-year borrowing arrangement with the IMF will be completed. The Government has announced its decision not to seek further financing from the IMF thereafter. Pakistan will thus join the 70 percent of the member countries with whom the IMF presently has no lending relationship. The Fund respects that decision. And there are good grounds for it. On current prospects, Pakistan will continue to maintain high official foreign reserves and can count on gaining the confidence of international capital markets. Pakistan has been a prolonged user of Fund financing and the IMF has neither the mandate nor the resources for indefinite development support.
The IMF will remain staunchly committed to help Pakistan achieve its goal of greater prosperity for all its citizens. One avenue is to maintain an intensive economic policy dialogue. Other proposals include sharing the Fund's expertise for strengthening the soundness of financial institutions to further lessen Pakistan's vulnerability to external shocks.
Meanwhile, the remaining year under the Poverty Reduction and Growth Facility (PRGF) offers the opportunity and challenge to consolidate the economic progress achieved to date and to press forward with shaping economic institutions for the betterment of the Pakistani people. On occasion, public opinion makers in Pakistan exhort their government officials to negotiate hard with the IMF and outwit its staff. I cannot suppress a smile. Fund staff and their counterparts are not buying or selling carpets, but learning together how best to achieve the common goal. At this table, we sit on the same side.
Henri Ghesquiere is the IMF's senior resident representative in Pakistan. He shared these views as part of an ongoing dialogue with Pakistani society.