IN A DEBT TRAP

SYED FAZL-E-HAIDER
(feedback@pgeconomist.com)
Sep 13 - 26, 20
10

Flood-hit Pakistan is not in a position to pay off huge loans crossed to over $54 billion over the years. International Monetary Fund (IMF) recently agreed to give Pakistan $450 million in emergency flood aid, which is not the part of IMF $11 billion loan programme agreed in November 2008. The IMF commenced talks on August 23 with a delegation led by Pakistan's Finance Minister Abdul Hafeez Shaikh on reorganising the terms of loan programme in Washington. The government has indicated its plan to get another loan programme from the IMF. Analysts fear that another loan arrangement from IMF will further enhance the country's debt servicing obligations, thereby squeezing the resources meant for developmental projects. Critics say that the government's policy of preferring external borrowing to run the economy is nudging the nation into a debt trap. The business community has expressed its dismay over the outcome of the two-week long talks with IMF and the World Bank terming it extremely hopeless, as it is not the time to further burden the nation with another loan when the country is not in a position to pay off huge loans. The loans have already piled up due to the devastating floods in the country's history that has caused monetary losses to the tune of $43 billion.

The country has added almost $12 billion to external debt during the last two years, as against $2.6 billion in the previous seven years, which shows the government's reckless approach in piling up external liabilities. The country's total debt-to-gross domestic product ratio has crossed 61 percent during the outgoing fiscal year, breaching the 60 percent limit set under the Fiscal Responsibility and Debt Limitation Act. The critics say that even the foreign assistance could not prevent the deterioration of the economy, as irrationally high interest rates and tight monetary policy of the central bank is holding back its growth.

IMF has so far been reluctant to allow any space to Islamabad for breaching the major performance criteria, as the country could not achieve the key economic targets set by the Fund for the last fiscal year 2009-10, ended on June 30. The IMF team in June warned the country of derailing its existing programme if the country fails to meet the agreed performance criteria of the Fund. Some analysts believe that United States would use its influence to help the country get the remaining loan from the IMF, as the devastating floods have put the US interests at stake. The country is not in a position to continue its fight against Islamist extremists, as devastation brought by the floods would have substantial impact on the already crumbling economy. The expected food shortages due to ravaging floods may lead to widespread violence and armed militants could take advantage of the country's worst humanitarian disaster by operating among its displaced victims

The business community has demanded of the government to categorically express its inability to pay the debts in such a condition and all or partial loans should be written off.

Critics say that the country's ruling elites have developed the art of relying on charity and assistance by foreign countries leading the country to a stage where it cannot survive without foreign aid.

Consumer price index (CPI) inflation rose 12.34 percent in July from a year ago, according to the Federal Bureau of Statistics. The inflation trend is likely to be higher in coming months because of serious floods which began at the end of last month and destroyed some food stocks as well as crops in the fields, and disrupted transport.

Some analysts argue that Washington is likely to prevail upon IMF for immediate release of loan to the country without setting tough conditions. Washington is concerned about the huge economic impact of devastating floods on the country, which is on frontline position in US-led war on Al-Qaeda and Taliban and has been the major supply route for the international missions assigned in the Afghanistan since late 2001. Destruction of infrastructure and roads by the worst floods across the country threatens to affect the oil supplies to Nato forces in Afghanistan. The country lacks the capacity and resources to deal with the disaster of unprecedented magnitude.

The key reasons behind an alarming increase in Pakistan's debt burden include large fiscal and current accounts deficits, depreciation in exchange rate and uncontrolled borrowing. IMF has estimated that the country's external debt will increase by another $2 billion in 2011-12 and cross $72.6 billion in 2015-16.

The IMF is the biggest contributor to the total foreign loan received by the country in the past two years. The country turned to the IMF in November 2008 to avert a balance of payments crisis and has been struggling to meet the conditions of that $11.3 billion emergency loan. The country has so far obtained $8.7 billion from the IMF that forced the political government to take unpopular decisions like further monetary tightening and hike in power tariffs. The central bank in July raised its discount rate by 50 basis points to 13 percent under IMF pressure.

What the cash-strapped Pakistan needs to do is to seek greater access for its textile exports to USA and Europe to shore up its sliding economy in the wake of the worst floods. A UN report has reportedly raised hopes that the American and European governments would consider giving preferential treatment to textile exports from Pakistan to help it cope with the economic pressures caused by the widespread destruction by flash floods. The country's business community feels that the only way for sustainable rehabilitation of the affected people is through creation of new jobs, which will not be possible unless the world allows greater access to Pakistan's exports.

Islamabad should seek a 10-year preferential market access from Europe and the US the two largest importers of Pakistani textiles - in view of the vast economic losses suffered due to floods and the war against terrorism. The country's textile industry has reportedly called upon the government to demand greater access for their exports in the US and European markets, as Sri Lankan textile exports were given preferential treatment in the wake of destruction from tsunami to help it revive its economy.