Pakistan, the IMF and the Illusion of economic reform.

Despite the glossy public optimism of Prime Minister Imran Khan about his economic track record, the fact remains that Pakistan and the IMF are deadlocked in a negotiating quagmire. The $6 billion IMF loan program is mission critical if Pakistan is to avert sovereign default. The PTI government does not want to enforce the IMF’s demands for cutbacks in public spending, higher electricity tariffs, fiscal austerity and higher tax collection targets that now lag growth in nominal GDP. The IMF also insists that the State Bank tighten monetary policy to combat inflation, despite the economic fallout from the Covid-19 pandemic.

Without an IMF loan program in place, Pakistan will be unable to attract development finance from the World Bank, let alone issue a planned $1 billion sovereign Eurobond new issue. Once again, Islamabad and the IMF are deadlocked in a high stakes game of chicken, where the outcome will determine Pakistan’s financial future.

Saudi Arabia’s demand for early repayment of a $3 billion loan and decision to freeze an oil import credit facility after a diplomatic dispute over the Kingdom’s stance on the Kashmir conflict and Riyadh’s refusal to allow the OIC to condemn Narendra Modi’s revocation of Article 373 exacerbates Pakistan’s fragile balance of payments. The timing of the Saudi Arabian diktat is also catastrophic since the State Bank of Pakistan has only $12.5 billion in hard currency reserves, a mere three months in import cover. The PTI government is also embattled by domestic political pressures and street protests. The deterioration in Saudi-Pakistani diplomatic relations comes at a dangerous moment as Islamabad grapples with the economic fallout of the Covid-19 pandemic and negotiates with the IMF on its $6 billion loan program’s next tranche.

China immediately compensated for the cut off in Saudi financial aid with a $1 billion fund placement in the State Bank. Pakistan, once viewed as a “too big to fail” state by both Riyadh and Washington, now is a de facto vassal state of the Middle Kingdom, with Beijing as its primary geopolitical and financial sponsor. Foreign Minister Mehmood Qureshi’s letter to the IOC to hold a ministerial meeting to condemn India’s annexation of Kashmir in August 2019 or Pakistan would hold its own meeting of Islamic states is an explicit challenge to Saudi Arabia’s diplomatic legitimacy as the leader of the global Muslim ummah. In retrospect, it is not surprising that the Saudi Crown Prince retaliated against a state he had once pledged to act as “Pakistan’s ambassador in the Kingdom.” This is now the most serious crisis in Saudi-Pakistan relations since the PML-N Prime Minister Nawaz Sharif refused to send Pakistani combat troops to Yemen.

Saudi Arabia wants a more balanced relationship with India, one of its main trading partners, Aramco client and a potential security umbrella provider if Washington slashes its military footprint in the Arabian Gulf and Indian Ocean. Saudi Arabia’s decision to “tilt” to India at a time of geopolitical confrontation between New Delhi and Beijing over Ladakh also has a seismic impact on the balance of power in South Asia.

Pakistan has not achieved economic stabilization since the 2018 sovereign debt crisis, though economic activity has picked up after the draconian contraction triggered by the pandemic’s first wave. The economic rebound is not sustainable as it is constrained by structural headwinds such as the rise in the external debt from $95 billion in 2018 to $115 billion now and the crushing burden of debt servicing on the national exchequer. There is no post IMF “growth dividend” in Pakistan’s proximate future. In fact, Pakistan’s sovereign solvency will remain hostage to the IMF’s structural adjustment program, itself a deterrent to accelerating economic growth.

Pakistan, a classic Asian tiger economy in the 1960s with 7% plus annual growth rates, now boasts a secular growth rate of a mere 3%. Since 1980, India, Bangladesh and Sri Lanka have achieved far higher per capita income growth rates than Pakistan, a dismal track record for a Praetorian garrison state whose military elite was obsessed with “strategic depth” in Afghanistan and overturning the verdict of Partition and the 1972 Simla Accords in the killing fields of Kashmir. General Zia ul-Haq’s catastrophic intervention in the Afghan civil war in the 1980’s, the serial incompetence of kleptocratic civilian governments in the 1990’s, the Kargil misadventure and the “war on terror” in North Waziristan/Swat in General Musharraf’s decade in power as military dictator and the brutal TTP insurgency took a horrific toll on Pakistan’s economy and social fabric. The the Rawalpindi GHQ’s Sparta/Prussia political model desperately needs a holiday from history and the geopolitical reveries of what Z.A Bhutto called its “Bonepartist generals.” Unfortunately, Zia and his junta and later Musharraf’s uniformed apostles of enlightened moderation” cronies did not bequeath Pakistan a modicum of economic and political stability.

Pakistan’s economic governance has been as deficient as its political governance in my entire adult life – the reason for the state’s dismal failure to resolve its energy crisis, escape the IMF debt trap, eliminate mass poverty, boost high tech exports, attract FDI on a global scale or boost its secular growth and productivity metrics.

Despite 73 years as a sovereign state, Pakistan has one of the lowest tax collection/GDP ratios in Asia. Successive civilian governments, the GHQ, the Supreme Court, NAB, the bureaucracy, Big Business and provincial power elites have all imposed an erratic, volatile economic policy framework on the state. It is high time the captains (OK, generals) and kings in Islamabad wean the state from its fatal dependence on external patrons – from the princes of the House of Saud to the Chinese Politburo and the military aid umbilical cord in the Pentagon. CPEC alone is no panacea for Pakistan’s structural economic malaise. The military budget cannot be sacrosanct or beyond parliamentary scrutiny in a world where survival is dependent on the embrace of the Digital Age, not the discredited “Army, Allah, America” governance model of the past.

Pakistan has no business being a pawn in the geopolitical ambitions of Turkey’s President Erdogan, the Qatari royal clan, Iran’s imperialist Ayatollahs and Russia’s predatory Kremlin. Their collective military interventions have meant only mayhem and misery for the people of the Middle East. Pakistan’s natural allies now, as in the past, are the United States, Saudi Arabia and, above all, the UAE, whose fraternal relations were forged in the 1970s by two of the greatest statesmen ever born in the history of the Islamic world – Sheikh Zayed bin Sultan Al Nahyan and Zulfikar Ali Bhutto. That much, at least, is certain.

Pakistan needs to upgrade its exports beyond mere textiles and footballs. It needs to reform its tax code, power subsidies, channel its elite’s “black money” into the capital markets, modernize its agriculture, crackdown on unproductive property speculation mafias and tax its elite’s penchant for luxury imports, the “Dubai Chalo bling-bling syndrome” I have witnessed since my boyhood in Karachi. Pakistan’s public sector white elephants not only bleeds cash and spawns a fiscal black hole. State owned behemoths also stifle internal competition and abort sustainable private sector growth curve. The civil service, the PBR, the Planning Commission and the Ministry of Finance all need institutional reform in the state’s quest to achieve a rational economic policymaking paradigm.