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How Pakistan economy was in fast lane for 30 yrs but its engine kept overheating with debt

PM Shehbaz Sharif said that a life of debt is no life. But a look at the history of Pakistan’s loans suggests his predecessors perhaps lacked economic wisdom.

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In Pakistan, the more things change, the more they remain same — Imran Khan or Shehbaz Sharif, it doesn’t really matter. Prime minister after prime minister is faced with the same problem they come to power criticising their predecessors for — ‘it’s the economy, stupid‘. And a burden they all feel, of the debt that’s ever mounting.

It’s now Shehbaz Sharif’s turn to firefight as Pakistani officials sit with the International Monetary Fund (IMF) representatives in Doha for grant of the remaining $3 billion from an existing loan programme. Finance Minister Miftah Ismail has promised Pakistanis he’d come back with a deal.

Pakistan has developed a vicious debt culture, something that’s similar to borrowing fuel to run your car, which is a guzzler—a few kilometers and the tank goes empty. Back to the petrol station, which in Pakistan’s case is the IMF.

Pakistan was one of the fastest growing economies in South Asia for most of the period between 1960-90. Today, it has Asia’s second-fastest inflation that the country’s central bank is struggling to tame.

So, how and why did this culture that has become fodder for a universe of memes involving its leaders infect the neighbourhood?

PM Shehbaz Sharif may have said that “a life of debt is no life” but a look at the history of loans the country has taken suggests his predecessors perhaps lacked the economic wisdom.

Pakistan’s relationship with the IMF dates back to 1958, when General Ayub Khan led the country to the multilateral body and signed a Standby Agreement to obtain Special Drawing Rights (SDR) 25 million, which was, however, never withdrawn.

Not too long after, in 1965 and 1968 respectively, Ayub’s financial team sought two consecutive IMF programmes and ended up withdrawing roughly SDR 112 million that made Pakistan its client officially.

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Where it stands today

The Express Tribune cited the State Bank of Pakistan’s (SBP) latest debt bulletin to show how the total debt and liabilities increased to PKR 53.5 trillion, a surge of PKR 23.7 trillion or nearly 80 per cent, when compared with the statistics before the Pakistan Tehreek-e-Insaf (PTI) came to power with Imran Khan in 2018.

Commenting on the economic failure of the country, economist Farrukh Saleem remarked in The News : “In 2018, when the PTI formed the government, national debt and liabilities stood at Rs 30,000 billion. By 2022, the same had grown to Rs 51,000 billion.”

“Imagine, between 1947 and 2018, a period of 71 years, we took on debt amounting to Rs 30,000 – and then in a matter of about four years we took on an additional Rs 21,000 billion,” Saleem wrote.

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Financial aid from World Bank, IMF and others 

Pakistan has been a member of the World Bank since 1950 and has received $40 billion in assistance since then.

The IMF has lent money to Pakistan 22 times during the last 60 years and they all come with some stringent conditions.

In 2019, the IMF gave the loan to Pakistan on the conditions of increasing energy tariffs, removal of energy subsidy, increase in taxation, privatisation of public entities and fiscal adjustments to the budget.

Such have been the conditions of IMF’s bailout that despite reassuring the people that fuel prices will not be increased, ahead of IMF talks in Doha, current finance minister Ismail said that the government may have to revisit its decision soon.

The most stringent condition laid by the IMF for Pakistan has been to account in detail the Chinese financial outlay in the China-Pakistan Economic Corridor and give firm assurances that Pakistan will not divert IMF loans to service its China debts, according to a report in Pakistan Today. Political economist Shakeel Ahmad Ramay has even called the IMF predatory by design and in nature.

Asian Development Bank says that it has committed 723 public sector loans, grants, and technical assistance totalling $37 billion to Pakistan since 1966 with the ongoing sovereign portfolio in Pakistan, including 48 loans and three grants worth $8.42 billion.

The Islamic Development Bank has also provided Pakistan with a total funding of $14.6 billion for 429 projects, of which 378 have been completed and 51 are active.

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Debt obligations from China, Saudi Arabia, UAE

Apart from these international lenders, several friendly nations like China and the Gulf countries have also been giving financial aid to Pakistan and have linked this support to negotiations with the IMF. Last month, China agreed to rollover $4.2 billion debt, providing a major financial relief to the government.

The finalisation of new loan deals with Saudi Arabia, China and the United Arab Emirates (UAE) remain undecided due to the ongoing IMF talks as Pakistan awaits a rollover of $2.3 billion Chinese commercial loan. Beijing has placed a condition for the renewal of its $2.3 billion loan as it wants that its loans could not be used for any purpose and should only be treated as part of the reserves because of Pakistan’s weakening financial situation.

According to an October 2021 report in Pakistan Today, after the IMF, the biggest donor to Pakistan is China. The report further said that Pakistan will have to pay back $100 billion to China by 2024 on the total investment of $18.5 billion which China has done in the form of bank loans in 19 early harvest projects under the China–Pakistan Economic Corridor (CPEC) which has the potential to transform the Pakistani economy although with the fear this transformation could come at heavy price.

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The high had the seeds of low

Economist Akbar Noman, in his 2015 Columbia University research paper, noted that Pakistan was among the ten fastest growing economies of the world during 1960–90. But he also argued that it was in this very period that “the seeds for the subsequent economic and technological malaise were sown”.

“Notwithstanding the exogenous shocks of the war with India in 1965, the 1971 war and the break-up of the country as well as the “policy shocks” that followed in its aftermath, the growth momentum was such that, over the three decades ending in 1990, Pakistan’s annual GDP growth rate [with 6.1%] placed it among the top ten countries,” Noman explained.

However, the 1970s was also marred with disruptions resulting from war and the break-up of the country, combined with ill-conceived populist policies and nationalisation, Noman noted.

“While much of that was reversed in the 1980s, the decade was one of facile growth and one in which a different set of seeds was sown for the subsequent slowdown”.

During the 1980s, the set of bad seeds alluded to the “heavy domestic borrowing at very high interest rates that allowed unsustainably expansionary fiscal policies in the 1980s and that were at the heart of the macroeconomic crises and consequent austerity programs – with a series of IMF bailouts – that have shackled growth since the early 1990s.”

Noman further argued that the germination of the politics–governance–security nexus, deterioration in the security situation, the rise of terrorism associated with worsening of foreign attitudes, business sentiments and higher cost of doing business also contributed to the continued slowdown.

“Even in the heyday of its growth performance, Pakistan grossly underinvested in human development. This underinvestment was in sharp contrast to the East Asian economies that sustained rapid economic growth and transformation and no doubt contributed to the reasons Pakistan was unable to do so,” Norman said.

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