IMF fresh loan to Pakistan- a recipe to ruin

(By Abdul Khaliq)

Pakistan’s public debt has grown over the last six years at a pace never witnessed in the country’s history. Public debt has grown at an average rate of 21.5 percent per annum from 2008 to 2013 against an average rate of 6.6 percent per annum during 2000-07.

Thus current foreign debt stands at $63 billion in June 2013. The domestic debt is even higher; more than about $75 billion. On the other hand average annual debt servicing is about $6 billion–over 20% of export revenues, and more than half what Pakistan currently spends on health and education combined. Two Ds (Debt and Defense) consume almost 90% of Pakistan resources, leaving peanuts for social sector.

The successive governments over the last 60 years accumulated Rs.6040 billion public debts while the previous PPP regime alone added Rs.8215 in just five years. Put differently, every child born in 2007-08 carried a debt burden of Rs.36606. A child born in 2012-13 carried a debt of Rs.77896 – an increase of 112 percent in just five years.

Within the public debt, it is domestic debt that has grown at a pace (23.4 percent per annum) faster than external debt, which stood at $46.2 billion in end June-2008 and rose to $66.4 billion by end-June 2011. However, it declined to $60 billion in end-June 2013. This decline in external debt owes to the suspension of the IMF program in May 2010.

Meantime, Pakistan continued to service its external debt obligations out of its foreign exchange reserves. It appears that the suspension of the IMF program was a blessing in disguise as it prevented Pakistan from further accumulating external debt to the extent of approximately $10 billion by now.

Within the domestic debt, the composition of debt has witnessed considerable changes in the last five years. Medium-to-long term debt has been converted into short-term debt with serious consequences for government’s debt management. Today, over 55 percent of domestic debt (Rs.5.2 trillion) is of short maturity, which must be rolled over at least once a year. Even more worrisome is the fact that the bulk of short-term debt is shifted to the shortest end of the maturity (three and six months).

In nutshell the debt situation is worse when we look at the figures of Pakistan’s foreign debt, which is galloping with horrific speed and has almost touched the new heights. There seems no way out for the successive governments to get rid of this vicious circle but to persistently borrow more loans to meet their previous debt obligations.

Evolution of bourgeoning debt

According to period-wise figures released by the Economic Affairs Division (EAD) and the Ministry of Finance at last year briefing to Special Committee on Debt, in the last 28 years Pakistan economy relies on reckless borrowing, which could not solve the economic problems of the country.

During the period from 1985 to 2012, a total amount of $72.261 billion loans and grants were received by Pakistan, including $59.240 billion as loan and $13.020 billion as grants. However, after repayment of total outstanding amount of foreign loans as of July 31, 2012, it now stands at $46.4 billion while total amount of grants received so far by the country are at $13 billion.

During Gen Zia regime from 1985-88, the total foreign assistance received by the country was $6.37 billion including $4.6 billion as loans and grants of $1.7 billion. During the 1988-90, in Benazir Bhutto’s first regime, $4 billion as foreign loans and $1.11 billion as grants were received by the country.

From 1990-93 during the first regime of Nawaz Sharif government, a total of $7.5 billion as foreign assistance including $6.1 billion as loans and $1.4 billion as grants were received. From 1993-96, during the second tenure of Benazir Bhutto a total of $8.1 billion foreign assistance including $7.3 billion as loans and $804 million as grants were received.

In Pervez Musharraf’s regime from 1999-2008, a total of $23 billion loans and grants were received by the country that included $17.9 billion as loans and $5.06 billion as grants while in 2008-2013 the previous PPP government received the total foreign assistance of $14 billion, including $11.6 billion as loans and $2.3 billion as grants.

Pakistan – obedient to IFIs

Pakistan is perhaps among the best clients of international creditors. It never disappointed its creditors, did not stop its debt servicing even during worst human crisis in 2005, when about 89000 of its people killed and millions rendered homeless by devastating earthquake. Again in 2010 super floods about 20 million people were severely hit, deprived of basic amenities, shelter less and foodless, but Pakistan, like a good customer, continued debt servicing on its foreign debts and did not seek any debt relief.

This does not mean that the country is very much financially strong or capable enough to combat natural disasters and at the same time never falters in performing its debt obligations. In fact the successive governments/regimes instead of taking care of its people have been continuously and shamelessly shifting the debt burden, under the dictations of IFIs, on the working classes of Pakistan.

Recently in September 2013, IMF agreed to a fresh 3-year bailout package for Pakistan under Extended Fund Facility. Strict conditions are attached to this deal. This agreement hides more than it reveals, from whatever has so far been divulged, it is clear that Pakistan would have to implement tough fiscal measures such as imposition of more taxes, withdrawal of tax exemptions, increase in power and tax tariffs, elimination of power tariff subsidies and privatization of public sector enterprises.

The IMF strings reflect that already terror and poverty-stricken people of Pakistan would have to brace themselves for greater hardship in the coming years. In a situation where more and more population is fast plunging into poverty particularly when food security is already alarming as 80 out of 131 districts of the Pakistan or about 48.6 percent of population does not have access to sufficient food.

Reckless borrowing from banks

Since the latest IMF program required the government to build $4 billion of additional reserves during the current fiscal year, it is in a desperate mood to buy foreign exchange from right and left to build the reserves. Under IMF dictation in September 2013, the govt. reached an agreement with a consortium of seven domestic and international banks to borrow $625 million to boost foreign exchange reserves and stop continuous bashing of the Pak rupee.

The banks which agreed to provide foreign exchange include; Bank of Tokyo, Al-falah Bank Limited, Credit Suisse, Standard Chartered Bank, National Bank of Pakistan, United Bank Limited and Allied Bank Limited. The highest contribution of $150 million will come from Bank of Tokyo. More than half of the country`s liquid reserves of over $10.3 billion are currently held by the commercial banks. This deal would accumulate government debt while the banks would keep enjoying.

The prevailing economic scenario suggests that debt burden will be going further up as Pakistan is also seeking financing from other sources: $1.5 billion from the World Bank, $1.6 billion from the Asian Development Bank, and $2.4 billion from other countries.

IMF and Pakistan

IMF has been the most persistent lender to Pakistan and is regularly providing ‘bailout’ loans to Pakistan. For 29 of the past 40 years Pakistan has received loans from the IMF, which amounts to one of the most sustained periods of international lending to any country. Over the period the IMF\\\\\\\’s loans have made Pakistan a more unequal country.

In September 2013 The International Monetary Fund (IMF) approved latest bailout loan of $6.64billion under Extended Fund Facility. In exchange, it demanded such strict austerity measures that are bound to devastate the living conditions of workers and the poor.

The cash-strapped newly installed Pakistan Muslim League (PML) government has no option but obey and implement all the IMF’s demands. A total of $3 billion has to be repaid during the current financial year, including to the IMF. Pakistan’s dollar reserves stood at $6 billion—only enough for Pakistan to pay for six weeks of imports. The strict conditions attached to the three-year EFF program include:

Budget cuts to lower the fiscal deficit from 8.8 percent of gross domestic product (GDP) to 6.3 percent.

Subsidies cuts. One immediate target of subsidy cuts is electricity. The government agreed to a 30 percent increase in electricity prices for domestic users. Gas prices are also being “rationalized,” with a new levy.

Currency depreciation. The Pak Rupee will be devalued an average of 110 rupees to the US dollar. On account of which the volume of foreign debt has increased in one go.

Privatization: Speeding the restructuring and privatization of state-run enterprises. The government will select 30 public firms for privatization, beyond the 35 that have already been chosen. About 1.2 million jobs are expected to cut down as result of privatization plan.

Increase in taxes. The IMF has also demanded a significant increase in tax revenues from current levels of 9.7 percent of GDP to 15 percent by 2018. In July 2013, sales tax on imported and domestic second-hand clothes, largely consumed by the poor, was more than doubled from 2% to 5%. In the same government budget, income tax on asset management firms was cut by 10%, a gradual reduction in the corporate tax rate was announced.

The under-taxation of the wealthy elite, including politically powerful rural landlords, is something that IMF conditions have not addressed. The country collects less in taxes as a percentage of its economy than almost any other country of its size. While Pakistan has failed to meet many of the lenders\\\\\\\’ demands to increase its overall tax revenue, the government managed to find a way to push through sales tax with focus of indirect taxation.

Fresh spree of privatization

On the dictations of the IMF, the new Sharif government has directed the Privatization Commission to immediately start the process for sale of 31 public sector entities (PSEs). The companies cleared for divestment include the Oil and Gas Development Company Limited, Pakistan Petroleum Limited, Mari Gas, Pak Arab Refinery, Pakistan State Oil, Sui Southern Gas Company Limited, Sui Northern Gas Pipelines Limited, Pakistan International Airlines, PIA-Roosevelt Hotel, New York, Pakistan Railways, Gujranwala Electric Power Company, Lahore Electric Supply Company, Islamabad Electric Supply Company, Faisalabad Electric Supply Company, Northern Electric Generation Company, Pakistan Steel Mills, National Power Construction Company and Pakistan National Shipping Corporation.

The financial sector entities selected for sale in the first phase include National Bank of Pakistan, First Women Bank, Small and Medium Enterprises Bank, National Investment Trust Limited, National Insurance Company Limited, Pakistan Reinsurance Company Limited, State Life Insurance Corporation and House Building Finance Corporation. The Civil Aviation Authority, Karachi Port Trust, Port Qasim Authority and National Highway Authority are also on the list.

The government has also made a commitment with the IMF to announce a strategy for the sale of 30 firms as a benchmark for disbursement of second tranche of the IMF loan. Under the commitment, the government is to announce privatization plans for remainder of total 65 entities by the end of 2013.

People feel the pinch

The overall impact of these IFIs-dictated moves proving harsh blow to the living and social conditions of workers and the poor. Foreign loans have weakened the economy, eroded the currency, decreased the buying power of the masses, and have promoted the interests of the elite.

Pakistan is currently unlikely to meet many of the millennium development goals, including on hunger, education, gender equality, child and maternal mortality and access to basic sanitation. High debt payments, and cuts in government spending, make it more difficult for the state to provide decent quality public services such as healthcare and education.

The careful analysis shows fresh IMF program designed to extract as much as possible from working people, to pay for the crisis of big business and international finance capital. The IMF intervention in Pakistan looks similar to its program for Greece—which has deepened the recession in that country, reducing working people’s conditions to miserable levels, increasing unemployment, imposing deep wage cuts, and wiping out social programs.

Inflation is going to rise due to continuing devaluation of the local currency, and subsidy cuts and taxes will increase the cost of living unbearably, under conditions where the masses are already living in dire poverty. 49.4 percent of Pakistanis live in poverty while 25% live below poverty line of $1 per day.

This ever-increasing debt burden has worst implications on the lives of these poverty-stricken people. Since Pakistan has to repay its debts at any cost, it is unable to resolve its pressing problems; like energy crisis. The power crisis has worsened to the extent that government has no option but to close down its educational institutes and universities. The Quaid-e-Azam University was shut down is one such example, which was shut down on account of electricity load shedding in summer of 2012.

So much so that operation theaters in rural areas hospitals have to suspend their work due to lack of power. Labor is being laid off due to closure of industrial units on account of load shedding, causing unemployment. The textile sector of Faisalabad is devastated by chronic power crisis, rendering thousands of workers out of work. The energy crisis is directly linked to water crisis, as number of working class area has to face severe water scarcity along with energy crisis.

Under IMF pressure the increase in indirect taxation on daily use items has further made the life of those millions particularly 46% population living below poverty line, miserable. Increase in VAT in current budget 2013-14 has made people to pay the price by compromising on the education and health of their children. Many poor families have no choice but to withdraw children from schools, particularly girls. These children are sliding down to the child labor market.

The state of public health is even worst. Due to poor health facilities in government hospitals people have to buy these facilities in private sector. So expensive are the private hospitals that poor people prefer self-medication or consult the local quacks, risking their health. The government who does not fail to pay any of the IMF installments has shamelessly witnessed 157 of its children died due to measles outbreak in Punjab till June 2013. Earlier this year, more than 460 children died from measles in Sindh. The lives of about 200 people were claimed by Dengue last year in Punjab province alone. One of the major reasons for this epidemic is the lack of vaccination coverage in different parts of the country.

Joblessness coupled with price hike has left little option for many poor families but to commit suicide. According newspaper reports the Govt. had to ban rat-killer pills as many people, particularly household women used these pills as easy and cheap way to end their life due to poverty. Some years back jumping from tower liberty (Minar-e-Pakistan) in Lahore became favorite place of suicide committers. Taking it as sheer embarrassment, Government had to stop the electric lift service of the Minar to check this suicidal trend. The new trend in suicide is really heart rending as in many cases entire family along with kids commit suicide. The predominant reason in majority of such cases is poverty.

Debt and disasters

To compound its problems, Pakistan has been deluged by a series of catastrophes, including 2005 devastating Kashmir earthquake, 2007 cyclone and the 2010 super floods that displaced some 20 million people, destroyed infrastructure and continues to ruin lives today. But through all these disasters, Pakistan could not get debt relief and kept debt servicing on. The record shows that response of the IFIs and donor countries during the above mentioned disasters in Pakistan has been disappointment, particularly in the context of comparison with other countries in humanitarian crisis.

For instance within 10 days of the Kashmir Earthquake in 2005, which left up to 3.5m people homeless, the donors provided Pakistan $247million ($45m pledges). This amounted to $70 per person. On the other hand within 10 days of the Haiti Earthquake in Jan 2010, some $742 million were provided and $920 million pledged to assist 1.5 million people. This amounts to $495 per person.

Similarly, within 10 days of Cyclone Nargis striking Myanmar in 2008, affecting 2.4 million people, an amount of $110 million was provided ($109m pledged). This amounts to $46 per person. On the other hand after 2010 Pakistan floods, when 20 million people were affected, less than $45 million were provided ($91m pledged), which amounted to $3.20 per person.

In their response to the 2010 UN flood appeal for Pakistan different countries, clubs and organizations pledged aid for relief, recovery and rehabilitation of flood-hit Pakistan. Only 56% of the total pledged amount was materialized. If we look at the table below, it gives clear impression that flood aid pledged by rich countries was just peanuts in comparison to loans they have been offering Pakistan.

The natural disasters in the last one decade have coincided with Pakistan’s prolonged commitment to the US-led so-called \\\\\\\’war on terror\\\\\\\’, which has cost the country about $80 billion financial loss besides killing and displacement of thousands of people.

Deterring debt domination

Though Pakistani peoples struggle against debt domination and IFIs economic terror has not been successful to the desired level but such resistance has been there to register itself. For instance after 2010 devastating floods a number of civil society organizations led by CADTM-Pakistan pressurized the government of Pakistan to seek debt relief instead of loans from donor community. Under Pakistan Debt Cancellation Campaign (PDCC) we held a number of anti-debt rallies, demos and conferences to push forward the question of debt justice. Thousands of people were mobilized around the issue, as a result of which the Senate (upper House of Parliament) passed resolution to seek debt relief.

Pakistani civil society is of the view that under the prevailing conditions, instead of further borrowing, Pakistan must be able to check corruption, tax the rich, cut military budget and mobilize all available resources toward relief for the poor through introduction of social protection systems. Instead of sending billions in debt service out of the country, Pakistan should be able to divert those resources to end energy crisis and creating jobs to the poor on urgent basis. The first and foremost thing in such circumstances is the fulfillments of all fundamental human needs of the populations.

Debt Audit – Need of the hour

In a country where about 50 million people live below the poverty line and 35 million are undernourished, the debt jacket is tantamount to economic torture. The debt on which these unjust loans were based keeps this strategic nation exactly where world leaders want it – in absolute dependency. But there is an alternative. There is a growing movement in Pakistan for suspension of debt payments, a full audit, and repudiation of debts regarded as illegitimate.

As a result of reckless borrowing, Pakistan’s governments have little need to be accountable to their people; this lending insulates governments and makes them dependent on foreign governments and international institutions like the IMF.

An audit of the public debt of Pakistan is need of the hour and prerequisite to economic justice. It doesn’t just mean debt cancellation. It means the people should decide which debts were legitimate, and which debts should be cancelled, as a first step towards a more accountable society.

We’re not simply calling for debt cancellation for Pakistan, but a debt audit, which helps put Pakistan’s people in charge of their economy. We believe this would be a first step to a more equal, accountable and sovereign society

We don’t pretend that a debt audit and debt cancellation will solve all of Pakistan\\\\\\\’s problems. We think it can begin to institute an economy run for and by Pakistan\\\\\\\’s people – but it\\\\\\\’s not enough on its own.

A debt audit would turn things around, and forces accountability of the government to the people. A debt audit necessitates bringing Pakistan\\\\\\\’s people into the picture, increasing an understanding of how debt was run up and giving them the opportunity to decide what to do about it. We\\\\\\\’re not simply talking about repudiation, but a democratic process of separating \\\\\\\’elite, regime debts\\\\\\\’ from ‘democratic debts’.


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