Two recent economic issues cry out for comment: the launch of Pakistan’s US$500 mn Eurobond by the finance minister, Shaukat Aziz; and the plea of the Governor of the State Bank, Ishrat Husain, for an end to the IMF programme in Pakistan.
Like most government decisions, the launching of the Eurobond was an in-ministry fait accompli. There was no serious debate about its pros and cons in parliament or in the media or at domestic trade and commerce forums. Mr Aziz took the decision in his own wisdom. He then took a road show abroad and quickly sold the idea to foreign portfolio managers. Indeed, even the idea of swapping the relatively expensive fixed issue @ 6.75% for one with a lower floating rate of around 4.50% occurred to him after the bond was hugely oversubscribed.
The arguments in favour of Mr Aziz’s Eurobond have been trotted out endlessly: it is meant to replace Pakistan’s expensive debt with cheaper debt; and it is expected to signal greater confidence in Pakistan as an emerging market for foreign capital market investors. But critics are right to ask whether this is the best way to achieve these objectives. We have forex reserves of about US$12 bn. We have invested a large chunk of these abroad at less than 2%. Why then are we floating the Eurobond to borrow at over twice the rate at which we have invested much of our forex reserves? Is this level of US$12 bn an optimal level of reserves for Pakistan according to some established balance of trade or payments formula? Why not reduce the level of our reserves by a few billion to retire relatively expensive existing debt instead of floating expensive new debt to retire still more expensive existing debt? Furthermore, the government has received considerable concessional loans in the recent past. Thus the stock of relatively expensive foreign debt is probably not so great that it cannot be wiped out by a chunk of the reserves. And as far as the issue of building foreign investor confidence in Pakistan is concerned, we cannot help note that the Eurobond’s oversubscription was in response to not just the high coupon rate offered but an effect of our existing forex reserve position, stable currency and our commitment to the IMF stabilization programme which is reflected in B++ international credit ratings rather than the cause of it all.
This brings us squarely to the continuing rationale for the belt-tightening IMF programme that has also paradoxically increased unemployment and poverty. While appreciating the need for the IMF programme in the last four years, Dr Ishrat Husain has listed compelling reasons for saying bye-bye to it now. Pakistan’s external account is satisfactorily restructured; a debt reprofiling and repaying strategy has reduced the debt service burden on the budget from 66% of forex earnings to less than 25%, suggesting that there is no longer a bottomless debt trap; workers remittances at about $3.5bn a year or three times the pre-1999 level are expected to stay stable in the future; the trade gap has been diminishing and this trend is not expected to be reversed; forex reserves are above optimal levels; the fiscal deficit will be down to 3.5% of GDP next June. And so on.
But investment and growth are not picking up significantly. Thus it may be time to trigger a jump in development spending in order to tackle poverty and employment. There is no risk, argues Dr Husain, that doing so would jeopardize the gains of the past. Tax collection has increased by over 60% in the last four years and the trend is irreversible since it is based on hard times rather than good times; public sector organizations are on the mend; and fiscal discipline has been institutionalized. The IMF has helped shape our new economic reality. But political will and consensus are now required to reap the benefits of the reform in the past few years. The IMF cannot help us on that score.
But do we just need to dispense with the IMF and apply prudent economic policies to take off into self-sustained growth? No. Those are just the necessary conditions. Among the sufficient conditions are political stability and continuity at home and optimal integration into the world community. But on this score, there are still many ifs and buts. What if the peace dialogue with India is derailed by the jihadis and we run headlong into conflict again? What if President Pervez Musharraf is run out? What if the nuclear proliferation issue should re-surface with a vengeance? What if another murderous attack by Al Qaeda on America leads to a severe backlash against Muslims in general and Pakistan in particular?
As long as General Pervez Musharraf’s Pakistan is dependent on one-man, one-party rule which is in turn dependent on short term external goodwill and benevolence, the path to self-sustained economic growth will remain littered with thorns. Having successfully accomplished the necessary economic turnaround, General Musharraf needs to think about establishing the sufficient political conditions that will make it sustainable in the longer term. If only Mr Aziz and Dr Husain had the requisite qualifications to give him some good advice on this score.