Business

Pakistan’s IMF man regrets move for bigger loan

Country will soon need debt relief, says economist.

Shahbaz Rana March 26, 2011

ISLAMABAD: The man who pleaded Pakistan’s case in the International Monetary Fund (IMF) Board for enhancing the bailout package limit from $7.6 billion to $11.3 billion now regrets the decision to go for a larger loan.

“I made a mistake in arguing for the augmentation in the IMF board, and also got the IMF to allow us to use a part of the 2009 August tranche as a bridging loan for budgetary spending,” wrote Dr Ehtisham Ahmed, Pakistan’s former representative in the IMF board, in an email to a business tycoon and an economist.

In August 2009, the IMF augmented the size of Pakistan’s standby arrangement programme to $11.3 billion $3.7 billion more than approved in November 2008. Pakistan had sought the increase and permission to use a portion of it for budget financing after the Friends of Democratic Pakistan refused to provide a promised loan.

According to Dr Ahmed, “We are currently unable to repay the IMF for the $8 billion already borrowed. We will soon be looking for debt relief.”

Dr Ahmed, who is senior fellow in the Centre for Development Research, University of Bonn, criticised former finance minister Shaukat Tarin. “Had I known that Tarin had already thrown in the towel on tax reforms, I would never have made the (augmentation) case in the board,” wrote Dr Ahmed in the email on February 5, 2011.

Tarin was not available for comment.

“It initiates a debate on whether we needed such a huge amount and who is responsible for this mess,” said Dr Ashfaque Hasan Khan, former director-general of the debt office, when asked about Dr Ahmed’s comments. He said Dr Ahmed and Tarin were both to blame for the “irresponsible borrowing”.

Officials who in 2008 worked in the finance ministry said that there had been two views about the bailout programme within the ministry.

Asif Bajwa, who was then special finance secretary, believed that Pakistan needed the IMF’s confidence more than its money. The other view, backed by Shaukat Tarin, was that Islamabad must go for a big chunk of money to build its reserves.

“Those who advocated going for a big amount didn’t think about the cost at which the $11.3 billion was obtained,” a finance ministry official who had backed Bajwa’s plan said on condition of anonymity.

Dr Ahmed also downplayed the relevance of Pakistan’s $17 billion central bank reserves. “Policymakers and the public seemed to be lulled into a state of paralysis by the level of reserves. Unfortunately, these are not our reserves,” he wrote.

Of the $17.5 billion reserves, almost $8 billion is borrowed from the IMF, one billion from China and Saudi Arabia, and over $3.5 billion belongs to commercial banks, leaving the net balance at near the level in 2008 when Pakistan rushed to the IMF for a bailout.

Since last May the IMF has suspended the bailout package due to the government’s failure to carry out tax reforms and is still holding $3.5 billion in balance payments.

“Shaukat Tarin, being a banker, was keen more to restore confidence, but the problem is that despite the huge borrowing, if you take out the IMF and commercial banks’ reserves, Pakistan’s reserves are sufficient only for two-and-a-half months of imports,” said former finance minister Dr Hafiz Pasha.

Pakistan’s total debt and liabilities reached the unprecedented level of Rs11.01 trillion in 2010, which is 69.1 per cent of the total size of the economy, according to the State Bank of Pakistan. Under the Fiscal Responsibility and Debt Limitation Act, the government must keep the debt level below 60 per cent of GDP.

Domestic debt amounts to Rs5.3 trillion and external debt to over Rs5 trillion. Apart from this, public sector enterprises have borrowed Rs390 billion, while the federal and provincial governments have borrowed Rs364.3 billion for commodity operations.

Repayment plan

According to finance ministry estimates, Pakistan will pay over $1 billion in interest on loans obtained from the IMF. The repayments start next year when Islamabad is to repay $1.2 billion to the IMF including $230 million in interest. It must repay $2.9 billion in 2013; $4.3 billion in 2014; $2.6 billion in 2015; and finally remove the debt with payment of the last tranche of $430 million in 2016.

At that point, Pakistan is to start repayments of $8.9 billion in Paris Club loans, which were rescheduled in 2002 as a reward to Islamabad for joining the US-led war in Afghanistan.

Published in The Express Tribune, March 26^th, 2011.

COMMENTS (16)

Meekal Ahmed | 13 years ago | Reply Please read carefully. Dr Ehtisham regrets the augmentation (not the original loan size and first tranche) because it was based on a promise to the IMF's Executive Board that tax reforms, more specifically VAT, would be implemented. It was not done but as I said to him in private e-mail, this has been Pakistan's track record in it's dealings with the IMF over the past five decades: BROKEN PROMISES. There is no need to get up-tight over the fact that most of our reserves are made up of IMF money. That is what IMF money is intended for! To build reserves. Nor is there anything wrong with including reserves of the commercial banks or deposits from friendly countries. This is standard practice. However, it is valid to be concerned that the high level of reserves is causing complacency. Pakistan does not have an immediate balance of payment need. Problem is that this could change very suddenly so one needs to be prudent. I am not aware of anyone wearing a suit and tie (I suppose he should be wearing a maulvi shalwar) saying that the economy is "strong". In fact is always seems to be the reverse. Finally, so what if exports are largely a price effect. You take what objective conditions the global economy gives you. On the import side there is also a price effect working especially in regards to food and oil imports which is likely to get worse.

sandy | 13 years ago | Reply "Of the $17.5 billion reserves, almost $8 billion is borrowed from the IMF, one billion from China and Saudi Arabia, and over $3.5 billion belongs to commercial banks, leaving the net balance at near the level in 2008 when Pakistan rushed to the IMF for a bailout." This should shut the mouth of the paki joker politicians and ex-military/ ISI service men, who knows nothing about economy but comes to paki talk shows wearing a suit and tie and brag that paki has made great progress and is economically strong. What a fool ... Paki export has grown because of rising international textile prices and not some great paki story when hundreds of mills are closed and there is no electricity for 5 days a week. Similar hollow case is for its reserves. The economy is in a utter mess, can collapse anytime and illiterate politicians and military try to hide it. Happy to see atleast some paki knowledgeable person to write this article.

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XX | 13 years ago | Reply Oh thank you thank you thank you O Great Democracy!!! I SOOO LOVE my JAMHOORIAT!!!!!

Meekal Ahmed | 13 years ago | Reply Absolutely. Pakistan has potential to export a wide-variety of goods and services. You only mention "traditional" exports. I wrote an article for a quarterly on it. If you wish I can send it to you. Fundamentally an incentive structure needs to be in place favoring exports. Check out the Asian countries as well as successful exporters in Latin America and elsewhere. It is not rocket-science. At present there is an anti-export bias in the incentive structure including an exchange rate that is not competitive. It is thus much more profitable to sell in the protected domestic market where because of a lack of competition huge (monopoly) profits can be earned. That needs to change.

Meekal Ahmed | 13 years ago | Reply @John: It goes without saying that that borrowing should be predicated on a strong fiscal stance with sensible taxation and spending measures and a deficit that can be financed easily.

Raj | 13 years ago | Reply @Meekal Ahmed: I agree, but tell me how do you propose to raise exports? and furthermore Export what??? The country already has an export market for rice, wheat, mangoes, textiles! Is there anything else that country has which can be exported in significant quantity to really have impact on its balance of payments?

John | 13 years ago | Reply Not sure how PAK is going to pay back without defaulting on some. It is high time they implement the tax reform and austerity measures. I was wondering where did all the reserves came from in SBP monetary policy report of Jan '11. Now it is all clear. With the all the unrest in middle east the remittances will also slow down. Mango virus in Sindh is going to stall the trial Mango export to the US this fall? Reading reports that there is going to be wheat shortage-bit conflicting what PAK says and what outsiders say. @ Meekal Ahmed says heavy borrowing was justified. I am ok with it IF it is accompanied by fiscal austerity measures. SBP criticized the GOV for that, and the IMF loan also stalled based on this issue. If tax reform effort was already ignored, then the borrowing did disservice to PAK people and bond market.

John | 13 years ago | Reply @Irfan: I think the ISI already sold them to N. Korea, some parts to Libya, and last I heard they are also shopping around further east of eastern neighbor. Besides the money from these sales can not be laundered into SBP. SBP is not BCCI. So only legitimate route.

Meekal Ahmed | 13 years ago | Reply Gentlemen, Rave all you want. There is only ONE solution: raise domestic resources; cut your internal deficit and that will bring down your need to borrow. It will also mean lower inflation and lower interest rates. That would be good for investment and employment. Raise exports relative to imports and that will cut down your external deficit and the need to borrow externally. There is no other way. No country in the world and no economists/planner or thinker has come up with another solution to deficits and debt.

Raj | 13 years ago | Reply @Irfan: Nice thought ! however first check with the Army, that they are willing to do this, then Ask Uncle Sam if they would entertain the idea, as they have serious economic crises too! Oh Yes and by the time you finish clearing all the outstanding debts and interest charges, please ensure that whats left is not looted by those in power for personal gains, then perhaps, one can start thinking about building a new economic and fiscal modules for developing the country!! Lastly a very important point do ensure that clergy returns to mosques and stay there and don;t try to mingle in order to achieve power!!! This is a very tall order!! The future is not bright but rather blur and How these repayments are going to be met, is a million dollar question, without borrowing further. So its like borrowing from paul to pay peter, and so on, and in mean time the country will go to dogs!!!!!!

Khurram Ashfaq | 13 years ago | Reply What is the issue in exploring our natural resources to clear our debts?

Irfan | 13 years ago | Reply why dont we put a condition of all nuclear bombs we have! we have 100 nuclear bombs and lets ask americans for 100 billion dollar for all our nuclear bombs!! 100 billion dollar will propel us into a fast growing economy and we could some kind of treaty with our neighbors and integrate our economy to become an economic power in region!!

Meekal Ahmed | 13 years ago | Reply This is my first cousin speaking in his private capacity. He is taking too much credit for himself as though this is his personal bank. These things (augmentation) are discussed and decided beforehand. You don't take your case to the IMF Executive Board for approval (on any matter) only to have it shot down. I believe augmentation was correct irrespective of what Ehtisham and Ashfaq say. Pakistan needed a big boost in confidence to stem capital flight, calm markets and most of all stabilize the exchange rate. It worked. Of course we have to pay this money back. It is only a problem now since the GOP-IMF program has stalled. That means there is no inflow from them; just an outflow of repayments which will get larger going forward.

omer | 13 years ago | Reply and his regret would save Pakistan from the pit it has fallen into ? unless such people are given the capital punishment, such "small" blunders would continue to happen. Force everyone to pay his/her due share of tax. be it a "zamindar" or a businessman. only that would save Pakistan from the cluthches of IMF and Co.

P.A. Bhutto | 13 years ago | Reply “I made a mistake in arguing for the augmentation in the IMF board, and also got the IMF to allow us to use a part of the 2009 August tranche as a bridging loan for budgetary spending,” wrote Dr Ehtisham Ahmed, Pakistan’s former representative in the IMF board, in an email to a business tycoon and an economist. ET what business is it of yours to be reading and publishing people's PRIVATE EMAILS ?? We gonna take you to court !

Punjabi | 13 years ago | Reply Paying back the loan taken, A dream all pakistaniz see at their very own level. Before sleeping at night. It helps in sleeping. With such incompetent government & governence which is current & expected from next government as well, i can see where this country is heading towards.

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