By: Kaleemullah & Sana Bashir
It has been a trend of any regime in Pakistan at various times to take loans, formulate short-term development plans, and expect some success, but such fantasy of economic growth fades after a while, and the cycle of borrowing loans continues again as usual. Pakistan is likely to face another politically charged economic catastrophe. Pakistan’s total debt, according to the SBP, is Rs 53.5 trillion, including Rs1.4 trillion from the IMF. It undoubtedly implies that we seek a bailout or assistance. The IMF is the most promising place for developing nations like us. Is it the IMF’s debt trap that has kept us in the cycle of borrowing? Why do we go there? Why don’t we implement long-term plans to avoid going to the IMF again and again?
The manifesto of any political party has always said that they would rather starve to death than seek help from the IMF, yet when they come to power, they knock on the door of the IMF. They do realize later that if we do not go there, we will go bankrupt, and so the IMF becomes our last resort.
This is a difficult question to answer is the IMF that bad or a trapper? This is true to some extent that the IMF is a trap. The IMF is used by developed nations to financially colonize the developing nations, but on the other hand, it also assists countries such as South Korea in strengthening their economies. South Korea is notable for its rapid economic growth from undeveloped to developed in a few decades. It also implies that the IMF is not a horrific thing if properly negotiated. It provides financial policies that our government would not be able to implement otherwise.
It seems that Pakistan has a love affair with the IMF. It’s the same as when someone falls unwell and must see a doctor. The same is true for Pakistan and the IMF. The simple reason is that countries with generally weak economies, weak industries, and imports that are lower than exports must meet foreign exchange requirements to pay for their imports. Some countries take loans for development projects, but these loans are conditional on the completion of these projects, and the money is given on a performance basis. Pakistan’s imports are significantly lower than its exports, resulting in an annual trade deficit. Pakistan is unable to pay for imports due to its export imbalance, and as a result, trade is always at risk of collapsing. The local budget deficit can be filled by printing notes, but because dollars cannot be issued in Pakistan, the foreign exchange deficit must be filled through borrowing. The money that the IMF has been financing Pakistan in the name of economic recovery for decades is being utilized to supply foreign exchange for import repayment and debt service.
There are also mortgage loans available from the World Bank or the Asian Development Bank. No development work has been done in the country through IMF funds, and it will not be done in the future. It is quite simple to stimulate our economic growth with these loans, but it is far more difficult to sustain such growth over time. When we wish to stimulate our economy, the government injects funds into it by providing subsidies to enterprises and businesses. For instance, because of the corona epidemic last year, our economic progress halted. According to the state bank of Pakistan to boost growth, the government provided low-interest loans at 2 to 3 percent interest rates. As a result of which firms and businesses increase their imports, we become dollar deficient and then seek to slowdown growth once again. The only tool in the toolbox is then to raise taxes and interest rates or to visit the IMF. In this vicious cycle, the rich are always getting richer because of subsidies, while the poor become poorer. To close this cycle, we always end up on the IMF.
For long-term growth, we must apply the strategy of treatment not using painkillers. Firstly, we need to reduce our trade deficit. Our firms import billions of dollars each year, but their export is negligible. Statistics issued by the ministry of commerce show that the automobile industry imports roundabout $5 billion worth of vehicles and parts each year, but exports are minimal. Our currency depreciates because of imports without exports, and as a result, our debt grows. Our debt soared by 3 trillion rupees during the previous regime due to currency depreciation. To do this, we must compel our industries to export, and we should enforce them that they would not import unless they export.
The land is one of Pakistan’s most valuable stores. The property tax system must be reformed. Real property was promoted by the previous administration. To discourage it, we should impose a tax on the empty land. When land prices increase faster than inflation, it has an impact on economic activity. Instead of investing in factories, people are buying land.
Pakistan is one of the world’s major agricultural countries. Sixty-five percent of rural inhabitants and 34 percent of the total labor force relate to the agriculture sector. However, we need to import everyday food items. According to the federal minister of finance, Miftah Ismail Pakistan imports $3.5 billion worth of cooking oil and $1 billion worth of beans each year. Reforming the agriculture sector can make the rural poor folks Reacher and help decrease inequality. Another key point is that we should focus on valued things rather than just producing things. According to the research on Pakistan’s economy, the Netherlands has a total area of 41543km, while Pakistan has a total area of 796096km, but the Netherlands’ agriculture exports are 104.7 billion Euros, while Pakistan’s are only 4.2 billion Euros. Instead of just producing maize, corn, and potatoes, we need to consider value products.
We need long-term policies and, most crucially, custom reforms to minimize smuggling, incentivize the private sector to start exporting, and improve our regional connectivity, privatization, and political stability to get rid of the IMF. It will be difficult to revive our economy if the political situation remains unstable and chaotic.
The writers are students of Economics at the National Defense University Islamabad.
