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Pakistan: New approach needed for leveraging international financial resources

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Haroon Sharif |

Pakistan has had a long history of engaging with international financial institutions (IFIs) including the multilateral banks, IMF, UN agencies, bi-lateral aid outfits, professional bodies like the Financial Action Task Force (FATF), and international NGOs. While these resources were conceived and created to provide stability to the developing world, in case of Pakistan outcomes of these so-called partnerships have not shown much promise; in recent years most of these international organizations have been increasingly perceived as the proxies for political influencing on behalf of their western shareholders, particularly the USA.

The recent press statement of the US Secretary of State Mike Pompeo and the follow-up letter from a group of US Senators concerning a potential IMF bailout for Pakistan is perhaps the most recent unfortunate attempt of linking political influencing with a multilateral institution. The letter from the Senators took a position that Pakistan’s likely (request not made so far) for an IMF bail-out package to ease its external debt payments will be an outcome of rising imports under the China-Pakistan Economic Corridor (CPEC) projects. The letter cautioned the US Treasury and State Department about China’s debt trap diplomacy through its Belt and Road Initiative (BRI) which could be a potential threat to the stability in the region and the US national security interests.

The strategy should be driven by a home-grown agenda as mentioned above. Keeping in mind the political economy constraints, credibility of multi-lateral institutions is quite low in terms of their ability to provide timely advice and lending which helps economic growth.

Ironically, none of the other major shareholders or the senior management of IMF issued a rebuttal in defense of the institutional independence and transparency of decision-making at this multilateral organization. Instead, a simple statement was issued that the IMF had not received any request from Pakistan for a program loan so far – further deepening the impression that IMF is merely an extension of the US interests. Pakistan is no stranger to the IMF programs and multilateral lenders, but it is now critical to examine the changing dynamics of its relationship with the west in wake of the evolving power shifts led by China in this region – and the mounting western reaction to it.

This situation demands a new approach for a strategic and constructive engagement – that is mutually beneficial – with multiple international institutions. Pakistan remains among the top five borrowers in Asia for the World Bank and Asian Development Bank for quite some time. Both organizations provide loans of roughly USD 4.0 billion each year for a variety of projects and programs. These are large sums of foreign loans which are almost at the same level as the annually expected inflows from China under CPEC. Over the years, the focus of loans from multilateral institutions has been shifting from large infrastructure projects to public policy initiatives and social sectors.

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As a matter of fact, almost half the yearly financing is currently spread over a lot of policy linked programs where conditionalities are linked to pieces of legislation, changes in the governance structures, budgetary allocations and policies for economic development. It is a convenient tool for most Finance Ministers and staff of the multilateral banks as large sums could be quickly disbursed through government budgets without any long-term commitments to international contractors in case of large-scale infrastructure. Such lending instruments are effective for countries where robust economic policies are in place and policy consistency is ensured through local ownership and political consensus.

It will thus be useful for the new government in Pakistan to undertake a comprehensive review of the multilateral lending instruments and come up with a strategy to steer these funds towards real economic sectors which promote economic growth and financial returns to service this debt. In any case, it is not advisable to involve international organizations in crucial public policy issues at a time when major geo-political re-alignments are underway. The prudent practice for the transition economies is to develop the capability to formulate home-grown economic policies and then reach out to international lending houses for aligning their financing behind national development outcomes.

The letter cautioned the US Treasury and State Department about China’s debt trap diplomacy through its Belt and Road Initiative (BRI) which could be a potential threat to the stability in the region and the US national security interests.

In the case of Pakistan, a major fault line is the declining capability of state institutions responsible for economic management. None of the international organizations have come forward in support of the much-needed civil service and institutional reforms in Pakistan. Instead, most of the so-called capacity building loans have been utilized for foreign scholarships, international visits, and hiring of consultants to help the government. Pakistan must be among a few donor dependent countries in Asia where a large trans-national elite patronized by the international agencies is active in the name of governance and institutional strengthening. Eroding institutional capability of a large state like Pakistan should be a matter of serious concern for the policy makers.

The country needs strong democratic institutions and even stronger technical structures to implement policies. I remain seriously concerned about the current capability of state economic institutions to implement much needed structural reforms. Most bureaucrats will again look towards international support which in the case of Pakistan has not helped in the past and will not be useful unless the country develops the capability of implementing a home-grown economic reforms agenda. While multi-lateral banks and bi-lateral aid agencies could share valuable knowledge of global best practices, but it remains the responsibility of professionals hired on merit who will have the capability to use this knowledge.

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For the past many years, Pakistani policy makers have outsourced economic policy thinking to international lenders who often have a direct conflict of interest with national priorities. Countries like Pakistan need to be very careful in appointing their representatives on the executive boards of multi-lateral banks. The current practice of rewarding retired federal secretaries for these key positions is counter-productive. How can you expect a top bureaucrat to firmly negotiate with multi-lateral banks if he or she is eyeing for a lucrative international posting in the very same organizations? Progressive countries groom younger economic managers by giving them international exposure.

With such glaring weaknesses in the economic team dealing with multi-lateral banks, it is unfair to expect the lending institutions to bring in top quality international expertise and knowledge to help the government initiatives. Instead, they have been patronizing low-level officials and the consultants to give policy inputs to Pakistan. The fundamentally critical public policy challenge for Pakistan is to build a capable team of economic managers who bring in adequate skills and exposure to engage with multiple international institutions and countries.

The prudent practice for the transition economies is to develop the capability to formulate home-grown economic policies and then reach out to international lending houses for aligning their financing behind national development outcomes.

The transition from a conflict led the region to an economically prosperous and stable economy requires a new approach for engaging with the outside world by taking a leadership role and putting forward an economic value proposition for shared prosperity. Let’s look at some of the changes in the international financial architecture which could have a profound impact on Pakistan’s future financing requirements. During the past five years, major changes have taken place in the institutional space around Pakistan and its neighboring economies.

This includes the establishment of new IFIs, rapid advancement in regional trade agreements and more importantly the emergence of new political and economic alliances with China playing a lead role in driving the regional connectivity. Some of the new institutional initiatives include the New Silk Road initiative (2011); China’s famous Belt and Road initiative (2013); Eurasian Economic Union (2015); BRICS New Development Bank (NDB); Asian Infrastructure Investment Bank (AIIB); and PRC’s New Silk Road Fund.

At a strategic level, the Shanghai Cooperation Organization (SCO) gained momentum and SAARC became totally dysfunctional. It is critical for Pakistan to have influence in these institutions through the facilitation of economic initiatives and strategic dialogue. Pakistan needs to take cognizance of the fact that the trade war between the USA and China is expected to continue for some time and India will remain a strategic ally in the new US policy on South Asia with a particular focus on stability in Afghanistan.

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At the same time, it is a huge challenge for China to ensure the success of its massive infrastructure investment under the BRI including a USD60 billion commitment in CPEC under which Gwadar sea-port is expected to play a central role for regional connectivity and trade. If the BRI corridors succeed in developing regional markets, Pakistan could become a gateway to 700 million people market of Western China, Central, and West Asia. This could be a major incentive for global investors in the European Union, the UK, Russia, and East Asia. These fast-moving developments are expected to shape the future direction of economic cooperation in this region.

It is pertinent to note that Pakistan has one of the lowest savings and investments to GDP ratios in Asia. In order to meet the country’s massive investment requirements and to provide dignified jobs to a huge young labor force, the new government in Pakistan must take steps towards restructuring the economy on solid footings. A structural shift from a consumption led growth towards export led growth will require huge financing and technical support from across the world. As argued before, this support will only be beneficial if Pakistan demonstrates a capability to implement reforms and projects.

The fundamentally critical public policy challenge for Pakistan is to build a capable team of economic managers who bring in adequate skills and exposure to engage with multiple international institutions and countries.

For reviving capability of economic institutions and to smartly leverage IFI resources, Pakistan needs to focus on following priorities. Firstly, a clear model for medium-term growth and competitiveness needs to be developed with consensus among political parties on the overall direction. The economic growth strategy must create incentives for investment in real sectors to enhance productivity and innovation in manufacturing, agriculture and services sectors.

Secondly, a robust macro-fiscal framework is required to avoid systemic risks related to the chronic balance of payment crisis. The structure of the economy and economic management in Pakistan has not changed for the past three decades. Pakistan’s economy shows periods of good growth in the range of 5-6% and then fails to sustain it due to chronic fiscal and balance of payment related imbalances. The growth momentum is then broken, and the focus moves towards stabilization through monetary tightening and compromising investments needed for a sustained growth period. Extraordinary commitment and efforts are needed to create the required fiscal space to double the investment levels in Pakistan.

Thirdly, private sectors’ role needs to be enhanced on a level playing field. It will take a long time to build the capability of the state institutions. Partnerships with private sector professional organizations and universities could bridge this gap. The private sector must play its role in domestic resource mobilization to meet the investments requirements. Pakistan’s primary capital market has raised nothing for infrastructure, housing or other development sectors.

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Fourthly, the economic team needs to have a clear strategy to reach out for cheaper multilateral financing from both the traditional and new institutions. Diversification of financing resources is critical to lower dependence on a couple of IFIs. The strategy should be driven by a home-grown agenda as mentioned above. Keeping in mind the political economy constraints, the credibility of multilateral institutions is quite low in terms of their ability to provide timely advice and lending which helps economic growth.

Pakistan’s Finance Minister must ensure that due diligence has been done before the appointment of country directors and senior staff of IFIs dealing with Pakistan. The knowledge products of international institutions must be separated from lending operations. Eventually, private capital will start replacing multi-lateral financing as we saw in East Asia. Unless key positions in the economic team and multi-lateral banks are filled through merit-based professionals, Pakistan will remain hostage to weak advice and fragmented financing from international financial institutions.

Haroon Sharif is a senior development and public policy expert and has worked with both the private sector and multilateral agencies. He is currently a Senior Fellow of the British Council for promoting regional knowledge and leadership networks between the UK and Pakistan and is also a Distinguished Visiting Fellow at the National Defence University in Pakistan with a focus on China and economic security. He previously worked with World Bank, Dfid, and Securities & Exchange Commission of Pakistan at senior positions. The views expressed in this article are author’s own and do not necessarily reflect the editorial policy of Global Village Space. 


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