The Untold Realities of Pakistan: Kaiser Bengali

 

Pakistan's Unending Debt Enslavement

Dr. Ikramul Haq in The Friday Times

Nearing 76 years of independence, our leaders in power want to celebrate liberation from colonial rule after pushing the country into a deep debt trap. This paradox depicts what Zulfikar Ali Bhutto highlighted in his masterpiece, Myth of Independence. What makes the situation more painful is the fact that every time a new loan is obtained, those in power express jubilation as if an extraordinary goal has been achieved.

The signing of a nine month US$ 3 billion standby arrangement (SBA) with International Monetary Fund (IMF) on June 29, 2023, was commemorated like August 14, 1947 by Premier Shehbaz Sharif and Finance Minister Muhammad Ishaq Dar et al. The same was the practice in all earlier governments and mindset of previous rulers. This indeed is the worst possible manifestation of our subjugated ruling elites—tragically all governments, civil and military alike, have forced the nation to remain incarcerated in the debt prison.

In 2016, I brought up the burning issue of debt enslavement of Pakistan and the callous attitude of our ruling elites. In 2023, the situation is no different, rather worse. All the six budgets presented by the PML- N government from 2013-2018, four by the Pakistan Tehreek-i-Insaf (PTI) from 2018 to 2022 and two by Pakistan Democratic Movement (PDM) from 2022 to 2023 have common characteristics, with the main emphasis on ensuring economic enslavement through burgeoning debts. The PDM with their fourth-time Finance Minister Ishaq Dar heading the economy has finally obeyed all of IMF’s commands in a revised budget 2023-24, as he did when PML-N obtained a US$ 6.6 billion bailout package in 2013.

Our history of IMF programs is old and seemingly never ending. On December 19, 2019, as per a statement issued by IMF, its Executive Board completed the first review of Pakistan’s economic performance under the Extended Fund Facility (EFF). Completion of the review allowed Pakistan to draw Special Drawing Rights (SDR) 328 million (about US$ 452.4 million), bringing total disbursements to SDR 1,044 million (about US$ 1,440 million). It may be remembered that IMF Executive Board approved the 39-month, SDR 4,268 million (about $6 billion at the time of approval of the arrangement, or 210 percent of quota) Extended Fund Facility (EFF) for Pakistan on July 3, 2019. It was later extended to June 30, 2023, but as in the past ended unsuccessfully with new short term 8-month US$ 3 billion SBA for which complete credit is given by Ishaq Dar to Premier Shehbaz Sharif. 

For the coalition government of PTI claiming prior to elections that “we will never beg” obtaining IMF’s US$6 billion bailout was a great “achievement,” though the conditions imposed by the lender of the last resort were the most stringent in our history of getting such packages since 1958.

It is a matter of record that the PTI coalition government secured over US$13 billion in foreign loans in the fiscal year 2019-20 alone! It was the second highest amount in history. Making things more painful was the reality that we started borrowing just “to repay maturing external debt and cushion the shrinking foreign exchange reserves.” During the fiscal year 2017-18, we received gross loans of $13.2 billion from bilateral and multilateral lenders including, IMF and commercial creditors, according to a report, quoting data compiled by the Ministry of Economic Affairs.

Pakistan received $29.2 billion in foreign loans from 2017-2019 that included US$26.2 billion by the PTI government since August 2018. Out of this, US$19.2 billion was used just to repay maturing external debt and the remaining was added to “external public and publicly guaranteed debt.” The resultant increase in debt-servicing as repayments contracted as new foreign loans, increased substantially. For the fiscal year 2020-21, the cost of external debt servicing was estimated at Rs. 315 billion though we had secured over US$300 million or about Rs. 50 billion temporary relief from the G20 group’s moratorium on debt servicing.

In fiscal year 2018-19, Pakistan borrowed US$16 billion, including balance of payments support from Gulf countries, and returned US$9.1 billion worth of loans. In fiscal year 2019-20, gross foreign loans stood at US$13.2 billion and repayments amounted to slightly above US$10 billion. The Ministry of Finance said we did not have any option but “to borrow to repay maturing loans and stabilize foreign currency reserves that dipped below $10 billion in May 2020 after the outflow of hot foreign money of over $3 billion”.

According to a press report, “the withdrawal of hot foreign money, on the one hand, exposed the State Bank of Pakistan’s (SBP) ill planning and on the other highlighted the fragility of foreign exchange reserves that were built on the back of foreign borrowing. The dip in foreign exchange reserves triggered panic borrowing by the economic managers of the PTI government.” Resultantly, the government “started borrowing from the commercial, bilateral and multilateral creditors exceeded the budgetary target due to the dip in SBP’s foreign currency reserves, low inflows under the Saudi oil facility and the decision not to float Eurobonds valuing at $3 billion. The PTI government, like its predecessor, has also been unable to fully capitalize on non-debt creating inflows like exports, remittances and foreign direct investment”, the report added. 

Like the previous PML-N government, the PTI also relied on short-term foreign commercial loans. Against the budgetary estimate of $2 billion, it took $3.4 billion in foreign commercial loans. Commercial loans are always considered expensive due to their short maturity period and relatively higher interest rates compared with the official bilateral and multilateral credit. Two Chinese financial institutions, China Development Bank ($1.7 billion) and Bank of China ($500 million), provided about two-thirds or $2.2 billion of total foreign commercial loans. Dubai Bank extended $564 million, Ajman Bank $300 million, Citibank $148 million, Standard Chartered $27 million and Suisse Bank AG $205 million.

The PTI government also sought US$15 billion in gross foreign loans in 2020-21 for debt servicing and building foreign currency reserves in the absence of non-debt creating inflows. Out of the estimated external borrowing of US$15 billion, nearly US$10 billion, or two-thirds, were used to return the maturing loans, excluding interest payments. The pattern under the PDM has not changed, rather assumed further accentuation.

Decades of dependence of local and foreign debts has made Pakistan a weak and vulnerable state—though every government keeps on harping the mantra of having nukes and an unparallel ‘strategic location.’ Now Ishaq Dar after inking fresh SBA with IMF, while terming it a “great success” proudly claimed: “… the government convinced the IMF that it would be very unfair if $ 2.5 billion balance amount of the concluding program was not given to Pakistan… only potential of the mines sector of the country is six thousand billion dollars. Pakistan possesses substantial assets amounting to $3000 billion… We need to make efforts to free our economy from foreign aid.”

It may be remembered that on concluding talks with IMF in 2018, the PML-N government proudly announced: “this is the first time we have successfully completed the program in 15 years and the sixth in its 58-year relationship with IMF.” The detail story of that sordid subjugation and what happened thereafter was highlighted here in 2019 and more recently on this paper’s pages.

IMF Agreements (1958-2023)

Since 1958, Pakistan has entered into 23 programs with the IMF. On December 8, 1958 the military government signed a one-year Standby Arrangement (SBA), which it terminated prematurely in nine months. The second SBA was signed on March 16, 1965 and concluded on March 15, 1966. Yet another one-year SBA completed on May 17, 1973. The fourth SBA, signed on August 11, 1973, ended on August 10, 1974. The fifth one was on November 11, 1974 and concluded on November 10, 1975. The sixth was signed on March 9, 1977—it was terminated exactly after one year. On November 24, 1980, an Extended Fund Facility (EFF) was concluded which lasted for three years—ended on November 23, 1983. After a gap of five years, two simultaneous programs, Structural Adjustment Facility (SAF) and SBA were signed on December 28, 1988. Both continued beyond the agreed timeframe and ended in 1990 and 1992, respectively.

The ninth program, again a one-year SBA, was signed on September 16, 1993 but was terminated prematurely on February 22, 1994. The 10th program comprised two separate facilities—SAF and EFF—signed on February 22, 1994 for a period of three years. However, both the facilities were terminated much before maturity—on December 13, 1995. The 11th SBA was signed on December 13, 1995. It ended on September 30, 1997. The 12th program was of two separate facilities, the Poverty Reduction Growth Facility (PRGF) and an EFF. Both were signed on October 20, 1997 and continued till October 19, 2000. Under the 13th program, another SBA was signed on November 29, 2000 and continued until September 30, 2001.

The 14th Extended Credit Facility/PRGF was signed on June 12, 2001 and terminated on May 12, 2004. A three-year SBA was signed on November 24, 2008 but was prematurely terminated on September 12, 2010 after Pakistan could not initiate tax and energy reforms. The PML-N signed an agreement in September 2013 and was successfully completed. The PTI government’s US$ 6 billion extended EEF ended unsuccessfully on June 30, 2023. Under the just concluded SBA, the IMF would give US $3 billion dollars within a period of nine months and the first tranche of the US$ 1.1 billion would be released after the IMF board meeting in mid July 2023.

Finding the right path 

Managing a high fiscal deficit coupled with massive debt burden is the toughest challenge faced by our economic managers. The obvious and undisputed solution is substantial increase in resources and drastic reduction in spending, but it is easier said than done. For the last many decades, Pakistan’s fiscal policy has remained under immense pressure owing to perpetual failure of underperformance of Federal Board of Revenue (FBR), continued security related outlays, rise in wasteful expenditure and greater than targeted subsidies, losses of State-owned Enterprises (SOEs) etc. Other alarming elements remained great fiscal deficit, sluggish exports and high imports.

The burgeoning fiscal deficit and ever-increasing debt burden are not isolated phenomena. These are related to lack of political will to undertake fundamental structural reforms, enforce fiscal discipline, crackdown on parallel economy, increase tax collection, abolish perks and benefits of the ruling elites, eliminate wasteful expenses, dismantle rent-seeking structures, ensure rule of law, and stop reckless borrowing and ruthless spending. The perpetual failure to tap the actual tax potential has forced successive governments to rely more and more on external and internal borrowings, pushing the country into a ‘debt prison.’ In the just ended fiscal year 2023, the FBR failed to meet even the original target of Rs. 7470 billion, what to speak of the revised figure of Rs. 7640 billion even after mini budget, levying additional oppressive taxes of more than Rs. 270 billion through the Finance (Supplementary) Act of 2023 and Tax Laws (Amendment) Act, 2023. 

Collection of below potential revenue of Rs. 7.15 trillion (provisional) by FBR has raised serious questions about the State’s ability to meet its needs, in fact to ensure its economic viability, Collection of Rs. 16 trillion at federal level alone is not possible without restructuring the entire tax system for enhancing revenues to decrease/eliminate the burgeoning fiscal deficit, which is estimated at Rs. 7.5 trillion in the federal budget of 2023-24 . Even in the revised budget of 2023-24 and Finance Act 2023 approved on June 21, 2023, there is nothing to tax the high net-worth rich and mighty sections of society through progressive direct taxation.

Taxes are byproduct of economic growth and the new federal and provincial governments after general elections 2023 should not impose further oppressive taxes even if suggested by IMF. New vistas of non-tax revenues should be explored by making locked assets productive, ending circular debt and losses in SOEs, and drastic cut in wasteful non-development expenditure. Efforts should be made to achieve high economic growth of over 7 percent for a sustainable period of at least one decade.

Are we ready to put our house in order through fundamental structural reforms? Nadeem Ul Haque, Vice-Chancellor of Pakistan Institute of Development Economics (PIDE) has very rightly pointed out: “The IMF or no donor or external friend can help us with putting our house in order. We have to build a modern state and a modern society that is responsible and ready to participate in the global economy of the 21^st century. Without that we will continue to bleed and require the IMF again and again.” 

Let us take the example of Finland, a small country of 5.56 million people with GDP of nearly US$ 300 billion in 2022 (Pakistan with population of 225 million has a GDP of around US$ 350 billion, it was US$ 348.3 billion in 2021). In 2022, Finland’s tax-to-GDP ratio was 43 percent and ours only 10.1 percent.

Unfair taxation is the biggest impediment in the way of economic and industrial growth. What a tragedy that the rich and mighty get VIP facilities, plots, perks and benefits at taxpayers’ expense. They are the beneficiaries of the state’s resources—generated mainly by the poor farmers, suppressed landless tillers and toiling industrial workers. Pakistan is not a poor country—the state’s kitty is empty because of unwillingness of the rich to pay due taxes, the colossal wastage of taxpayers’ money on unproductive expenses and non-exploitation of vital natural and human resources.

Absentee landlords, a list which now include mighty generals who have been allotted State lands under award and rewards, have been resisting proper personal taxation on their enormous income and wealth. This anti-people alliance of military-judicial-civil complex, corrupt and inefficient politicians and greedy businessmen controlling and enjoying at least 90% the State resources contribute less than 2% towards national revenue collection and nobody talks about it.

We can easily generate taxes of Rs. 16 trillion through FBR alone. The dire need in today’s Pakistan is rapid industrialization, especially promoting agro-based industries to provide employment to the poor rural population and ensure fair distribution of resources to reduce inequalities. The IMF or any other donor will not tell us how to achieve these goals. We will have to promote research to find our own solutions to become a modern and dynamic nation as pleaded by Dr. Nadeem Ul Haque and many others.

Resource mobilization should be given priority to build infrastructure, facilitate growth of small and medium sized firms in the industrial sector and small farms in the agricultural sector for an employment intensive and equitable economic growth process. To end economic apartheid, large corporations, especially loss-bearing SOEs, with equity stakes for the poor can be established through public-private partnerships. This would set the stage for a structural change that could help achieve economic growth for the people and by the people, which is presently confined to the elites only.

Democracy in Pakistan: Of the elite, for the elite, by the elite

 Civilians and the military have taken turns to rule Pakistan, but the system, arguably, has remained the same, ‘unscathed’ by democracy writes Touqir Hussain in The Dawn  

One of the most perplexing debates around is on the subject of democracy, where it is easy to confuse concept with practice, form with substance and illusion with reality.

There is another problem. Countries at varying stages of democratic evolution are all called a democracy, which adds to the confusion, as we, in our mind, expect all these models to be equally responsive in meeting the needs of society. That makes us tolerate and endure a system that is not quite democratic and may never become so.

In Pakistan, democracy remains both illusive and elusive. What we have is something that looks like democracy, but does not work like one. Democracy is a dynamic, not static, process but Pakistan’s “democracy” is stuck.

If any “good” has come out of the current crisis, it is hopefully the realisation that the conventional wisdom that Pakistan’s problems are due to a lack of civilian supremacy, or because the “democratic system” has faced repeated interruptions by the military rule, or that elected governments have not been allowed to complete their full term may not be quite true.

Has the current crisis — and the way politicians’ brazen preoccupation with the struggle for power is ripping the country apart while it burns — left any doubt that the “democracy” we have has been part of the problem, not the solution? In fact, it is this very “democracy” that has provided legitimacy to bad governance, produced weak governments opposed to reforms for fear of losing elections, and has kept recycling. Above all, it has lacked substance.

Form and substance

True democracy has both form and substance. The form manifests itself in electoral democracy, sustained by a process of free and fair elections, and peaceful and orderly change of governments. But the form must embody good governance to empower people, and it can do so only by resting on free and representative institutions, constitutional liberalism or any other value-based system, strong rule of law, and a just and equitable social order. That is the substance. Without substance, democracy remains hollow. It has no soul.

The intelligentsia in Pakistan, especially the liberal/secularist segment, is most passionate about the Western liberal model focusing on freedom of choice, free speech, civil liberties, independent judiciary, and of course elections.

Much of this class lives emotionally disconnected from the rest of the population and their harsh challenges of survival and means to cope with them. It feels that all you need is elections, free media, independent judiciary, and the Constitution.

Voila! You have democracy — and it will take care of the nation’s problems, including those of the poor.

Democracy and progress

The secular/liberal class as a whole, and Western-oriented sections of it in particular, are right in seeing a causal connection between democracy and progress in advanced industrialised countries. They are, therefore, justified in emulating a similar democratic political system and having high expectations from it.

Where they are at fault is that they do not grasp the full picture. Most of them forget that democracy, which ostensibly brought progress in the West, was more than a political system. It was also a society’s organising idea, whose substance was equality of opportunity, fairness, rule of law, accountability, safeguarding of basic human rights and freedoms, gender equality and protection of minorities.

In sum, democracy’s core idea was humanism. And the whole objective of giving people the right to choose who will govern them on their behalf was to ensure the implementation of this very ideal.

Otherwise, what is the purpose of self governance? Given the chance to self govern, would people like to bring themselves to grief with their own policies? Certainly this was not the intent.

Unless a nation shows this fundamental understanding of democracy and takes steps to put itself on the road to democracy, it will never get there. It will keep moving in circles or going backwards.

The poor cannot ‘feed’ on democracy

For much of the liberal class in Pakistan, especially its more affluent stratum, the form is the substance. It looks at democracy as simply black and white — there can be no gradation. 

Pakistan’s “democracy” is advanced enough to satisfy the liberals’ love of liberty and enjoyment of certain human freedoms, but regressed enough to be exploited by the elite for their purposes at the expense of the people.

In her book, ‘Thieves of State’, Sarah Chayes focuses on corruption in Afghanistan. Sarah, who spent a decade in Kandahar, concludes that the concerns of most people did not have much to do with democracy. Pakistan is, of course, no Afghanistan but the book has a message that applies here as well.

Democracy is no doubt the best form of government but go and ask the masses in societies that are grappling with serious state and nation-building challenges what is most important in their lives. What is important for them, they will tell you, is social and economic justice, human security and dignity and the hope for a better future. And they will like any government that provides this kind of life.

A USAID official once asked me what the people of Pakistan want. Development or democracy? Prompt came my reply — if democracy brings development, they want democracy; if it does not, they want development.

Basically, you need a democracy that satisfies the human aspirations for freedom as well as improves the quality of life for citizens at large. 

Pakistan’s ‘democracy’ a political tool for power

In Pakistan’s case, “democracy” is just a political tool for the dominant social groups to maintain their wealth and status. The other instrument is military rule.

But the beneficiaries are roughly the same in both models — the whole panoply of power comprising the top tier of politicians, bureaucrats, the military and judiciary, “business folk and the landed”, who among them monopolise the country’s economic resources.

The civil and military leaderships may compete for power, but eventually cooperate to maintain the status quo. Both use each other — the military using the failure of the politicians as a pretext to come to power or to dominate it, and politicians using the alibi of military interruption or dominance for their own failure. They are allies as well as rivals.

In Why Nations Fail, Daron Acemoglu and James Robinson trace the evolution of political and economic institutions around the globe and argue that nations are not destined to succeed or fail due to geography or culture, but because of the emergence of extractive or inclusive institutions within them.

They write:

“Extractive political institutions concentrate power in the hands of a narrow elite and place few constraints on the exercise of this power. Economic institutions are then often structured by this elite to extract resources from the rest of the society. Extractive economic institutions thus naturally accompany extractive political institutions. In fact, they must inherently depend on extractive political institutions for their survival … political institutions enable elites controlling political power to choose economic institutions with few constraints of opposing forces. They also enable the elites to structure future political institutions and their evolution.”

In light of their thesis, we can see how powerful groups or institutions have long dominated Pakistan’s body politic by taking advantage of its security issues, place of religion in its national makeup and its feudal social structure. The political system that emerges from this body politic is designed to empower only the powerful and privileged and does little to foster the rule of law.

Musical chairs

Civilians and the military have taken turns to rule Pakistan, but the system, arguably, has remained the same, ‘unscathed’ by democracy. There was no fear of accountability, and no obstacle to electability. They did not need the people, so they did very little for them. And neither of them faced the full wrath of the public as each deflected the blame on to the other.

When the cost of maintaining a “democracy” led by civilians would become unbearable, we would tolerate the army’s intervention to help us get rid of them. But instead of returning to the barracks, the military would stay on. Then we’d long for democracy, which would let us down yet again. The fact is that no institution is solely responsible for democracy’s misfortunes in Pakistan. They all provided opportunity to each other to come to power and supported the system.

In the civilian edition that now comprises the ruling coalition, politicians may be divided into political parties but are united by the elites. Henceforth, whichever party comes to power when the ongoing bloody struggle for power is over, it will likely be no different from others in being invested in the system. It may disrupt the system, but will not threaten it.

Liberty and order

Even if Pakistan had a fully functional Western liberal democracy, it was not going to solve the country’s fundamental challenges. The fact is the Western liberal democratic model has become too competitive. In their book, ‘Intelligent Governance for the 21st Century’, Nicolas Berggruen and Nathan Gardels challenge the view that the liberal democratic model is intrinsic to good governance. Examining this in relation to widely varying political and cultural contexts, especially the Chinese system, the authors advocate a mix of order and liberty.

When asked once on the Charlie Rose Show what he thought of Western democracy, Lee Kuan Yew — the inaugural prime minister of Singapore — replied that the system had become so competitive and combative that in order to come to power, the opposition spent all its time planning to undermine the incumbent government by misrepresenting or distorting issues and thus misleading the public. “It would be a sad day when this kind of democracy comes to Singapore,” he said.

In his classic, The Future of Freedom, Fareed Zakaria states that Singapore follows its own brand of liberal constitutionalism, where there are limits on political freedoms — and it happens to be one of the most self-content countries in the world.

It boggles one’s mind that we in Pakistan tolerate the civil-military led political and governance structure, which is rigged in favour of the elite, while using the full freedom of a democratic system to play the game of politics at people’s expense. We put up with it as if this behaviour is an acceptable price to be a “democracy”, which incidentally does not quite happen to be a democracy. Indeed, there are institutions that one finds in a democratic system, but they lack autonomy and integrity. They have failed in the moral strength to serve the people, but not in the capacity to sustain the system.

You can see how millions of good Pakistanis are glued to TV or their phones every day following the comings and goings of politicians as if they were going to solve the country’s problems. We forget that their fights are about themselves, among themselves.

Democratisation is a revolutionary struggle

You cannot change what you do not know. The creation of a true democracy is a revolutionary struggle. And it must begin with the realisation that the “democracy” we have will not solve our problems regardless of who is in power. We cannot also bank on this “democracy” to become democracy by itself.

Countries change not because they have become democratic. They become democratic because they have changed. In many ways, democratisation is a painstaking struggle, indistinguishable from state and nation-building. Progressive movements and the civil rights campaign in America, political and social movements in Europe and the Meiji Restoration in Japan are a few such instances.

How will this change occur in Pakistan?

That is the subject of a much wider and complex debate. Briefly, one can say the following: Pakistan has enormous strengths — remarkable resilience, faith-based optimism, a sense of exceptionalism, a vibrant media and a promising civil society.

There is enormous talent available within the country — academics, journalists, authors (many of them internationally acclaimed), political activists, retired public servants — both civil and military — who all have shown extraordinary knowledge and commitment to Pakistan. They can inspire and mobilise the young generation yearning for true change that could provide stimulus and critical mass for social movements.

That will be the purpose of social movements — to remove the obstacles to a genuine democracy in Pakistan. These include a misplaced focus on faith that has fostered extremism and hindered openness and tolerance, and a feudal dominance that has inhibited education, gender equality, openness to modern ideas and a credible political process.

Not to mention the military’s pre-eminence that has led to the dominance of security over development. The latter has skewed national priorities and resource allocation. All this is hardly a life-supporting environment for democracy.

Can Pakistan truly become democratic? Yes, it can. Whether it will; remains to be seen.