IMF loan is not a solution to Pakistan's debt problems

People are upset, naturally, because cost of living has become simply unbearable in the ten or so months of this government.

By Shahab Jafry

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Published: Wed 22 May 2019, 9:00 PM

Last updated: Wed 22 May 2019, 11:06 PM

Well, Pakistan Prime Minister Imran Khan's warning clearly failed to keep everybody and their uncle (market forces?) from bidding up the dollar - the rupee's weakened by over seven per cent in four trading days till the time of writing - but maybe prominent religious scholar Maulana Taqi Usmani's stern edict will do better.
The prime minister promised strict action against anybody fiddling with the exchange rate (formed a committee, actually), yet the rupee touched historic lows on every day since Friday. That might please expats since their dollars and dirhams will fetch their families more rupees and gifts this Eid. But a collapsing currency will also bring their loved ones more misery as it feeds into steeply rising inflation; so there's only so much they'll appreciate the technically bloated remittances.
Enter, here, the maulana with his novelty. 'Purchasing dollars to hoard and earn profit by the increase in its price is a grave sin and disloyalty to the country in the present economic situation', he tweeted. He didn't say it specifically, but it seems long-dollar positions are non-sharia compliant for Pakistani Muslims only.
Now, this is not your average next-mosque cleric issuing an emotional proclamation. He's a former judge of the Federal Shariat Court, and the Shariat Appellate Bench of the Supreme Court of Pakistan. He was also instrumental in former president Gen Zia's successful attempt to give the constitution an extreme religious-right face-lift in the 80s; the pivot point, in so many ways, in Pakistan's checkered history. As far as so called establishment-clerics go, he's the real deal.
And you can bet on more common folk understanding what he's saying than the 'structural adjustment, discount rates, corrective measures,' mumbo jumbo that comes out of the state bank and finance ministry. Already social media is littered with posts warning against the enemy's designs to get us to destroy our own economy by buying dollars. There's even news of a man burning dollars to support the country (he didn't say how many!). Poor guy probably thought prices would drop, he'd get a promotion and the flag would fly higher before the flames were out.
People are upset, naturally, because cost of living has become simply unbearable in the ten or so months of this government. To make matters worse, there's just no telling when you could be the next one getting the chop at the job. Then you hear the government's just signed a deal with the IMF to save the economy from debt-collapse, but for some reason that means yet more unemployment and higher prices for "some time" (SBP).
And God, Imran Khan and (likely) IMF only know why, but the government just refuses to put its cards on the table. This has now led to a communication paralysis that has not just bewildered the working class - what's in store for us? - but also bled the currency and equity markets half to death. That means tens of billions of dollars now in money heaven, by the way, which we will need to borrow all over again.
Failure to communicate has created a vacuum which the clergy and right-wingers on social media are conveniently filling. Yet the government chooses to stay mum, leaving it to everybody to join the dots on their own.
Let's try.
The latest crisis was triggered last Monday, after the late Sunday night deal with the IMF, which the stock market responded to by losing 800 points, the beginning of an epic slide. And two days later the rupee began its journey to historic lows. Then, amid the rout, we had a 1.5 basis point hike in the interest rate; pulling the monetary policy meeting ahead by a good 10  days just for this announcement.
The rot started, apparently, when the government gave no details about the IMF programme, even after leaked reports that they had agreed to a free-float of the rupee; let market forces decide. Now that, as far as the ruling party was concerned, was always a no-no. With everybody caught off guard, and no explanation, there was only one way market sentiment could go.
There's more. To the best of everybody's understanding the deal is about bailing us out of our debt burden. But why, then, must we devalue the currency and raise rates as 'prior conditions', since both expand the public debt? Isn't that a shouting contradiction? As things stand, depreciation of one rupee against the dollar adds Rs105.8 billion to the debt while a one per cent increase in the interest rate adds another Rs180 billion. At 152 to the dollar, where it's currently hovering, that's approximately $700 million and $1.2 billion respectively.
And who'll explain the logic behind agreeing to a free-float and the PM forming a committee to control the exchange rate? Isn't that another contradiction? Getting people to endure extreme austerity, because of no fault of theirs, so you get new debt, to pay back old debt, by first inflating the original debt? How much sense does that make? All this for a $6 billion loan while the quantum of total debt stands at $108.5 billion, 91.2 per cent of the size of the economy?
Connecting the dots just seems to take us in circles. Until the government answers some important questions, it will have more discontent on its hands, and more blood on the market floor.
Shahab Jafry is a senior journalist based in Lahore

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