Debt trap is a common word which is being used these days. There’s hue and cry by the western countries to malign the Belt and Road Initiative (BRI) by using the term debt trap. It has become a buzzword along with environment and many self-imagined assumptions in Pakistan for criticizing China-Pakistan Economic Corridor (CPEC) related interventions and programs. The proponents of this term paint a scary picture and try to convince the common man that something really bad is on the horizon.
They claim that CPEC is not an economic opportunity, rather a debt trap, but the actual debt trap which was systematically introduced by other factors does not get space in the debate, especially in the liberal circles.
For many years Pakistan has been taking new loans to pay back the interest which is in fact the real form of debt trap.
Pakistan, like many other developing countries, has been in a debt trap for many years without actually declaring it a debt trap. Pakistan has started to pay the price of debt trap in the form of high inflation, free fall of rupee, shrinking production sector of Pakistan and removal of social welfare spending under the dictation of International Financial Institutions (IFIs).
Pakistan started its journey of debt in 1952. The first-ever loan agreement of USD 27.2 million was signed with World Bank in 1952. The country started its journey with International Monetary Fund (IMF) in 1958 by signing an agreement of USD 25 million, which Pakistan never withdrew. Asian Development Bank (ADB) came into the picture from 1966 and total borrowing from ADB till April 2019 was USD 32.18 billion. Pakistan also availed the opportunity from Paris Club. Bilateral loans or borrowing is yet another story; a sharp increase in bilateral borrowing has taken place during the last two years. Pakistan also borrowed from commercial banks and the journey is still going on.
There has been consistency in approaching IMF, World Bank, ADB, and bilateral partners for getting loans. From Ayub Khan to Prime Minister Imran Khan, IMF has remained a constant player in our economic landscape which led to accumulation of debt and in 2018 it reached around USD 95.1 billion dollars at the completion of previous government. For many years Pakistan has been taking new loans to pay back the interest which is in fact the real form of debt trap.
There is no substitute of building on productive sectors. Countries can only grow by focusing on industrialization, agriculture development and keeping pace with the changing dynamics of markets. For example, Turkey also implemented the IMF program, but it kept close focus on the productive sectors. If there is no focus on productive sectors, then austerity measures cannot help the country to develop.
Right after assuming the office of Prime Minister, the present government had to arrange USD 10 billion on debt servicing to pay back the installments and interest on loan. It led to crossing the psychological barrier of 100 and now it stands at USD 105 billion. Pakistan is going through a crisis, which is the result of irresponsible policies of successive governments. Their reliance on loans and not prioritizing productive sectors has brought Pakistan to this point. Pakistan did not focus on the productive sectors except for a few years. Leading sectors of economy, i.e., agriculture and manufacturing, exhibited frequent fluctuation in the last twenty years. The story of remaining years of history is no different.
It happened despite the fact that international partners, IFIs and the Paris Club were advising the country to reform. Among all of them, IMF has been the leading advocate of reforms in Pakistan for decades, especially after the Structural Adjustment Program of 1988, which was introduced to reform the system. It came with micro-management style. IMF started to advise government on how and where to bring reforms. The history of reforms proposed by IMF is very interesting. Many countries crumbled during the reform period of IMF. Latin American economies are the most cited example on this front but we can find new entrants like Hungary and Greece, too.
Reforms are a hectic and long-term process, and require time to mature. Reforms to break the system do not work; it can only yield results when these are designed according to the circumstances and status of the country. China is a noticeable example on this front. It started reforms in 1978 and sequenced the reforms according to the development status of the country.
These two countries are the most recent examples of IMF led reforms. Hungary started the deal with the implementation of austerity measures, reduction in pension benefits, seizing of wages and reducing the deficit. Reforms introduced by Hungary badly struck the social welfare spending and system, which led to agitation against the government, but IMF was comfortable. When Hungary’s government tried to create some space for the poor and introduced banking transaction tax, IMF reacted very strongly over it and halted the cooperation. Greece, despite all the recipes from IMF, European institutions and partners, is still unable to find a sustainable solution.
There are five lessons for Pakistan to be learnt from the episode of Latin America, Hungary and Greece. First, loans are not the solution for achieving development and commercial loans are the most unsustainable and difficult ones. Latin American countries borrowed heavily to build infrastructure and for industrialization, and when they could not secure the required amount of resources from IFIs, they started to borrow from commercial banks and sources, which was another strategical mistake. Commercial borrowing led to worsening the situation after the 1970s oil crisis. Thus Latin American countries could not complete many projects due to lack of resources. Moreover, there is a need to rationalize the need of big infrastructure projects according to the development status of a country. Blind obsession with building of infrastructure is not a wise or sustainable strategy.
Second, there is no substitute of building on productive sectors. Countries can only grow by focusing on industrialization, agriculture development and keeping pace with the changing dynamics of markets. For example, Turkey also implemented the IMF program, but it kept close focus on the productive sectors. If there is no focus on productive sectors, then austerity measures cannot help the country to develop.
Debt trap marks the beginning of a policy trap. Once a country has been captured in debt trap it will ultimately fall in a policy trap, which is more dangerous as it becomes very difficult to reverse the policy framework.
Third, IFIs’ formula of overnight implementation of reforms is a faulty recipe. There is no magic wand to change the scenario in the short term. Reforms are a hectic and long-term process, and require time to mature. Reforms to break the system do not work; it can only yield results when these are designed according to the circumstances and status of the country. China is a noticeable example on this front. It started reforms in 1978 and sequenced the reforms according to the development status of the country. Once considered a closed economy, China is now the champion of globalization.
Fourth, debt trap marks the beginning of a policy trap. Once a country has been captured in debt trap it will ultimately fall in a policy trap, which is more dangerous as it becomes very difficult to reverse the policy framework.
Fifth, IMF’s reform agenda under the Structural Adjustment Program is being derived from Washington Consensus, which calls for radical changes in a short span of time. It tries to blur the difference between revolution and reforms. Theory of reforms was built on the principles that it is a time taking process. It is closer to evolution than revolution. We need to understand that reform is not merely writing a few policies, principles and putting deadlines. It is more about the behavioral changes and building characters of actors, while character cannot be built in the short term. It is a process of years, if not decades, as we have to deal with humans, not machines. Diversion from the principles of reform leads to chaos in the country and resultantly, people start to get agitated.
The recipe presented or implemented by IFIs, especially by the IMF, does not qualify for the principles of reform. Instead it looks like an attempt to ‘trap’ policy of any country. Pakistan has been going through this since 1988, and has put itself in the debt trap. However, Pakistan has the chance to avoid the policy trap. For that purpose, Pakistan first of all needs to understand that Structural Adjustment Program cannot help until the productive sectors of the economy are revived. Fortunately, at present Pakistan is trying to introduce some measures to revive the productive sectors, and has generously allocated for agriculture. It also has developed a good framework for the next five years to help the agriculture sector and farmers.
The government is also trying to revive the economy by giving priority to manufacturing sector, especially the industry. Moreover, the government is also striving to diversify the economy, as this time around focus is not on textile alone. Pakistan needs to diversify as an international market is more inclusive for diversified economies.
Luckily, Pakistan has a window of opportunity in the form of CPEC and China. We know that the government is strengthening the social welfare program but what most people do not know is that it is happening due to the generous help from China. It has committed more than USD 1 billion to support the social welfare system of Pakistan. Additionally, it will also be contributing to the skill development programs of Pakistan in the coming years. CPEC provides us an excellent opportunity to revive our economy, while SEZs present an excellent opportunity for the growth of industrial sector in Pakistan. Cooperation in technology and modern IoT will serve as a future opportunity. However, to benefit from CPEC Pakistan needs to understand that it is an economic opportunity, not charity. Therefore, we will have to deal with it as an economic opportunity. If we fail in taking advantage of CPEC and China’s help, we would have to face the reality that policy trap is waiting for us.
The impacts of policy trap would be even more dangerous as compared to debt trap. Policy trap will lead to compromise on vital national interests. More specifically, we need to understand that U.S. enjoys veto power at IMF and World Bank, and it will definitely try to extract its national interests. Therefore, it’s time for us to think rationally and devise policies of self-reliance.
The writer teaches digital diplomacy, negotiation skills and conflict transformation at Foreign Services Academy. He is also the Chief Operating Officer at Zalmi Foundation.
E-mail: [email protected]
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