IMF's $6 bn loan to Pakistan may end up supporting its terror infrastructure instead of salvaging its sinking economy

How long will the International Monetary Fund (IMF) continue to brush the world’s greatest problem of terrorism under the carpet of economics? For Pakistan, the two are joined at the hip—a deep state that creates, nourishes and exports terrorism from its soil as a state policy, while thriving on doles received from the US, China and multilateral institutions such as the IMF, the World Bank, and the Asian Development Bank. There is a deeper politics at play here, a politics of negotiation and a transaction of international power games that is diluting the dangers of Pakistan’s brazen state-sponsored terrorism. The IMF’s 12 May 2019 press release follows this trajectory. For a state, whose sole achievement has been to become the hub of global terror, it is surprising that the T-word almost didn’t make the grade—it is carefully tucked away, almost incognito, in the seventh out of an eight-paragraph press release, virtually invisible. The release talks about a $6 billion loan (a 39-month extended fund arrangement), the country’s 13th programme in the past few decades, and holds forth on the reforms Pakistan must undertake. This, when the country already owes $5.8 billion to the IMF from past bailouts, of which it has completed the programme only once. “Priority areas include improving the management of public enterprises, strengthening institutions and governance, continuing anti-money laundering and combating the financing of terrorism efforts, creating a more favourable business environment, and facilitating trade,” the IMF release states. [caption id=“attachment_6178691” align=“alignleft” width=“380”] File image of Pakistan Prime Minister Imran Khan. Reuters[/caption] Further, the loan comes with several growth catalysing conditions attached. These include improving public finances and reducing public debt through tax policy and administrative reforms; ensuring a more equal and transparent distribution of the tax burden; cost-recovery in the energy sectors and state-owned enterprises to the quasi-fiscal deficit; budget for FY2020 to aim for a primary deficit of 0.6 percent of GDP;  the State Bank of Pakistan to focus on reducing inflation; and that Pakistan should move to a market-determined exchange rate. The humiliation of the IMF dictating how a nation should deliver economic governance aside, none of these are easy. If Pakistan moves to a market-determined exchange rate, for instance, its currency will crash further, after having fallen by 22 percent over the past 12 months, and 35 percent over the past 24 months. A further depreciation of the Pakistani rupee would mean the cost of servicing its foreign debt will rise.

What Pakistan may face soon is a debt trap, a condition where the country will need to borrow to pay interest, the principal remaining untouched. To put this in perspective, it is only a matter of days and a depreciation of just 2 percent for the currency-adjusted GDP of Pakistan, currently at $280 billion, to fall below Bangladesh’s $274 billion.

Further, if inflation needs to be brought down using monetary policy, it can only be done by hiking interest rates. Here too, the economy is under severe pressure — the policy rate stands at 11.25 percent today, it was 7 percent last year, and less than 6.5 percent two years ago. The 20 percent fall in Pakistan’s market, the Karachi Stock Exchange KSE30, over the past 12 months is a sign that takes both these factors, a falling currency and a rising interest rate regime, into account. Clearly, even as the IMF is entering Pakistan, smart money is exiting its markets. The IMF is hoping for reforms; investors know Pakistan will not eschew its past habits. A beggarly situation is not new to this country. Between 1948 and 1953, the US provided $121 million CV economic assistance to Pakistan, writes Husain Haqqani in his fascinating book, Reimagining Pakistan: Transforming a Dysfunctional Nuclear State. This rose to more than $45 billion between 1954 and 2017. US aid has been augmented by concessional loans from other developed countries, including the ‘Paris Club’, and multilateral institutions. “On several occasions, Pakistan’s usefulness to the US in the strategic realm determined the lenders’ decision to provide debt relief,” Haqqani writes. Even if Pakistan assures the world that it will not divert funds to China, it may use it to invest in and strengthen its terrorist infrastructure. Now that the US is receding, the space for financial assistance from the West is reducing. Can China fill in the vacuum left by the US? Strategically, the geography of Pakistan to China is as important, if not more, as it was to the US. China seeks to control the rise of India, and where Pakistan, its ‘Iron Brother’ and partner-in-hate, is a willing geography provider. The China-Pakistan Economic Corridor needs to be seen in this light — a geography-for-alms transaction, where Pakistan provides strategic geography through the corridor that passes through Balochistan, a politically volatile province seeking independence from Pakistan, right up to the Gwadar Port, while China provides the alms to support the military-terrorist deep state as a fence against India.

What is surprising is the fact that while the US has been suspicious of the IMF loan being used by Pakistan to repay “debts incurred from predatory Chinese infrastructure projects,” there has been no public assurance to the contrary so far. On the contrary, the world is seeking greater transparency of Pakistan’s debt to China, which suits neither of them. Even if Pakistan assures the world that it will not divert funds to China, it may use them to invest in and strengthen its terrorist infrastructure.

The saving grace comes in the form of the IMF loan being incumbent upon timely implementation of “prior actions.” The world can only hope that this precondition is met. The stakes of international negotiations and power plays must not overpower the need for terror-free coexistence. Otherwise, by restricting itself to economic indicators, the IMF risks becoming a partner that ends up funding Pakistan’s terror activities. (This article originally appeared in Observer Research Foundation)