New Delhi, Feb 2 The Pakistan government has become addicted to IMF borrowing much like a drug addict and refuses to extricate itself from the self-made problem of creating cycles of foreign exchange shortages and bare sufficiency with IMF loans, according to a new report.
These are accompanied by fiscal profligacy as seen in the government’s inability to contain needless expenditures and raise sufficient revenues to keep its debt at sustainable levels, according to an article by former Deputy Governor of the State Bank of Pakistan, Riaz Riazuddin.
“There are certain similarities between a drug addict and a person addicted to borrowing,” the article in Pakistan’s Dawn newspaper remarks.
A borrower expects bailouts, debt rollovers, or forgiveness from lenders and may spend money beyond sustainable limits, in the assumption that there will be future relief. In both cases, either there is no full understanding of the consequences of risky behaviour or the risks associated with this behaviour are not accepted.
Any external support, though stabilising in the short run, weakens discipline. Initial borrowing solves a temporary problem or boosts consumption. Over time, the income increasingly becomes committed to debt servicing; additional money is borrowed just to maintain the same lifestyle. Debt ceases to fund growth and instead funds survival, the article laments.
Denial is also a key similarity. The addict says, “I can quit anytime’; the compulsive borrower claims, ‘growth will rebound’. Both ignore warnings and personal narratives are used to postpone reality. This cognitive dimension reinforces the moral hazard and deepens over-indebtedness, the article states.
It is surprising to see the Pakistan government’s exhibit similar behaviour as it is going through the current IMF programme which is the 25th. Over-borrowing and substance abuse aptly reflect "our government’s high debt through the abuse of foreign exchange mostly by keeping the rupee overvalued, which primarily increases imported consumption (together with fiscal profligacy). This abuse is sometimes caused by directly selling foreign exchange to the market, and at others by not buying more from it," the article further states.
“Drug addicts need therapy; should the government also get it? It does in a way — from the IMF in six-monthly reviews, and in between whenever economic symptoms (reflected in data) start signalling deviations from discipline. Therapy in this case is talk about what is a good policy (good economic behaviour) and what is not. Therapy is ineffective in this case because the government is intelligent and already knowledgeable about good policies,” the article laments.
It also points out that good things have happened on the foreign exchange front, not because of reforms, but because of bounty in terms of more remittances that increased dollar reserves. Exports have stagnated and the rupee remains appreciated in real terms.
Whenever the dollar build-up is in accordance with the IMF’s prescriptions, the Fund seldom objects to overvalued currency other than urging the authorities to leave the exchange rate to be truly determined in the interbank market.
Unless the authorities commit to implementing reforms, only they will benefit from the IMF packages, while the masses, who bear the costs of postponed reforms, will continue to suffer, the article states.
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