IMF is not the new East India Company

An article was published by Pak Tea House titled The New East India Company referrfing to IMF. What was surprising that it was written by professors who claimed to be LUMS professors yet it lacked statistics and logical arguments. I had written a rebuttal which is reproduced below.

This article is in response to the criticism of IMF in the earlier article titled “The new East India Company”. I am a critic of IMF’s policies but the earlier article ticked me off as it was based on populist aphorisms with no reference to economics or any stats. I was surprised that it was written by authors claiming to be professors at a prestigious business school, tax consultants and writers of several books.


In second half of 2008, Pakistan was facing a crisis. Shaukat Tarin came up with three plans notoriously known as Plan A, B and C. ‘Plan’ was a misnomer as in reality they represented a pecking order for our begging bowl. Plan A involved approaching Asian Development Bank (ADB) and World Bank (WB). Plan B consisted of approaching so called friends of Pakistan. Plan C was approaching IMF, the least desirable option.

ADB, WB and friends of Pakistan had reached a conclusion that they could not bail her out, though they had bailed out Pakistan earlier. The most famous was Saudi Oil Facility wherein Saudi Arabia allowed Pakistan to purchase oil on deferred payment basis after the nuclear blasts which was later turned into grant. This time again Saudi Arabia was considering a deferred payment facility to help out Pakistan. But Pakistani media and ministers were thinking that this additional facility might also be turned into a grant so Saudis refused to be taken for a ride. Hence, plan C was the only option available.

There was another option: Default. Default is not a good thing but it is not the end of the world. But to do that, you really have to have a good economic management team to breathe life back into the economy. The emerging market success story of last year, Russia, had defaulted in mid nineties. Argentina has a history of default. Ecuador was contemplating deliberately defaulting on its debt this year. I would have been gung ho for Pakistan defaulting on its debt but tell me the name of one person who had the financial acumen and leadership to steer the country out of the ensuing crisis. For all the talk of ‘home grown’ formulas, this country has failed to produce ‘home grown’ economists and financial managers.

Role of IMF

So it was our own incompetency that we ended up with IMF. When Pakistan borrows from IMF, Pakistan has to demonstrate to IMF that it can repay the loan from its cash flows. Otherwise IMF will request Pakistan to take steps and implement policies that will generate enough revenue to ensure repayment. Obviously one can argue for and against IMF’s policies but like a prudent lender, IMF will recommend and push the policies it knows best.

Amongst all this, we should not forget a more important role that IMF plays. It becomes the devil for forcing the government to take positive yet unpopular actions. For example, for such positive moves as reducing fiscal deficit, increasing tax base, and imposing tax on agriculture etc., IMF was painted as the New East India Company in the earlier article.

Populist Claims

The authors of the original article make the most ridiculous statement about agriculture tax. Agriculture is 21% of the national GDP however as far as I know tax contribution from agriculture is negligible. Would the authors let me know how much taxes does the agriculture sector pay and what is the mechanism to collect it? While they are at it, would they also please enlighten me who is paying taxes to Shaukat Tarin before they are due which was another absurd claim in their article.

I want to smoke what the authors have been smoking. How can they say that IMF is strangling the export base? As per SBP statements, from FY06 and FY08 when FDI was highest, around 70% of FDI was directed towards consumer sectors whereas only around 3% was directed towards export based sectors broad categories being cotton, leather and chemicals. There was no IMF at the time. As a matter of fact, we have not made any policies in this country for expanding the export base for quite some time with or without IMF.

The traders on the stock exchange pay next to nothing on the profitable trades that have made them millionaires and billionaires. IMF is pushing for imposition of Capital Value Tax on stock exchange trades. Yet successive governments have succumbed to powerful trader lobby’s whims and never imposed taxes (even as low as 0.2%) on these transactions.


Shockingly and shamefully, our tax-to-GDP ratio has never gone over 10%. The authors claim (and I believe them), the poor are already heavily (and disproportionately) taxed which means that the rich i.e., stock market billionaires, real estate landlords, textile magnates, industrial tycoons, and agriculture landlords who are not being taxed as much as they should be. So when IMF requests us to increase the tax base, it is actually doing us a favor.

True, all these multilateral aid agencies have a negative impact as well. For example, IMF will push for cutting certain expenses such as development expenditure, subsidies etc which hurt the underprivileged the most. Any serious criticism of IMF’s policies should target such issues but the earlier article was found wanting in the area.

Anyway, in our case, I would conclude that IMF is not ‘New East India Company’. Rather I would say Pakistan is a ‘Subprime Borrower’.


For serious criticism of these aid agencies, I recommend two wonderful books: ‘Confessions of an economic hitman’ by John Perkins, and ‘Neo Liberalism or Democracy’ by Arthur MacEwan.

Econ666: Liquidity Crisis in Pakistan

If the possibility of default is not enough to give jitters to Pakistanis, now they also have to worry about liquidity in inter-bank market so that banks might not collapse.

Due to the limits imposed on foreign investments for commercial banks, Pakistani banks are not exposed to subprime crisis in US. However, we have our very own subprime crisis lurking in the shadows due to runaway consumerism such as car loans, credit cards, personal loans and mortgage finance at a scale never seen before. More on consumer debt in later articles.

Its amazing how the current economic managers (Shamshad Akhtar – SBP governor, Shaukat Tareen – Advisor to Finance Minister) are actually ending up screwing the economy. Though SBP by reducing CRR by 100bps has managed to alleviate the situation and proven me wrong, what remains to be seen is what actually caused the crisis. What is amazing is that everyone is to blamed for this crisis as the players range from housewives to finance supremo.

One, It has been claimed by SBP that the liquidity shortage was because of Eid withdrawals. If that is the case then I am really amazed at naivete of the banks  and SBP. Its not like Eid is once in a decade event. Its an annual event. If the banks have not learnt to manage their liquidity during Eid and that is the real reason, then the bank management or at least their treasury should be fired.

Two, rumor mongering and a possibility of default which might lead to free fall in rupee had housewives withdrawing their rupee deposits from banks and converting them to US dollars. The matters were not help by shortage of cash at some branches as no branch is ready for huge withdrawals However, the problem was exacerbated when rumors started flying that certain banks are about to default such as Bank Al Falah etc.

Three, we all know that government is borrowing hugely from SBP and SBP has been raising a flag on the budget deficit for sometime. So what does our advisor Shaukat Tareen decide to do. Rather than cut spending to reduce deficit, he asks Public Sector Enterprises (PSEs) to withdraw deposits and uses those for spending. SBP actually agreed to this proposal. Worst kind of window dressing (voodoo economics) that is possible. Banking system was suddenly hit with huge withdrawals adding to the shortage of liquidity.

Four, its known that inflation is high and controlling inflation is on the agenda of SBP. The monetary policy measures taken by SBP can affect demand pull inflation but they hardly go anywhere in controlling cost push inflation. Nevertheless SBP had been conducting treasury auctions regularly to drain liquidity from the market. If it had any effect on inflation, remains to be seen. What is most shocking was that SBP had also conducted a treasury auction on October 8th, 2008 when the liquidity problem was most acute.

Thankfully, SBP came to its senses and reduced CRR by 100bps which brought in much needed liquidity into the banking system. However, the way the above events have played out, it does not give people much confidence in the financial sector or the economic managers of the country.

Econ666: How not to manage the emerging market economy?

I don’t know why we Pakistanis think of the locally educated or locally trained professionals as inferior and are so smitten with foreign bankers. Whenever we have imported anyone, he had no idea of ground realities, experimented with the economy and left without investing his single penny in the country. If we have to resort to hiring bankers only, I am sure we can find some expert local banker or are we implying that this land is incapable of training and honing talent.

Shaukat Aziz we have already covered in earlier post. At the receiving end of my wrath now is another legacy of Musharraf era, Governor of State Bank of Pakistan (SBP) Shamshad Akhtar, someone who was unqualified to hold the top post which called for a trained economist whereas she built her career in Operations. Her only qualification was that she worked for a multilateral organization namely Asian Development Bank (ADB).

She seems focused on implementing textbook policies that might have worked in developed economies but are not relevant or effective in Pakistan recent example of which is her instruction to increase the minimum capital requirement (MCR) of banks.

Her latest fiasco is handling of liquidity crisis in banking sector of Pakistan. Banks are running out of cash faster can they can replete their reserves. Two reasons:

  1. Depositors had withdrawing a lot of cash during the Eid season
  2. With declining value of rupee, whoever can withdraw money has done it and is converting it to foreign currency.

Though as per official statements, the exhange rate is Rs.81/$1 i.e., you can buy 1 dollar for 81 rupees. However, no one will give you dollars at that rate. The actual rate in the kerb market is Rs.83/$1. To think that SBP was actually thinking recently of pegging rupee to the dollar requires wild imagination. Somebody please tell SBP governor that people have started losing faith in SBP. Fixing the exchange rate might solve the problem in economic textbooks but when panic strikes, nobody is going to sell you $ at Rs. 81 whether fixed, managed floating or floating. She might as well peg it at Rs. 75/$1.

Due to the shortage of liquidity overnight interbank call rates (the rate at which banks lend to each other to meet SBP requirements) had shot up. Though SBP had conducted Open Market Operations this week to ease liquidity, whats amazing is that SBP actually went ahead with a Treasury auction (which was rejected due to sufficient bids not received). I mean at one end we are trying to inject liquidity through OMO and on the other hand we try to suck away that liquidity by auctioning treasuries. Mind boggling…

Desperate times call for desperate actions. You don’t try to resolve crisis in piece meal reducing cash reserve requirement (CRR) by 1% this month and another 1% after one month. If the 1% is not effective in solving it right now, you cannot wait one month to reduce it further. You will do it right away and that will reduce the credibility of SBP that it doesn’t know hot manage the economy (which will not be far from truth).

For those of us who had to taken Econ102 (Macroeconomics) there are two types of inflation. Demand pull and cost push. Monetary policy like increasing interest rates, CRR or draining liquidity from the market through OMOs etc can have some impact on reducing demand pull inflation but it has negligible impact on cost push inflation. Pakistan is facing cost push inflation due to rising fuel and commodity prices and under such circumstances, the only efforts SBP had taken (prior to current crisis) are to increase CRR/SLR and increase interest rates which are totally useless under such circumstances.

Another volteface according to Business Recorder,

Governor said that banks have been advised to launch more aggressive efforts to mobilise deposits including extension of their outreach in rural areas. Offering adequate real returns on deposits would help banks alleviate any bank specific liquidity shortages.

This goes against SBP policy of encouraging consolidation among banks by raising the MCR because then banks will not have any incentive to increase deposit or extend outreach as it becomes marginally unprofitable for large banks to engage in such activities. Does SBP have any idea of its myriad actions/instructions?

Shortcut’s Short Legacy

I am still amazed at so many people still holding Musharraf-Shaukat team in high esteem for building a house of cards that came crashing down within seven months of Shaukat Aziz disappearing. I will not use some twisted economic logic to justify my contrarian point of view rather present data and information from other so-called credible sources to highlight the havoc played by the earlier regime. (However, this does not mean that I support the current regime or their management or lack thereof of the economy)

Some people had pinned high hopes on Shaukat Aziz since he was from Citibank. Those of you who don’t know, and I don’t want to engage in unnecessary character assassination here, he was a Private Banker helping corrupt dictators, rulers, etc in managing and hiding their looted wealth. He was also under investigation in US Senate as Asif Zardari had laundered away his millions under his watch.

Now since we have so much faith in western financial institutions and their employees regardless of the fact that these very employees have recently brought these institutions to the ground, I will here only refer to Citibank research report on Pakistan dated September 8, 2008 written by Citibank resident economist in London Mushtaq Khan.

Rupee weakness is a legacy of flawed policies
Although the trigger for recent weakness can be traced to adverse political development, we believe sentiment reflects economic fundamentals. The underlying problem in Pakistan is simple: the current account deficit inherited from the previous government has become unsustainable.

The consumption-led growth engineered by the policies of Shaukat Aziz was easy to initiate using cheap and plentiful credit, and self-serving – high growth, strong FDI and the stock market boom were used as trophies of success – but would invariably end in tears (rising inflation, the power shortage, a growing income divide and, more recently, the FX crisis and the stock market collapse). With little policy focus on exports, Pakistan’s ability to generate FX was quickly eclipsed by its demand for FX, as the  consumption-led growth provided a tremendous boost to imports.

As per State Bank of Pakistan data


Now look at the last two lines of the table. It shows in what sectors was all the FDI coming. Almost negligible in export oriented sectors and heavily weighted towards consumer sectors. Without any increase in export revenues, you can’t go on increasing imports forever.

The previous government did not focus on the export sector, but we feel this will have to change. ….. textile export growth has been unimpressive, while non-traditional exports like carpets & rugs, sports goods, leather items, and surgical instruments have not fared well during the previous regime. In the 1990s, non-traditional sectors were actively encouraged to reduce Pakistan’s dependency on textiles.

In the 1990s: Is Citibank implying that previous democratic governments were actually trying to improve Pakistan’s export base but all those efforts were wasted during Musharraf-Shaukat Aziz regime? I guess so. But isn’t that blasphemy to actually praise the earlier democratic governments and fault the Musharraf-Shaukat regime?

After taking Econ101 you can justify that consumer credit was the engine of growth etc. but what the numbers say is that the engine had actually been moonwalking _ giving the illusion of going forward but actually going backwards. We are actually in this crisis because of those consumer oriented policies.

In Yesterday’s DAWN, Shahid Javed Burki (a highly respected economist) had this to say

This is what the country did in 1999 and gave up growth in favour of stabilisation. It was in an effort to pick up growth that the Musharraf administration loosened fiscal and monetary controls over the economy, laying the ground for the current crisis.

The [Planning] Commission was overshadowed by the Ministry of Finance during the Musharraf period for the reason that the man who headed the ministry for the entire period did not have the self-confidence to ask for advice.

During his tenure economic policy making became ad hoc, subject to personal whims and pressures exerted by powerful groups of lobbyists.

I rest my case.


ADB has approved a package of US$ 500 million for Pakistan to accelerate economic transformation. Reminds of an incident in 1979 when Zia ul Haq rebuffed an offer of $325 million by Jimmy Carter as “peanuts”. We should do the same with ADB aid package.

The foreign exchange reserves of Pakistan stand around $8 billion. With monthly foreign exchange burn rate (difference between monthly import bill and export proceeds a.k.a trade deficit) of $800 million to $1 billion. At this rate, and no other sources of major inflows expected, we will go bankrupt by first quarter next year. The only impact of ADB package will be to delay the inevitable by another 15-20 days.

But I got a good laugh from reading the purpose of this loan on ADB’s website

The fiscal space created by reforms [from this package] will cut financing gaps, generate conditions for a better deal in the sectors down the road, and provide much-needed cash flow to pay for safety net programs that protect the most vulnerable. ADB’s support balances the need for addressing the needs of Pakistan’s people while reassuring markets that the government is on the right track with its ongoing economic stabilization program.

What stabilization program? I have yet to heard of a program. About ‘Safety net program’ the only news I recall was its removal where government is removing subsidies from gas, electricity and most recently wheat.

Will somebody please share with me any solid steps taken by the current government to stabilize the situation. The only thing that is keeping the country afloat is the credit crisis in the world. With everybody worried about western economies crashing, nobody has time to really step back and worry about Pakistan except for Moody’s, Standard & Poor’s and Pakistani press. We all know how credible they are.

Now the question that arises is what is needed? Frankly, a lot of money. $10 Billion per year for 3 to 4 years. Yeah Right!! Who is going to give us this money? At the way we are operating at the moment _ no one. We don’t have a plan or strategy or even an inkling of an idea to get ourselves out of this mess.

We need the first $10 Billion just to stabilize the currency. And other billions to put in place sustainable growth program. Programs which unlike the ones implemented by former banker-turned-prime minister do not result in windfall profits to just banks but the effects trickle down to common man as well.

It is not impossible. But requires honesty and hard-work two things that never come to mind when you think about the current government. Rather than use the advices of imported consultants/ ministers/ governors from Citibank, IMF or ADB where they only end up benefiting their former employers or elite segments of society, we need to use our local economist and we do have some very good ones to chalk out a strategy to take us out of this mess.

Fingers crossed.

I smell a rat (IMF)!

Yesterday Business Recorder published an editorial about Home Grown Economic Package (a ridiculous name for even more ridiculous program) that was unveiled by Finance Minister Naveed Qamar last week. Before I go on ranting about the package, I would want to know why did it take Business Recorded one week to write an editorial PRAISING the package. It should have been done the following day or the day afterwords. When politicians claim that half of time press is in pay of the government, the content of the editorial actually proves that.

The program has all the indications of being an IMF program. Pick up economic history and read out the recommendations of IMF to developing countries. In all such programs, 3 things stand out

  • No subsidies
  • No development expenditures
  • Privatize public sector enterprises

The Home Program package proposes nothing but the above.The Finance Minister and SBP Governor really take us for fools for believing that we can’t smell IMF when the whole package is reeking with IMF’s recommendations. Or may be they are being more royal than the King.

On a digression, with a infrastructure breaking at the edges and non-existent in some cases, poverty levels having significantly increased and some of the public sector entities sold for much less than their worth in last few years, it amazes me that goverment of peoples party with its roots in poor and rural classes of Pakistan can come up with such a scheme. If fully implemented, I can assure you that there will be no Peoples Party as we know it in few years.

And add insult to the injury,

The government decided on Friday… phase out the subsidy on electricity by June 2009 under a plan to stabilise the economy

The electricity bill I pay every month for less than half a day of daily electricity makes me feel that its not the government which is subsidising me rather its me who is subsidising the government.

It is also true that most of the problems now confronted by the PPP government are due to the mismanagement of the economy in the last one year or so by the Musharraf-Shaukat government when it decided not to take harsh policy decisions for reasons of political expediency. Now, the authorities at the helm have to pick up the pieces and administer high doses of bitter pills to save the situation from worsening further.

Last one year? They must be crazy. When the whole house of cards of 6-7% growth of Musharraf-Shaukat regime had been built on the foundation of increased consumer spending for imported goods (read A/Cs, cars, motorcycles) by loading up the customers with debt (credit cards, personal loans, car loans, house loans etc) the only growth was witnessed in service sector, stock market and real estate, the whole 8 years have been a case of misdirected priorities and the house had to come crashing down. No efforts or policies were made in last 8 years to encourage industries or improving export base. As such, none of it took place and hence we are in a situation where we don’t even know where to generate foreign exchange.

Doses of bitter pills: Why the the bitter pills have to be swallowed by the poor only? Cutting on development and reducing subisidies won’t improve the economy. It will only instill resentment in people and force them into looting and stealing to make their ends meet. How about banning or applying exorbitant duties on import of cars? Why not launching schemes for urban transport so that people don’t have to rely on expensive fuel guzzling cars to commute and save some foreign exchange? These and similar other proposals which reduce our import bills, encourage people to save (finally the government has decided to raise rates on national saving schemes – a very positive step) can go a long way in improving the lot of people but then IMF does not agree with such policies.