Pakistan is in economic doldrums these days. Surging dollar, robust inflation, volatile stock market with a steep falling trend, high interest rates, is there any worse yet to come? God forbid! Only accountants may think of treating the looted money as a sunk cost, a majority thinks that somehow, someway the looted money will make its way to the national exchequer. Great Expectations!
One may desperately want the national exchequer to be replenished ASAP, but let’s have a look at the ground realities, such as Pakistan’s foreign diplomacy; legal agreements ratified by Pakistan; political ties with other countries and our political strength or lack thereof; and economic position as well as economic and trade relations with other countries. Can we find any cutting edge in any of the areas mentioned above? Perhaps we need further contemplation to clearly identify our strengths and weaknesses in these areas if we seriously want the looted money back to where it belongs. The properties outside are subject to the law of the country where it is situated and
It is the money that makes the mare go round (not to be confused with Mayor–the local bodies’ political administrator). Coming to think of it, you can make the mare go pretty straight if you have enough money. Nonetheless, money is crucially important to run the country and help the government overcome the economic challenges facing the country. Where will this money come from? We need US dollars since we have to make international payments for trade and US dollar is the most widely accepted currency. Why US dollar and why not Japanese yen or Chinese Yuan? Are these not powerful economies with currencies that have international acceptance? They surely are, but their currency will be accepted with perfect liquidity only in those countries which have international trade relations with Japan or China, whereas the US dollar is acceptable worldwide without exceptions and why so…? Because of the agreements that almost every country in the world has ratified pertaining to the international monetary system. It will take a series of articles to unfold the shortest possible description of the system; however, to begin with we will take up Bretton Woods Agreement to find the reason for US dollar’s international dominance.
Before the start of the Second World War, pound sterling was the most dominant currency in international trade owing to the British imperialist rule that stretched from Australia in the Southeast to Canada in the Northwest in the nineteenth century. Those countries, which gained independence before or during the 20th century remained members of the commonwealth and were supportive for pound sterling in international trade. However, the Second World War ended the British supremacy and pound sterling dominance. While German troops were obliterating Europe, the US Congress, till 1942, was debating on whether it has any role to play in the “regional dispute”.
It was only after the Bretton Woods Agreement that US decided to participate in the Second World War. In 1944, the Bretton Woods Agreement was ratified by the participants from 44 countries. The major highlights of the agreement included establishment of International Bank for Reconstruction and Development (IBRD), which is popularly known as World Bank today, and International Monetary Fund (IMF). The IBRD was setup with the task of reconstructing the war-struck Europe and the IMF was to ensure a sound international monetary system with minimum exchange rate risk to facilitate international trade.
Moreover, it was decided in the agreement that no currency other than the US dollar could be converted to gold and all the currencies of the world were to be pegged to the dollar, which not only meant that the currencies of the world were to fix their value against US dollar, it also implied that US dollar is as good as gold. The countries, which were previously maintaining gold reserves, now started keeping their reserves in US dollars. So with just a stroke of pen, the US dollar became dominant currency of international trade overnight. While IMF and IBRD continued to operate, the pegging aspect of the agreement lasted for a couple of decades and without a formal announcement, it ended as the countries relinquished fixed exchange rate regime in favour of floating regime, whereby the value of currency was to be determined by the forces of demand and supply in the open market. According to IMF’s annual report 2018, 69 countries across the glove, mostly developed countries, follow some form of floating exchange rate regime. Nonetheless, dollar dominance is to continue as long as the international system does not find a more desirable currency for international trade.
As for the two financial institutions that came about as a result of Bretton Woods Agreement, IBRD was renamed as World Bank once the task of reconstructing Europe was over and today it finances mega projects deemed necessary for a country’s development. IMF, which was mandated to ensure exchange rate stability, continues to provide funding to countries which are facing balance of payments problem.
Pakistan’s current loan from the IMF stands around $90 billion. In the present economic crisis, our government is seeking to get further funding from the IMF amidst heavy criticism from the opposition parties. It may be recalled here that those criticizing the government for going to the IMF, had never shied away from IMF loans when they were in power. It is also argued that IMF dictates its terms and conditions before it agrees to sanction loan to Pakistan and that the loan secured from IMF has not resulted in any development in the country.
One needs to understand that IMF loans are not meant for funding development projects. Just as a house loan cannot be used to purchase a car, the loan provided by the IMF is meant for correcting balance of payments problem to ensure exchange rate stability and it cannot be used to build infrastructure.
It should also be acknowledged that IMF is a financial institution and just like any other financial institution, IMF is mandated to recover the principal amount as well as the interest accrued on the loans provided. If a country’s economy does not produce good results, the repayment of principal and interest becomes a risky proposition and IMF has to intervene at policy level to ensure recovery.
To better understand the problem let us assume that Mr A borrows some amount from Mr B with a contractual promise of repayment of principal amount along with interest within a certain time period. If Mr A fails to make payment at the stipulated time, Mr B will surely show his concern and will try to find out the reason for delay. If Mr. A responds that he has not been able to pay because he did not have a job, Mr B will be quite rightful in asking what efforts Mr A has made to secure a job. If Mr. A tells that he wakes up at noon and sets out to seek a job after 4:00 pm, Mr. B will suggest Mr. A that you should wake up early in the morning and make more serious effort to get a job. Would Mr. A be justified in saying that this is a personal issue and Mr B has no right to intervene in my personal affairs?
Similarly, when the IMF sees that the present governmental policies can lead to a default on the loan, it suggests the government to make necessary arrangements to avoid bankruptcy. Blaming IMF for the economic mismanagement in Pakistan is only unfair. It was for the political elite and economic experts to make policies that may help to reduce trade deficit and to avoid seeking loan from IMF. It will be quite unwise to think that IMF should look after the interest of the people of Pakistan when our own leaders fail to protect the interest of their electorate.