From its very inception, Pakistan became addicted to reliance on foreign financial inflows as a substitute for domestic resource mobilisation efforts. In the period up to about the end of the 1960s, most of these inflows were in the form of bilateral grants or concessional lending by the World Bank through its IDA window.

Grants created no liabilities for debt servicing and debt repayment. IDA-lending by the World Bank carried very low interest rates and a long gestation period before the start of repayment of the principal amount. Accordingly, in the early years of the country, reliance on foreign inflows did not create the monster of external debt that was nurtured later on, and there was no immediate burden of foreign debt servicing. As a result, availability of foreign inflows in fact made it easier to manage the budget and the balance of payments.

These inflows were also put to relatively better use in the early history of the country. The Ministry of Finance did not have monopoly over economic decision-making in those days and professional input by the Planning Commission and other economic institutions and ministries was helpful for better economic management. Efficient use of foreign financial inflows was an important consideration during that period.

The annual budgets were developed within the framework of targets and policies given in the annual, five-year and perspective development plans prepared by the Planning Commission on sound economic principles, with substantial professional input by indigenous economists and foreign economic advisers. Maintenance of relative price stability was given equal weight to the achievement of a high rate of economic growth. There was also less financial corruption and pilferage in the public sector in those days, contributing to relatively efficient allocation of foreign financial inflows. All these factors led to a rapid rate of economic growth, a low rate of inflation, and an insignificant burden of debt and debt servicing.

However, bureaucrats, politicians and military rulers got used to foreign financial inflows as a substitute for domestic resource mobilisation efforst, and did not pause to ponder about the long-term consequences of the government’s prolonged reliance on foreign financial inflows, particularly with the change in the composition of inflows from grants and soft loans to loans on harder terms and of shorter maturity. As a result, and notwithstanding the change in composition of foreign financial inflows, every government – civilian or military – continued to borrow from abroad regardless of cost and sources. Debt servicing liabilities and debt repayments raised their ugly head and steadily became a major constraint on both the budget and the balance of payments.

In the meantime, the increase in corruption and pilferage and the firm hold of the bureaucrats of the Ministry of Finance on the country’s economic management blocked all avenues of fresh thinking about, and professional input in, economic management. The concentration of economic policymaking in the Ministry of Finance which had no expertise of dealing with increasingly more complex economic policy issues suited the personal and family economic interests of the ruling elite – and so the policy of heavy foreign borrowing that was beneficial for them all was continued indiscriminately.

In the 1970s, the government also turned to the IMF for balance of payments assistance. The IMF lending was supposed to be policy-based and short-term, and intended to remove the structural disequilibrium in the balance of payments through policy reforms. However, its assistance has been mainly used to overcome economic crises and postpone economic reforms.

Notwithstanding the long involvement of the IMF with Pakistan, the economic and financial situation in the country has become worse over time. The reason is that every government developed a patchwork of policies with the help of the IMF to tide over the short-term financial problems and any temporary improvement in the budgetary and balance of payments situation proved short-lived in the absence of structural policy reforms. The on-and-off access to the IMF’s financial assistance has continued without the real root causes of our economic difficulties being tackled.

Even the IMF executive board got concerned and appointed a committee to investigate the prolonged use of IMF resources by Pakistan without an endurable improvement in the economic situation. While its conclusions were one-sided, blaming successive governments for their failure to implement agreed economic policies, there was an equal share in it of the defective design of the IMF’s economic programmes and its poor monitoring of the economic performance of successive governments.

The IMF relied on an accounting approach to economic programming and monitoring of performance. Its performance criteria were limited to setting up certain financial and fiscal targets to be achieved by the government – and the bureaucracy of the finance ministry developed expertise in meeting them through short–term measures and figure fudging and thereby keeping the programmes alive without real policy reforms. Steadily, the country was put on a suicidal path of more and more foreign borrowing at higher interest rates not only to repay and service the past debt but also to finance the large fiscal and balance of payments deficits. This vicious circle continues.

Instead of learning from the past, the PPP-led and PML-N governments have continued on the beaten path of the previous governments. Addition to the total government debt in the five year tenure of the PPP-led government was more than the debt incurred by all the previous governments in a period of sixty years. The same approach is being followed by the PML-N under the present EFF arrangement with the IMF.

The PML-N government has undertaken no structural reforms to reduce the budget as well a the current account deficits and made no wise move in the policy framework to use the cushion provided by a sharp increase in home remittances to boost exports and reduce the need for foreign borrowing. Moreover, the government is finding it expedient to sell national assets to foreigners to generate some foreign exchange which will add to the burden of outflow of profits. Unfortunately, the approach of the PML-N government to indulge in more borrowing without structural reforms has been endorsed by the IMF. The government and the IMF have highlighted the build-up of foreign exchange reserves and a reduction in the recorded budget deficit under the EFF programme as achievements. But they make no mention of the fact that build-up of reserves reflects massive foreign borrowing and sale of national assets to foreigners and not a fundamental improvement in the structure of the balance of payments. Similarly, the lower recorded budget deficit represents accounting trickery rather than structural budgetary reforms.

Recent data show that exports are on the decline, imports are rising fast, there is a widening trade deficit and, in spite of increased home remittances, the current account of the balance of payments is heading towards a large deficit. A proper measurement of the budget deficit would show no real improvement. Indeed, if the window dressing of the data is removed, there is no evidence of ‘macroeconomic stability and increase in output growth’ or a ‘fall in the budget deficit’.

It is difficult to predict how long the IMF staff will be able to mislead its executive board and the PML-N government will continue to fool the people by selectively using dubious data to show that ‘macroeconomic stability has been strengthened’ and ‘output growth’ has rebounded under the EFF arrangement. What is easy to state is that the present fiscal, monetary, exchange rate and debt management policies are not working to reduce the structural imbalances – and it is not possible to achieve a high rate of economic growth, low rate of inflation and viability in the balance of payments on a sustained basis without fundamentally restructuring and reforming fiscal, monetary, exchange rate and debt management policies.

The writer is a former governor of the State Bank of Pakistan.