Twenty-second time lucky for Pakistan and the IMF?
The country is now in the grip of another bailout programme and Reza Baqir, the new central bank governor, sees parallels for the nation from his last job at the fund.
Pakistan holds an embarrassing world record that no self-respecting finance minister, central bank governor or national leader would ever want.
Since 1958, the first time the relatively new nation sought assistance from the IMF, Pakistan has been bailed out by the fund a staggering 22 times (and 15 times since 1980 alone).
The current $6 billion programme – the 22nd – which Pakistan entered in July 2019, was meant to curb government debt and hold off a balance of payments crisis. It is expected to last well into 2022, and follows a $5 billion, four-year programme that Islamabad only exited in 2017.
Little wonder then that Pakistan’s engagement with the IMF as a lender of last resort has been likened to the desperation of a drug addict in constant search of a new hit while unable to cure the addiction’s underlying cause. Or that of a chronic chain smoker who lights up another gasper straight after stubbing out the last one.
And, in the absence of a formally sworn-in finance minister, little surprise too that Reza Baqir – the new governor of the central bank, the State Bank of Pakistan, and who is now approaching one year in office – comes to the job from a long career at the IMF.
Baqir was the fund’s country representative in various other economic challenges such as Egypt, Romania and Bulgaria; he also had long stints in Manila and at the IMF’s head office in Washington, and worked at the World Bank before joining the IMF.
For many of the overseas Pakistanis, and at least for me, it’s a desire and a goal to come back and serve your country - Reza Baqir
While Pakistanis bicker about whether or not the IMF has effectively taken control of their economy (as happened in Indonesia circa 1998), Baqir is clear in what he thinks.
His answer is an emphatic no. Nor are there any secondees from the IMF working at SBP’s colonial-era head office in the heart of Karachi’s financial district on ramshackle I.I. Chundrigar Road.
Baqir says he got his job through a “normal” appointment process with Imran Khan’s government in Islamabad, and denies he was put in place at the stipulation of an exasperated IMF. Nor was he ever part of any IMF delegation in Pakistan, he says.
“When I became senior staff at the IMF about 10 years ago, I was automatically taken out of any communication that may pertain to my own country,” he says.
So how did the Lahore-born Baqir – who attended the same high school as the prime minister and who is a Harvard alumnus and a PhD graduate of the University of California’s economics school at Berkeley – get to be governor of the SBP?
“I was enjoying Cairo, running the IMF programme there,” he says. “I got a call… and I felt the opportunity was far too precious and prestigious to overlook, notwithstanding all the attraction of an IMF career, all the benefits and protections and comforts of an IMF career. I decided to embrace it. For many of the overseas Pakistanis, and at least for me, it’s a desire and a goal to come back and serve your country.”
Baqir and the SBP’s communications department were reluctant to elaborate on the precise circumstances of Baqir’s appointment, except to insist that his engagement was with the government of Pakistan, but a timeline might provide clues.
When Khan unexpectedly won the election in July 2018, his government was desperate to secure its authority. He promised a shiny new Pakistan, and the insipid economy was Khan’s critical mission: with his new finance minister, the businessman Asad Umar, the two portrayed themselves as Pakistan’s economic team.
Image of unity
And for a while, that image of unity was sound. When Asiamoney spoke to Umar in his Islamabad ministry office a year ago, he revealed that his nickname for Khan was ‘Skip,’ in reference to Imran’s captaincy of Pakistan’s successful cricket side through the 1980s and 1990s, before he entered politics.
Even though the state finances were dire at the time Khan’s government was elected – reserves were about $7 billion, or less than the equivalent of two months’ worth of imports, while external debt topped $100 billion – Khan and Umar were both keen to be seen resisting calling in the IMF.
The fund’s repeated interventions over the years meant it was associated with the ineptitude of past governments, and Khan was eager to break with that pattern.
Umar told Asiamoney in February 2019 that Pakistan was managing and that he really didn’t need IMF help because some $8 billion pledged to Khan by friendly Gulf nations and China would be sufficient to keep the country afloat. But Umar left the door open to the fund, saying its support “would be welcomed because of the credibility that it brings”.
Umar assured Asiamoney in the middle of February 2019 that he was determined to see out and solve Pakistan’s economic woes in his position as finance minister, but he resigned two months later.
That much-vaunted team had lasted just nine months, and Pakistan’s economy deteriorated further.
Behind the scenes, however, Pakistan was in close negotiations with the IMF. Teams from the fund were shuttling between Washington and Islamabad. Baqir denies he was part of any IMF delegation, saying he had resigned from the fund by that point.
On May 5, 2019, the SBP announced that Baqir had been appointed governor, replacing career civil servant Tariq Bajwa who was just two years into his three-year term.
An SBP official says Baqir had resigned from the IMF just two days earlier. On July 3 last year, the IMF approved a $6 billion support programme projected to last 39 months.
“The first thing I had to do (as SBP governor) was negotiate a programme with the IMF,” Baqir says. “Suddenly I was on the other side of the table.”
Baqir knows this is sensitive territory, and chooses his words carefully.
“In Pakistan we look at the IMF as a partner,” he says. “The actions that we have committed (to) in the context of the IMF programme are actions that we believe are going to help the economy of Pakistan, therefore implementing them is in our own interest.
“The surest predictor of going to the IMF, the 22 times that Pakistan has been, is a fall in reserves,” he adds. “So our first goal is to strengthen our balance sheet and build our reserves, and build them to a level where we preserve them and we take off the table the risk that periodically comes back to afflict us, to potentially seeking international financial assistance.”
Baqir cites a $5 billion improvement in Pakistan’s foreign reserves – taking them to $12 billion – since he came to run the SBP.
“We’ve been able to reduce our forward liabilities by about $5 billion,” he says, adding that Pakistan is ahead of IMF targets.
“I think Pakistan has made a very good start to the programme,” he adds.
The IMF seems to agree.
“International reserves continue to rebuild at a pace considerably faster than anticipated,” it said in a statement on February 14 that was issued at the conclusion of the IMF mission to Pakistan. “Economic activity has stabilized and remains on the path of gradual recovery. The current account deficit has declined, helped by the real exchange rate that is now broadly in line with fundamentals.
I think Pakistan has made a very good start to the programme - Reza Baqir
“Inflation should start to see a declining trend as the pass-through of exchange rate depreciation has been absorbed and supply-side constraints appear to be temporary,” the fund added. “Fiscal performance in the first half of the fiscal year remained strong, with the general government registering a primary surplus of 0.7% of GDP on the back of strong domestic tax revenue growth. Development and social spending have been accelerated.”
Baqir says: “The overall way (to) think about it is not to be under an IMF programme, as often it gets characterized, but rather looking at it as a partnership. The biggest benefit is that it can signal to the rest of the international community, from a party (the IMF) that is not in Pakistan, a disinterested party…that the reform programme is moving in the right direction.”
But that’s not how many Pakistanis see it. Local media is littered with articles describing “the IMF takeover” of Pakistan. They quote unnamed officials in the finance ministry describing the appointments of Baqir (to the SBP) and of former finance minister Abdul Hafeez Shaikh (he is now the prime minister’s adviser on finance) as being “enforced” on Pakistan by the IMF as a condition of the 2019 bailout.
Shaikh was finance minister after president Pervez Musharraf’s military rule from 2008 to 2013 and had led the team that then negotiated a rescue package in 2010 with the IMF’s Dominique Strauss-Kahn, who was chief at the time.
As Asiamoney was going to press, it appeared that the $6 billion package in 2019 with the IMF might be increased by at least $1.4 billion as Pakistan struggles to cope with the economic impact of the coronavirus outbreak.
On March 25, Shaikh – who acts as finance minister without the official title – announced that he had approached the fund for a “low-cost, fast-disbursing” loan.
Baqir says Pakistan’s commercial banking system is in good shape to confront the coronavirus challenge. He says it is liquid, nimble and run by competent managers. He would like the banks to lend more to the private sector, saying their average loan-to-deposit ratios could be higher.
There is also more scope for banks to lend to Pakistan’s small and medium-sized enterprises, and he wants banks to attract more women as customers at a grassroots level, a perennial deficiency in the country and a cause that many of his predecessors have taken up, albeit to little effect.
Pakistan’s economy is insipid. Economists say that to maintain current employment levels, Pakistan’s economy needs annual growth of at least 6% to 7% – whereas it only grew an estimated 3.3% in the 2018/19 fiscal year, according to official finance ministry figures, well below the government’s 6.2% target.
On March 19 this year, the government revised down its growth forecast for 2019/20 from 3.3% to 2.6%, even before coronavirus infections started to spiral across the country.
At one level, having a local veteran of a multilateral international agency installed as central bank governor is not particularly novel in Pakistan. Indeed, having such technocrats in office evokes a time not so long ago when the SBP was able to scratch out a relatively high degree of independence from government.
From the middle of the 1990s, three governors served out their appointed terms in full. It happened that this was a time when Pakistan boomed – the influx of Western aid when Pakistan became a post-9/11 frontline state in the war on terror certainly helped – and wasn’t in constant engagement with the fund’s overseers in Washington.
Before the 1990s, SBP governors tended to be senior civil servants who were elevated to the post after long and loyal service to the state, before being pensioned off.
Banking experience of any stripe, be it commercial or central, was not a prerequisite and, common to many central banks of the era, independence was not much of a consideration either. Pakistan’s 1953 SBP Act explicitly spelled out the central bank’s role as an obedient wing of the finance ministry in Islamabad.
Islamabad, with the Faisal Mosque in the foreground
But in 1993, after the then-prime minister, Nawaz Sharif, was forced from power during a constitutional crisis, the technocratic caretaker government appointed to replace him brought in a dramatic change in thinking. Warding off a systemic collapse in banking, the SBP Act was revised and moves were made to formally distance the central bank from the finance ministry.
Three professional economists – Muhammad Yaqub, Ishrat Hussain and Shamshad Akhtar, the so-called ‘multilaterals’ – ran the SBP in the 16 years from 1993. Yaqub was ex-IMF, Hussain ex-World Bank and Akhtar ex-World Bank and Asian Development Bank. And all of them managed to serve out their appointed terms.
But after Musharraf lost Pakistan’s first democratic elections in almost a decade in 2008, Akhtar stepped down as governor and politics intruded on the SBP’s independence.
Now there’s a revolving door at the SBP, with six governors in 12 years, even though each of them was notionally appointed to serve at least three years in office.
The government has given the central bank due space to be able to make decisions in a professional manner, but also to be held accountable to those decisions - Reza Baqir
Still, that seems almost stable compared to the position of finance minister: whoever is in that job has a big say in appointing SBP governors; in that same period since 2008, Pakistan has sworn in 10 finance ministers.
Baqir is well aware that tenure as SBP governor can be fragile and of the diminution in the central bank’s distance from politicians in Islamabad.
“The government has given the central bank due space to be able to make decisions in a professional manner, but also to be held accountable to those decisions,” he says diplomatically.
“I think we have enjoyed confidence from the government to that effect. Continuing in this path is going to hopefully address concerns of central bank independence being undermined in the future.”
He describes his experience so far as operating independently of government as a “really good trajectory.”
But is he his own man?
“I don’t think it’s a question that can be answered categorically yes or no,” he says. “But in the decisions that have been taken in my tenure, they have been guided by professional considerations.”
As the IMF’s recent former boss in Cairo, Baqir says there are lessons for Pakistan in Egypt’s experience of dealing with the fund and correcting a chronic cash crunch.
The fund approved a $12 billion three-year rescue package in 2016 to Egypt so it could overcome an acute currency crunch.
The country endured three years of painful austerity, floating its currency, slashing subsidies on essential items and embarking on a sweeping liberalization of the economy. The measures attracted billions of dollars in foreign investment and helped the central bank’s foreign reserves to swell to more than $40 billion, much of which Baqir watched over while stationed in Cairo.
“The first year and a half in the Egyptian programme was very tough,” he says. “There were challenges in the economy and there were challenges of communicating that the reason there were problems was because problems had been allowed to grow. The actions that were undertaken to address those problems are not the cause of the hardship, they are mitigating what otherwise could have been a much worse situation.”
In Pakistan, the problem is fiscal, Baqir says, namely a large budget deficit, much as Egypt suffered, and the burden of supporting state-owned enterprises while maintaining subsidies on basic consumer items.
He says Pakistan’s rupee was also overvalued – as was the Egyptian pound before it entered IMF intensive care, although the pound’s subsequent depreciation was sharper and more sudden than the decline in Pakistan’s rupee.
In late 2017, the rupee was trading at about 105 to the dollar. The day Baqir took office on May 4 last year, the rupee was 141 to the dollar. By July when the IMF package was finalized, it had eased to 162.78, 20% lower than when Baqir became governor and close to its weakest point in the last 12 months of 163.49, reached in June.
On March 25, 2020, as Pakistan went into virtual lockdown to contain the fast-mounting coronavirus, the rupee was trading at 160.60, after the SBP had lowered interest rates to 11%, while the government announced a $6 billion financial package to ease the impact of the pandemic.
Baqir says he is not concerned about the value of the currency, describing the progressive devaluation as orderly and attracting capital inflow.
“If the same coronavirus situation had happened a year ago, we would have been in a far worse situation,” he says.
In what seems a thinly disguised message for his current masters in Islamabad, Baqir says Egypt should be commended for not just tackling the “low-hanging fruit” holding back reform.
“It is the big problems that lead to a country seeking assistance from the IMF as a lender of last resort,” he says. “When you have big problems, if you do not demonstrate that you are willing to tackle them head on, you do not regain investor confidence in the manner that you need to.”
So what are the big problems Pakistan must tackle?
Economists say more efficient tax collection is high on the list, rationalizing and privatizing the lumbering state-owned sector, including the many businesses owned by the military, as well as widening financial inclusion.
Only one third of Pakistanis, and overwhelmingly men, have any sort of meaningful access to the financial system.
“The Egyptians took very bold and very difficult decisions,” he says. “The biggest lesson to take from Egypt… is sticking to the programme, demonstrating ownership of the programme and demonstrating that you are able to take tough decisions, which may not be necessarily popular, ultimately does deliver results.”