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November 3, 2018

The lure of loans


November 3, 2018

In a popular Bollywood movie, a firebrand political leader, whose reputation rests on bucking the system, assumes the chief minister’s office after a protracted struggle. The people who elected him to power believe that he will take the government off the beaten track. But he governs the state the way his predecessors did. When reminded that his policies were discordant with his stance while he was on the other side of the political divide, the chief minister curtly tells his detractors that a politician isn’t supposed to be as good as his word all the time.

As an opposition leader, Imran Khan would castigate successive governments for having drawn the begging bowl from time to time and thus sold national honour to foreigners. “There’s no such thing as a free lunch. When you get aid from another nation, you’ve to do its bidding.” That’s how he’d look down upon foreign assistance.

Today, Prime Minister Imran Khan is taking the credit for having secured considerable credit from Saudi Arabia and trying to get a similar ‘facility’ from other friendly countries. In the past, we made a distinction between good militants and bad militants. Now we have good loans (package) and bad – not in the economic sense – loans (alms).The federal finance minister – the wisest man in the cabinet after his skipper – has defended the PTI’s incongruous stance on borrowing abroad on the alleged grounds that while previous rulers sought credit just to fill their private coffers, his government is doing so for the sake of the nation.

Rhetoric aside, the $6 billion Saudi credit is what the doctor ordered for Pakistan’s cash-strapped economy. The ‘package’ stipulates that Saudi Arabia will deposit $3 billion in the State Bank of Pakistan for one year and Pakistan will purchase oil worth $3 billion from Saudi Arabia on a deferred payment basis over three years. For sure, the credit will ease the balance of payment problems, shore up foreign exchange reserves, send a positive signal to the market, arrest the exchange-rate deterioration, and bolster the government’s position as it negotiates a credit agreement with the International Monetary Fund (IMF) in the days to come. The euphoria in the ruling party isn’t without good reason.

International capital movements are akin to double-entry book-keeping: they have both credit and debit sides. Capital inflows constitute the credit side while the shrinking policy space is the debit side for the recipient. For the donor, bilateral economic assistance is an important instrument of foreign policy through which it seeks to advance its geostrategic interests. The creditor may also make aid contingent upon the procurement of its goods and services by the debtor.

For Pakistan, the credit side of the Saudi credit has been summarised in a preceding paragraph. What’s its debit side? If the prime minister and his ministers are to be taken at their word, the Saudi assistance has no debit side – ie, there are no strings attached to it. Instead, the envisaged capital inflows from the holy land are just an affirmation of the strong bonds between both countries. Of course, Pakistan will have to repay the debt – the rate of interest has not been specified. But debt retirement is not the same as the strings or conditionality.

Let’s exhibit the willing suspension of disbelief and take the cabinet at its word. A true friend always lends a hand to another in times of need, and Pakistan is in dire need of external capital inflows. The Saudis hold the new Pakistan government in high esteem. Both Saudi Arabia’s crown prince and our prime minister are on a messianic mission to stamp out corruption in their countries and recover the looted wealth. On several international issues, their views are concordant. So, it isn’t a big deal if Riyadh opens up its enormous kitty and gives a few billion bucks to Islamabad.

‘Not so fast,’ the cynics would retort. In a selfish world, even the fastest of friends have an axe to grind when they appear to be altruistic. Didn’t, they would ask, the prime minister return empty-handed from his inaugural visit to the holy land barely a month ago? If Riyadh had been so forthcoming in bailing-out Islamabad, it would’ve done so in the first instance. So, some significant developments must have come about during this period, which made the Saudis change their mind. Alternatively, Islamabad must have agreed to do something that it previously wasn’t willing to do. For the moment, the government may have decided to keep the details under wraps.

Let’s suppress our credulity for the time being and go along with the cynics and cast our minds a few years back. In 2014, within months of the induction of the PML-N government, the Saudis doled out $1.5 billion in the form of assistance to Pakistan to ward off a difficult external balance situation. At that time, the former government’s position was identical to that of the PTI government at present: the capital inflows were unconditional. Later, it transpired that sending Pakistani troops for a war in Yemen was the price that the Saudis wanted to exact for the capital inflows. The request was turned down. However, Pakistan did send its troops to Saudi Arabia to shore up its defence capability.

The Saudis are not interested in structural economic reforms in Pakistan, much less in promoting human rights or democracy. It goes without saying that Riyadh and respect for civil liberties are miles apart. Making Pakistan purchase their goods and services is not the priority of the Saudis either. Last year, Pakistan imported goods worth $2.7 billion from Saudi Arabia, of which nearly half was accounted for by oil, and ran trade deficit worth $2.4 billion with the latter.

The major development that took place between the prime minister’s first and second visit to the holy land was the murder of Saudi journalist Jamal Khashoggi at the country’s Istanbul consulate, which has ushered in its growing international isolation. With the House of Saud having received a rap on the knuckles from a large number of countries for its continuing suppression of dissent, the kingdom is desperately seeking to build alliances.

Islamabad’s silence on the journalist’s death and its participation in an investment conference hosted by Riyadh, which was boycotted by several countries, must have been highly appreciated by the Saudis. Misery loves companionship. But this isn’t all. By accepting Saudi aid, Islamabad has sent the unmistakable signal that it supports Riyadh in its regional conflicts, almost all of which involve Tehran.

In addition to the dismal state of Pakistan’s economy, America’s decision to withdraw from the Iran nuclear deal and re-impose sanctions on Tehran, which has dashed all hopes of reviving Pak-Iran commercial relations, has also been instrumental in tipping the scales of our foreign policy in favour of Saudi Arabia. The government’s tilt towards Saudi Arabia is, therefore, driven primarily by economic considerations.

At the same time, Pakistan’s claim of playing the role of a mediator in Saudi Arabia’s regional conflicts is little more than calumny. Islamabad has neither the influence nor the trust of Saudi antagonists to play such a role.

The prime minister has drawn a great deal of flak for having painted an abysmal picture of the economy during the investment moot hosted by Saudi Arabia. Such a picture, it is argued, will scare away foreign investors. This form of criticism misses the mark. However hard the government may try, the state of Pakistan’s economy can’t be kept under wraps. All the relevant data is available on the web page of the central bank and other official sites. It does, however, signify that the government’s preference, at least in the short run, is for loans rather than investment.

The writer is an Islamabad-based columnist.

Email: [email protected]

Twitter: @hussainhzaidi

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