Is foreign aid helping the Pakistan’s economy?

Pakistan is trapped in the tentacles of foreign aid [and debt] now more than ever. These loans come with a high interest rate and more debts are acquired for the previous debt servicing. The term of debt servicing is used for markup on any short or long term debts. Every incumbent government is formed with the tall promises of not only standing the economy on its own feet, but also paying the existing loans.

These promises are smoked in the air and once again the ‘Bretton Woods’ institutions are approached for fresh help. These negotiations end up with the debtors agreeing in inflating the prices of the commodities and utilities once again so as to enhance the revenue streams of the country.

Every decision by ruling elite is made considering the political interests. Voters are charged by hollow claims of uplifting living standard of the poor. PTI did the same with little to no implementation. Take for instance the matter of going to IMF – Imran Khan contrary to his promise opted to knock its door as he gained power.

Like its predecessors, the ruling PTI party also promised the false economic stability in its electioneering campaign. Its economic presentation revolved around getting the country rid of the debt traps it has been mired in since the days of yore. Soon after forming the government it was realized by the then economic team of the government that it is one thing to criticize the opponents and totally another thing to deliver in the real world, and that the economy of the country cannot be turned around with mere good intentions and window dressings.

The first year following the forming of government was wasted in procrastinating towards seeking the help from the donor institutions. This situation of self-denial further worsened the economic woes and revenues further fell while the debts kept piling up. The promises made by this party in the elections, of not taking any foreign debts would haunt them in their dreams when the need to take such loans came knocking on the door. As a face saving attempt, the erstwhile financial team of our jingoistic Prime Minister was overhauled with the key finance minister’s removal from the cabinet.

The team of finance was replaced with some veterans serving in the donor institutions at different places. This was done to make way for a timely International Monetary fund’s program. A package was negotiated and afterwards funds started pouring in installments.

These funds always come with certain conditions, the primary among them are enhancing the sources of revenue for the government by restructuring in different sectors. In Pakistan’s case, mostly these revolve around enhancing the tax base of the country in tandem with overhauling – and privatizing if need be- the loss making state owned institutions.

To be honest, if these plans were to implement in Toto, it would turn around the economy of the country for real. But here comes the tricky part: the Realpolitik. The government doesn’t want to sell many loss-incurring state owned institutions because it might lose its vote base of the laborers working there, and also because it opposed the privatization attempts by the previous regimes.

The debts would keep piling up and the economy still destabilize with inflation skyrocketing. This conundrum would nudge the country closer to another IMF program with every passing day. The tax base is also not substantially enhanced because it might alienate the certain quarters in the ruling party safe guarding the interests of different sections of the economic players in society.

The foreign aid helps in turning around the economy of the country if the economy has a potential of standing on its feet with such help. Even with some effective reforms, it would take a certain time for the economy to take off. During such time, the foreign aid helps in overcoming the short term cash needs of the country. But, it might also work to the detriment of the economy if it comes with a high interest rate, and the reforms promised are not implemented in the letter and spirit.

The same happened in the case of Pakistan when the current government negotiated the package with the IMF on unrealistic terms which included taking all the subsidies on utilities away from the common people. Even after taking these subsidies away the agreement stipulated a many time increase in the prices of electricity and gas which –to a certain point- became virtually impossible. That’s why currently the financial team of the government is facing a deadlock with their counterparts from the donor institution over the demand of further increase in utility prices.

To Pakistan, foreign aid isn’t helping as long as the government is not coming out of its current state of denial towards the privatization of the loss making SOEs, and enhancing the tax base by taking strict actions where and when necessary without resorting to the Realpolitik.

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