The beg and borrow policy

Courtesy:- Abid Hasan
Tuesday, March 27, 2012

For decades, the political and military elite governing Pakistan have followed a beg and borrow strategy for financing government expenditures, rather than raising taxes. In addition, this elite stole from these resources to benefit themselves, and their family and friends. This financing strategy has made Pakistan much more dependent on foreign grants and loans, compared to other countries of similar size, endowment and level of development. Foreign borrowings for bad projects and programmes have mortgaged our future generations, while excessive foreign grants have mortgaged our national sovereignty.

Over the last two decades, Pakistan has received close to $40 billion in foreign grants (mostly from the UK and the US) and loans from the World Bank, the International Monetary Fund and the Asian Development Bank. As in all developing countries, the impact of this aid on Pakistan’s socio-economic development is directly linked to Pakistan’s own performance in respect of structural reforms and the effectiveness of the current and development spending by government. Since the effectiveness and accountability of total spending by government remains low in Pakistan, the effectiveness of foreign assistance has also been low. The “results on the ground” from the $40 billion of foreign assistance have been disappointing. While there are many examples of programmes that have helped Pakistan, there are as many, or more examples, of failure and less-than-satisfactory results.

Around half foreign assistance, roughly $20 billion, was for development projects. Of this, around $10 billion has been put to good use. These include Ghazi Barotha Dam, national highways, barrage improvement efforts, power-generation, pipelines, ports, earthquake reconstruction, banking-sector reforms, micro-finance and polio eradication. These projects have yielded visible and lasting results.

Foreign aid has supported some small islands of excellence-like LUMS and the Pakistan Poverty Alleviation Fund. A stellar example of donor-supported programmes in the 1960s and 1970s was the Indus Basin Dams and Irrigation Systems Development.

Another $10 billion in project aid has financed projects with limited impact. These include support for education and health, the water sector, institution-building and access to justice. Despite decades of donor support for health and education, results have been disappointing.

While many of these projects showed good results in the short term-a new school, additional teachers, increase in piped water-these improvements were short-lived. Within a few years: the school building deteriorated and its toilets became dysfunctional; new health centres neither had doctors nor medicines; new piped water systems became non-functional because there was no money the repair of pumps. All donor supported efforts to establish an accountable and efficient civil service, improve access to justice in lower judiciary, or reduce corruption have not yielded the desired results. The accountability and capacity of departments providing these front line services has continued to remain weak. Consequently, despite the large quantum of aid, Pakistan continues to have some of the worst human development and service delivery indicators in the world.

About $20 billion or so of aid was provided as policy loans and grants, in the form of cash to finance persistent foreign-exchange and fiscal deficits. Some of the these loans, especially those from the international financial institutions (IFIs), helped Pakistan avert foreign-exchange crises and avoid defaults in 1999 and 2008. However, the majority of these loans have not achieved the developmental objectives, and most reforms supported by these loans have been short-lived and have been reversed.

A major focus of policy loans and grants has been to support Pakistan achieve sustainable macro-economic growth and poverty reduction through better fiscal, monetary and structural policies. But achieving this goal has been elusive. Pakistan’s long-term growth trend is declining. Its share of exports has dropped in the last two decades, while the tax-to-GDP ratio has remained almost static for two decades. When the leaders and the elite don’t want to pay taxes, donor-driven tax reforms will simply not work.

Because of decades of borrowings to finance high fiscal deficits, Pakistan now has one of the highest interest expense in the developing world as ratio of tax revenues. Despite billions of dollars of policy loans from IFIs, Pakistan’s economy is stuck in a “low growth-high inflation” trap and Pakistan could soon once again face a foreign-exchange crisis.

Another key focus of policy loans was reforms in the energy sector. However, sector efficiency and viability have actually deteriorated despite decades of IFI support. All the billions of dollars of policy loans and grants essentially kept the country afloat, by financing wasteful and extravagant expenditures of corrupt and irresponsible governments and ruling elite. They provided the corrupt ruling elite the soft option of evasion of taxing themselves to finance fiscal deficits or increasing exports to reduce balance of payment deficits.

There are two key reasons for poor impact of aid. First, poor performance by the government itself. For decades Pakistan’s reform efforts have been Tango 1-2-3 movements: One step forwards, two sideways and three backward. There is no penalty within government for bad borrowing decisions or poor project implementation. And in respect of improving delivery of “pro-poor” services, the mindset of the political/bureaucratic elite is similar to Rhet Butler’s famous last words in Gone with the Wind: “Frankly, my dear, i don’t give a damn.” Second, donors have become part of the problem, rather than being part of the solution. They have willingly gone along with this tango like reform efforts. The same conditionalities have been repeated again and again in successive Policy Loans. Donors have been ever ready to provide loans and grants, becoming financiers of first resort for corrupt and incompetent governments

Pakistan needs a new aid strategy. First, Pakistan must get out of its shameful begging behaviour. Addiction to aid has become opium for the country. Second, aid effectiveness must be improved so the country does not incur foreign debt with no benefits to the economy or ordinary citizens.

Pakistan should welcome grants, because it is “free money,” provided they are in support of Pakistan’s development priorities and not priorities of taxpayers and NGOs in aid-giving countries. Excessive bilateral grant aid in the past has compromised our national sovereignty, without any tangible benefit to the people. The big donors, especially the US and the UK, have a very large footprint in Pakistan, becoming excessively involved in our politics and national affairs. Worst, they have given refuge to corrupt leaders and their ill-gotten wealth in their countries.

Foreign borrowings should be very selective to avoid increasing debt burden without any benefit to the country. Over the next few years, Pakistan should only take concessional loans, and use these mostly for large infrastructure-dams, highways, power, railways, pipelines and ports. It should not borrow for “soft” projects, unless there is far high degree of certainty-than in the past – that project objectives will indeed be achieved. Until quality of governance improves, Pakistan should avoid policy loans-except where it becomes necessary to avert a foreign-exchange crisis.

This paradigm shift in foreign aid strategy can only happen if responsible elements in the political system, civil society, the media and senior civil servants become the agents of change and restrain government from contracting unnecessary foreign loans and going around the globe with a begging bowl. It is also incumbent on donors to be much more selective and stringent until such time as Pakistan scores high on quality of governance, soundness of policies, effective use of public money and implementation capacity. As a nuclear state, and the sixth largest state in the world, Pakistan should be an economic powerhouse rather than an international beggar.