The lenders, commercial banks or bilateral lenders, while processing the loan application assess the borrower’s credit risk based on factors better known as “5Cs” in banking terminology: credit history of the borrower, its capacity to repay the loan, its own capital, the collateral in shape of assets pledged by a borrower as security for a loan, the character which refers to a borrower’s reputation or trust regarding financial matters.
The approach of the International Monetary Fund (IMF) seems to be strictly in accordance with these cardinal rules of lending.
Often the borrower makes the mistake of assuming that with their negotiation skills or lobbying with the principal contributor of funds to the IMF, the US government, they would be able to extract concessions from IMF on its conditionalities.
Pakistan’s functionaries, time and again, are the ones who were under this euphoria and learned the hard way that it is an exercise in futility. In the process much time is lost, country’s credentials were dented and the fiscal position further deteriorated.
One example to understand the firmness of the IMF and other lenders on complying with “5 Cs” is a case related to India. In 1991, India was on the verge of default.
The International Monetary Fund (IMF) suspended its loan programme to India and the World Bank also stopped its assistance to this South Asian country. These actions left the Indian government with few options to address the crisis.
Ultimately, it was forced to take drastic measures to successfully avert sovereign default. One of the measures taken by the government was to pledge a large portion of the country’s gold reserves to the Bank of England and the Union Bank of Switzerland as collateral.
This action was intended to raise much-needed foreign exchange to help meet India’s debt obligations and stabilize the country’s economy.
This is how adamant the IMF is on its conditionalities regardless of criticality of growing US interests in relation to India following the demise of the Soviet Union. Pakistan has no such liquid collateral to offer in time of financial meltdown and will be left high and dry in such a case.
Over the last eight months of negotiations between the IMF and the government, much of “Cs” appear to have been agreed upon except the issue (or ‘C’) of “Capital” related to the frightening financing gap for repayment of loans and “Character” which refers to a borrower’s reputation or trust regarding financial matters. Both are interrelated.
The Minister of State for Finance Dr Aisha Ghaus-Pasha, while briefing the Senate Standing Committee on Finance last Wednesday revealed that the staff-level agreement on the 9th review was taking time because the International Monetary Fund (IMF) wants to independently verify commitments from friendly countries – Saudi Arabia and the United Arab Emirates.
This is the extent of IMF’s lack of trust in the commitments of the government functionaries who reportedly attempted to assure the lender of the last resort that consequent to an agreement with IMF the commitments from other donors or lenders would be honoured.
In parallel, another irritant and source of trust deficit has emerged which is the cross-fuel subsidy plan of the government. This decision was taken without taking the IMF into confidence. The Fund has rejected the subsidy plan and sought details as required to verify its sustainability.
Insofar as the compliance of the conditionalities is concerned, the fuel subsidy plan has certainly added to IMF’s suspicions about government’s seriousness.
The loan from Saudi Arabia is no longer as liberal as it was last year. Saudi Arabia signaled a radical shift, so to speak. “We are changing the way we provide assistance and development assistance,” Saudi Finance Minister Mohammed Al-Jadaan said at the January 2023 meet at the World Economic Forum in Davos, Switzerland.
“We used to give direct grants and deposits without strings attached and we are changing that,” the minister explained during a panel discussion and the participants of that discussion included IMF Managing Director Kristalina Georgieva. “We are working with multilateral institutions to actually say we need to see reforms.”
Saudi Arabia appears increasingly frustrated with the economic and political turmoil that has surfaced in the last months in Pakistan. It noted with displeasure that the loans that it granted previously were never utilised to revamp the country’s economy or reform its systems and processes. Same frustration appears to be true for the UAE and China as well.
There is no such thing as brotherly relationship or time-tested friendship in global diplomacy and politics. It’s all about one’s national interest above all other considerations. There could have been times in the past when Saudi Arabia and the UAE needed Pakistan for their internal and external security and global outreach, but that time now seems to be over.
China’s relationship with Pakistan is also national interest based. The current bondage is CPEC (China Pakistan Economic Corridor). But China is irked, and rightly so, by slowing pace of the CPEC, the security challenges to its citizens deputed on the project, and the delay in payments to its contractors and more of it. It is, therefore, a very worrisome challenge to secure a pledge of funds from the countries Pakistan is banking upon.
The Senate committee on Finance and the public at large are still at a loss to comprehend the reasons behind the inordinate delay in the completion of the 9th review even after the government took some tough decisions that led to skyrocketing inflation, unemployment, and closure of industries in the country. Some of the answers lie in the above stated facts. To conclude, the government is checkmated; and it appears clueless about its next move.
Copyright Business Recorder, 2023