EDITORIAL: Caretaker Finance Minister Dr Shamshad Akhtar is right in stressing that DFIs (Development Finance Institutions) have the “expertise, efficiency and flexibility” to become drivers of growth and development of capital markets.
Indeed, Pakistan has had a good experience of industrialisation through DFIs since the 1950s and 1960s — when they were first recognised as engines of growth all over the world – except for a brief period of political and financial irregularities in the early 1990s.
Presiding over a meeting with the SECP (Securities and Exchange Commission of Pakistan) chairman and heads of DFIs to review progress on establishment of a private equity and venture capital (PE&VC) fund, she was confident, and rightly so, that this initiative would energise the investment landscape and extend necessary resources for SMEs (Small and Medium Enterprises) and startups.
And that, in turn, would harness the potential of capital markets to diversify sources of financing for the resource starved economy.
Pakistan’s own experience has shown that DFIs provide a more structured form of extending finance than the traditional banking system. The framework requires DFIs to take a seat on the board of directors upon approval of loans, which means they monitor board meetings and keep a close check on how the money is used.
Strangely, though, the IMF’s (International Monetary Fund’s) structural adjustment policies have lately been geared towards limiting the scope of DFIs in client countries. Sri Lanka’s finance ministry, for example, had voiced concern that the lender’s bailout programme places restrictions on the ability of DFIs to function properly.
Such concerns are not new, of course, as the Fund has often faced criticism for its dogmatic pursuit of the neoliberal economic model, which involves a very selective implementation of Milton Friedman’s monetarism.
And it is not prepared to give an inch even in the face of mounting evidence that its prescriptions do more long-term harm than good not just to recipient countries, but the global economy itself. Pakistan finds itself in the thick of a bailout programme as well, without which the economy will surely go into a tailspin and most likely default within the next two fiscal years.
Fortunately enough, despite all the harsh “upfront conditions” that come with the Stand-By Arrangement (SBA), DFI activity hasn’t yet come up for debate. That’s all the more reason for the government to mobilise them as effectively as possible, especially since they can provide funding to crucial areas, just like PE&VC, when the financial crunch and very high interest rates have compromised traditional lending.
Pakistan desperately needs to grow faster. The problem with IMF help is that while it keeps the country afloat, although just barely, it also forces extremely tight and contractionary fiscal and monetary policies that restrict expansion. And DFIs are the perfect institutions to facilitate private sector investment and provide support to crucial sectors of the economy.
The finance ministry must not only encourage DFIs, but also push them towards a more central funding role. IT sector startups, identified as leaders of innovation and growth not too long ago, badly need venture capital to survive and then thrive.
With international sources drying because of an expected recession in the US and EU, along with a marked slowdown in China, the need to tap into indigenous resources has never been greater.
Copyright Business Recorder, 2023