Tuesday, November 25, 2008

Now I'm No Economist, But...

I have stayed largely silent during the latest episode of the long running Pakistan-runs-to-the-IMF-with-begging-bowl-in-tow serial, mainly because I lack the requisite expertise to comment on the matter. However, I do have one very basic question in mind, and was hoping that at least some of our readers could clear up for me.

The reason Pakistan is going to the IMF, by all accounts, is that we are struggling to pay our international loans. The reasons, in turn, we are struggling to pay our loans are (a) our economy has ground to a halt in the last 12-16 months, (b) a crisis in investor confidence largely fueled by political instability and militant violence, and (c) a falling rupee which makes our essential imports (oil, for one) more expensive than what they used to be.

Now, we are getting a loan to help us pay our other loans. The precise amount of this new loan to help us pay our old loans is $7.6 billion. At some point, we will have to pay back the principal on our new loan, as well as the interest on it - which will run between 3.15% and 4.15%.

So here's my question: aren't the reasons that are at the root of our inability to pay our old loans - instability, militancy, a falling rupee - also applicable to our new loan? Is Pakistan going to magically become Luxembourg in the next two years - suddenly free of violence and a crisis in confidence - and thereby pay back its IMF loan? And if not, what the hell are we going to do when we can't pay back our new loan? Get a new new loan?

Does anyone have any answers for me?

11 comments:

Omar said...

Chill out dude! We just need to make enough media noise till Bono comes along and pulls some debt-relief shit.

Anonymous said...

Read "Confessions of an economic hitman" to find the answer to your question.

Ahsan said...

Omar:

Haha yes, seeing as how Bono has had such a great effect on sub-Saharan Africa, I can't wait for him to get involved.

Anon923:

A number of people have told me about that book, but I've never read it. I heard it's fairly conspiratorial...is that true?

Uzer said...

You're right. Mosharraf Zaidi says so too:

http://www.mosharrafzaidi.com/2008/11/18/the-death-of-common-sense

Sab Prime said...

The IMF is the bureaucratic version of those companies that offer loans in exchange for your car or house title.

Saadia said...

This is what economists call the 'debt trap'. Russia is still struggling with it, and always will. All countries who take loans to pay-off loans, always will. It is a vicious cycle.

A more leftist approach would be to strike the problems at their roots - which you've hinted at. And yes, we should. But those won't go away overnight. Today, the loan is a matter of survival; not just of luxury. Iceland recently became the only state to have declared bankruptcy. How would you rather see Pakistan at this juncture?

Uzer said...

That's not true. Back in 1998 Russia and Indonesia did indeed default. Argentina has also declared bankruptcy in the past.

Why is the debt cycle a superior alternative to declaring bankruptcy?

Saadia said...

I don't know. I'm just thinking out loud. Both options look rather depressing to me.

Anonymous said...

Ahsan,

It is fairly conspiratorial but where the details might be spiced up for mass appeal, the broader idea is very true. i.e the U.S. uses a number of tactics, the first of which is economic control using the world bank and IMF to enslave other nations.

You should definitely read it. Like I said, the details might seem conspiratorial but its an interesting read nonetheless.

Anonymous said...

Just learn from India it had and has loans but with exponential growth in GDP it has managed to pay external debt and grow at the same time and in 20 years time could be donor itself to IMF fund. Which essentially is in laymen term just facilitator that makes taking loan from other country look more respectable. I your case it is US money routed via IMF for your government co-operation on war on terror. You may want to know that otherwise pakistan has a very bad credit rating in global financial industry. Primary aim to keep pakistani government going and avoid chaos for worl peace. Which your government won't tell you off course. No hard feelings mate.

Uzer said...

Hahaha. Governments are supposed to tell citizens stuff?

But seriously, hard feelings? After reading the post and a discussion about whether it's better to declare bankruptcy or perpetuate our debt, do you still think that Pakistanis aren't aware of the realities you mentioned? It doesn't take a genius to notice that Pakistan is a country in trouble...