Committee for the Abolition of Illegitimate Debt

20th December 2002

PRSP Secretariat
Ministry of Finance
Government of Pakistan
Islamabad

Dear Sirs/Madams:

We write as concerned citizens, public interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. organizations, trade unions, political parties, people’s movements, journalists, lawyers, teachers, students, doctors, and other civil society representatives to formally reject the process through which the Poverty Reduction Strategy Paper Poverty Reduction Strategy Paper
PRSP Set up by the World Bank and the IMF in 1999, the PRSP was officially designed to fight poverty. In fact, it turns out to be an even more virulent version of the structural adjustment policies in disguise, to try and win the approval and legitimation of the social participants. (PRSP) is being prepared by the government of Pakistan.

The PRSP, as we have gathered, is an immensely important policy document that is being prepared by the GoP, and will outline Pakistan’s economic policy regime over the next few years. It is on the basis of the PRSP that the International Monetary Fund IMF
International Monetary Fund Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.

http://imf.org (IMF) will extend major concessional funding under the Poverty Reduction Growth Facility (PRGF). Other institutions including the World Bank World Bank
WB The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 189 members in 2017), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

and Asian Development Bank (ADB) have also conditioned their funding on the PRSP, as have bilateral donors.

The Interim-PRSP (I-PRSP) was made public by the Ministries of Finance and Planning in November 2001. While the I-PRSP document itself suggests that extensive public consultation took place in the preparation stages, there is no concrete evidence to confirm this claim. The vast majority of civil society groups are still only discovering that the PRSP process exists. The content of the I-PRSP also indicates that no genuine participation has taken place - the thrust of the document is that fiscal stabilization remains a precursor to growth, which remains a precursor to poverty reduction. This neo-liberal philosophy has characterized policy prescriptions of the IFIs over the past two decades, and has brought Pakistanis nothing but sharp increases in social, economic, and environmental poverty.

We dispute the effectiveness of imposed privatization, liberalization, removal of price supports, and regressive indirect taxation, and do not believe they are legitimate and rational policies that will strengthen Pakistan’s economy and reduce poverty. We also are deeply concerned about the manner in which the PRSP process has unfolded, and the clear influence that IFIs are exerting on the Pakistani state. On numerous occasions, IFIs have indicated a preference for the military government, and have directly said that they expect that the new government will not veer from the policies that have been consolidated by the military.

The entire PRSP process has simply reinforced a previously tried and failed policy paradigm. It has also undermined democratic political processes within the country and thereby threatens the sovereignty of the state itself. We cannot ascribe to the conceptions of development that have been propagated through this process. We feel it is imperative to completely re-evaluate all prevailing norms about policy formation and how we conceive of “participation”. Without thorough, critical debates on these issues, it is impossible for us to feel comfortable interacting with the government and international actors. As such therefore, we reject the PRSP, both as a process and in its content.

Please direct any response to the Advocacy Program, Sustainable Development Policy Institute, No. 3 UN Boulevard, Diplomatic Enclave 1, G-5, Islamabad

N.B. You will find detailed annexes in which we describe our concerns about the impact of structural adjustment Structural Adjustment Economic policies imposed by the IMF in exchange of new loans or the rescheduling of old loans.

Structural Adjustments policies were enforced in the early 1980 to qualify countries for new loans or for debt rescheduling by the IMF and the World Bank. The requested kind of adjustment aims at ensuring that the country can again service its external debt. Structural adjustment usually combines the following elements : devaluation of the national currency (in order to bring down the prices of exported goods and attract strong currencies), rise in interest rates (in order to attract international capital), reduction of public expenditure (’streamlining’ of public services staff, reduction of budgets devoted to education and the health sector, etc.), massive privatisations, reduction of public subsidies to some companies or products, freezing of salaries (to avoid inflation as a consequence of deflation). These SAPs have not only substantially contributed to higher and higher levels of indebtedness in the affected countries ; they have simultaneously led to higher prices (because of a high VAT rate and of the free market prices) and to a dramatic fall in the income of local populations (as a consequence of rising unemployment and of the dismantling of public services, among other factors).

IMF : http://www.worldbank.org/ policies, the PRSP process, and the content of the I-PRSP.

Sustainable Development Policy Institute
Programme Manager, Advocacy Support Unit, SUNGI Development Foundation
ActionAid Pakistan
Pakistan-India People's Forum for Peace and Democracy (PIPFD)
Fernanda Zanuzzi, Brazil
Citizens' Network on Essential Services, USA
HRMDC, Peshawar
South Asia Partnership Pakistan
Shirkat Gah
Human Rights Commission of Pakistan
The Network for Consumer Protection
Pakistan Institute of Labour Education and Research (PILER)
CREED Alliance

People's Rights Movement
Communist Mazdoor Kissan Party
Labour Party Pakistan
National Workers Party
All-Pakistan Alliance of Katchi Abadis
Anjuman Mazarain Punjab
Deharidaar Mazdoor Union
Hashtanagar Peasant's Movement
Ittehad-e-Zamindaran-e-Kashtkaran NWFP

Pakistan Fisherfolk Forum
Zamindar Action Committee Balochistan
Affectees of Chashma Right Bank Irrigation Project (CRBIP)
Affectees of Ghazi Barotha Hydropower Project (GBHP)
Railways Mehnatkash Union
National Institute of Health Workers Welfare Association
Pakistan Federal Union of Journalists

National Agricultural Research Council Union
Capital Development Authority Union
Agricultural Development Bank of Pakistan Union
United Bank Limited Union
Water and Power Development Authority Union
Oil and Gas Development Corporation Union

Cc: Minister of Finance, GoP; PM Secretariat; Minister of Commerce, GoP; Pakistan Resident Mission, Asian Development Bank; Country Director Pakistan, World Bank; Country mission, International Monetary Fund (IMF); Resident Representative Pakistan, United Nations; IMF head office; WB head office; ADB head office.

Annex 1: Structural adjustment in Pakistan

Structural adjustment (and more specifically sectoral adjustment) loans have been the single most important leveraging tool of bi and multilateral donors in the post-war era. They have come to dominate economic policy contexts of a large majority of poor countries, and ostensibly will continue to do so as the debt trap intensifies.

In Pakistan, structural adjustment has officially been a rather stop-start process. While the first structural adjustment loans were issued during the tenure of General Zia ul Haq, they were discontinued due to unsatisfactory compliance with conditionalities. It was in 1988 that the first main loan package was signed, based on a need to combat a rapidly growing budget deficit and declining remittances from the Middle East. Also important to mention is that the Soviets had retreated from Afghanistan and the huge aid packages that had been coming into the country courtesy of the US had dried up. Therefore, the IFIs stepped in to fill the void.

The main focus under this first program was reduction of the deficit, cutting subsidies, and financial sector reforms. Subsequently another program was initiated in 1991, essentially a follow-up to the earlier program. The first program did not yield Yield The income return on an investment. This refers to the interest or dividends received from a security and is usually expressed annually as a percentage based on the investment’s cost, its current market value or its face value. the results that the IFIs wanted (when do they ever?), but the IFIs were ever so gracious in extending deadlines for desired targets. This process seemed to continue unabated with agreements signed in 1993, and then 1997. Privatisation, trade liberalisation, and financial liberalization were mainstays from the early days and all loan agreements that were signed throughout the 1990s continued to emphasise such policies.

As debt piled up, the country’s credit rating plummeted. Meanwhile the economy started to stagnate, suffering from the drop in remittances from the Middle East. A growth rate of over 5% in the 1980s could not be sustained and the budget deficit increased steadily. On many different occasions, foreign exchange reserves were as low as 2 weeks of imports. Revenues were dismal as always - indirect sales taxes on consumer goods kept the economy afloat, as they do now, the poor bearing the brunt of a lack of political will. This was the picture of Pakistan’s economy through the 1990s, and it was under this backdrop that each of the SAPs were signed and more loans were pumped into the economy.

In the post September 11^th period IFIs have warmed up to Pakistan again, as have many bilateral donors, based on the country’s sterling response to US calls for cooperation against “terrorists”. The main elements of the newest packages are as before - a focus on reduction of subsidies, the need to increase revenues, reduction of budget deficits, privatization, and trade liberalization.

And so the ultimate question: what have the impacts of these policies been? Let us look at the structural economy, as the IFIs are so fond of reminding us that the focus of stabilization programs is to reinvigorate the economy at its roots. Pakistan balance of payments Balance of payments A country’s balance of current payments is the result of its commercial transactions (i.e. imported and exported goods and services) and its financial exchanges with foreign countries. The balance of payments is a measure of the financial position of a country vis-à-vis the rest of the world. A country with a surplus in its current payments is a lending country for the rest of the world. On the other hand, if a country’s balance is in the red, that country will have to turn to the international lenders to meet its funding needs. position has deteriorated over the past 2 decades, almost to the point of no return. Pakistan’s total debt stands equivalent to annual GDP GDP
Gross Domestic Product Gross Domestic Product is an aggregate measure of total production within a given territory equal to the sum of the gross values added. The measure is notoriously incomplete; for example it does not take into account any activity that does not enter into a commercial exchange. The GDP takes into account both the production of goods and the production of services. Economic growth is defined as the variation of the GDP from one period to another. . Almost half of the annual budget goes to servicing debt. In 2000-2001, of a total of US$6.7 billion that was loaned to the country, US$6.2 billion was used to pay off outstanding debt, and the remainder used to beef up meager foreign reserves.

The value of the Pakistani rupee has plunged in the past 10-15 years. Exchange rate stability has not been achieved. The supposed removal of price distortions in agricultural and manufacture durable markets has not led to the increase in exports that has been so widely envisaged and preached about. In fact, the import burden has increased, and terms of trade for Pakistani exports, whether agricultural or textiles, have fallen. Meanwhile prices have risen steadily and alarmingly. Inflation Inflation The cumulated rise of prices as a whole (e.g. a rise in the price of petroleum, eventually leading to a rise in salaries, then to the rise of other prices, etc.). Inflation implies a fall in the value of money since, as time goes by, larger sums are required to purchase particular items. This is the reason why corporate-driven policies seek to keep inflation down. has not been controlled - yet another failed target.

Real wages have declined significantly and unemployment has also increased. These impacts are all the subject of discussions in various external evaluations of structural adjustment commissioned by the IMF. The major external evaluation of ESAP in recent years stresses two possible sets of impacts, those via private incomes, and those via social expenditures. In both cases, the evaluation suggests that there is a tendency for the poor and marginalized to lose out, even if theory would not necessarily have predicted such outcomes. In particular, the evaluation emphasizes the fact that short-term losses are usually too large for the poor, and that there are inadequate safety nets to compensate. There is also a sense that structural adjustment is definitely “one size fits all” and that the myopic nature of such policies inevitably hurts the poor.

The Interim-Poverty Reduction Strategy Paper (I-PRSP)
The introduction to the I-PRSP states, “In an environment where the main focus of macroeconomic stabilisation program - the key to reviving growth - has been towards controlling the fiscal deficit, generating resources for poverty reduction is a formidable task.” Ultimately, this is the crux of the issue: while the I-PRSP describes in some detail the GoP’s proposed initiatives on health, education, and other social sectors, there is always the nagging question of how such initiatives will be funded. And for the most part this question is answered in the I-PRSP by standard adjustment policy prescriptions. Generating resources for poverty reduction is dependent on the success of the structural “reform” that the document proposes. The document describes the main precepts of the reform package as engendering growth, implementing broad based governance reforms, improving social sector outcomes, and reducing vulnerability to shocks.

While all of these categories can be expounded upon, the basic gist of the I-PRSP is that liberalization, privatization, removal of subsidies and price supports, and imposition of indirect taxes, remain relevant policy initiatives that should be undertaken with renewed vigour. This is despite the widely accepted facts about the impacts of such policies on correcting so-called imbalances in the economies of countries such as Pakistan.

While during the era of structural adjustment there was less of an emphasis on poverty, the WB, IMF and other multilateral donors have now started using poverty reduction as the preeminent catchphrase in the policymaking game. It is therefore important to look at what the likely impacts of the policies outlined in the I-PRSP will be on the poor. It should be noted that from lows of below 20% in the 1980s, it is now estimated that well over 40% of the population lives in poverty. The increase has been most rapid over the past three years.

If one looks at the basic tenets of the neo-liberal paradigm, all outlined in the I-PRSP, privatization has the most direct adverse impacts on the poor. Lay-offs associated with selling state-owned enterprises to the private sector are very painful. This fact has never truly been acknowledged by the IFIs, and in fact, the I-PRSP quite emphatically includes two separate sections where the firing of 30,000 workers from Pakistan Railways is commended as a step toward efficiency and higher productivity. Labour issues, along with environment and gender, remain completely unaddressed in the I-PRSP, as has been the case with IFI policies throughout the 80s and 90s.

Privatisation of basic goods such as utilities, health and education has also become alarmingly common. In Pakistan too, attempts to privatize electricity providers look to be finally materializing, while efforts to corporatise health and education are being resisted by students, teachers and doctors all over the country. The philosophy that such services are provided more efficiently and at a higher quality in the private sector completely overlooks the fact that the majority of the poor are simply unable to afford the price increases that have already taken place, let alone when the market is allowed to determine prices.

Liberalisation has also had unambiguously negative impacts on the poor, and this pattern is likely to be perpetuated. Export orientation has affected food security across the world, and the Pakistani case is no different. Removal of price supports and subsidies badly affects the ability of subsistence farmers to make ends meet. The increased emphasis on cash crops exacerbates this problem as farmers are left exposed to unexpected exogenous shocks. The fact that rich countries continue to protect their markets ensures that poor farmers have virtually no way at all of offsetting all other adverse impacts.

Interestingly, the I-PRSP suggests that the solution to the woes of the agricultural sector is to resolve the water crisis in the country by building more dams and irrigation channels. The emphasis on mega water projects is not new, but the scale upon which new projects have been conceived of and designed over the past few years has been unprecedented. However lessons from the past seem not to have been learnt. Tarbela Dam, Ghazi Barotha Hydropower Project, Chashma Right Bank Irrigation Project, Chotiari Reservoir Project, and the National Drainage Programme are just some of the many mega projects that have been completed or are near completion, in which there have been serious financial irregularities, alongwith displacement, loss of livelihood, and serious environmental damage. It is white elephants such as these that indebt us to the IFIs while propagating a paradigm that has served only to impoverish.

Finally, the overall philosophy of exercising fiscal austerity always harms the poor. Whether it is through the imposition of indirect taxes such as the GST, or by reducing social sector expenditures, the poor are always expected to bear the brunt of efforts to increase revenue or reduce expenditures. In this regard, the fact that 90% of government expenditures are taken up by overheads, defence and debt-servicing, or the fact that the rich continue to evade taxation is simply overlooked. This is just as obvious in the I-PRSP as in any other previous policy document. Similarly, the notion of safety nets for the poor is discussed, and remains an inadequate policy response. It is not acceptable to postulate safety nets for the poor (and that too safety nets such as zakat that have a dismal history) after having systematically inflicted poverty-enhancing policies in the first place.

Annex 2: The Process

It is clear that the entire PRSP process, while claiming to be participatory in nature, and different from previous policy exercises, suffers from a lack of legitimacy, in much the same way as earlier experiences. Indeed, it is necessary to critically evaluate the entire notion of a participatory exercise of the kind that the PRSP claims to be. Is it really possible to attach legitimacy to a process on the basis of “consultation”? There is a need to have a serious rethink about the extent to which IFIs are actually interfering in what should be sovereign and organic decisions about the kind of priorities that should emerge from our economic policy discourse.

The Independent Evaluation Office (IEO) of the IMF has concluded that the IMF’s relationship with Pakistan cannot be considered independent of geo-political considerations. In a study on countries considered long-term borrowers, the IEO concludes that there has been little domestic ownership of policy prescriptions in Pakistan, and that there are serious design and implementation flaws in many structural adjustment interventions. Over the past few months, the IMF, WB and ADB have clearly indicated a bias toward the military government, highlighting how the military has streamlined good governance practices, while the elected governments of the period 1988-99 have been repeatedly categorized as corrupt and inept. There is almost no hard evidence to corroborate such claims, but this has not stopped the IFIs from making them.

Indeed one of the fundamental policy targets outlined in the I-PRSP is that governance reforms be undertaken. Many bilateral donors have focused their funding initiatives on so-called governance issues. The military’s devolution plan was given much support by the foreign donor community and for all the talk of it being a revolutionary exercise, it should be noted that General Musharraf is the third military ruler in Pakistan’s short history who has resorted to partyless local body elections to create a sense of legitimacy for himself. Subsequently, many of those who were elected under the local government plan played a distinct role in ensuring that the military’s preferred party, the Pakistan Muslim League (Q) won the general election.

The IFIs remain perhaps the only forthright supporters of the presidential referendum held in April, while many governments and other independent observers condemned the process as thwarting basic norms of democracy. The IFIs have also been keen to see General Musharraf’s most trusted economic managers including Shaukat Aziz retain a place in the new government. Mr. Aziz has been inducted as adviser for finance and related affairs (with the status of a federal minister) into the new set-up and the indications are that he will very much hold the reins of the economy in his hand. The IFIs have also indicated that unless there is continuity of policies undertaken by the Musharraf government, there is a great chance that funding will be at least partially withheld in the near future.

Almost in response to such thinly veiled threats, the new prime minister and his ruling Pakistan Muslim League (Q) party have expressed almost unconditional support for the IFI agenda, and it seems that the PRSP will now be finalized within a couple of months, with a rubber stamp from the new parliament to accord it the legitimacy that it so badly lacks. There is clear evidence that poverty has increased dramatically over the past three years. It can therefore hardly be considered legitimate that policies that have precipitated this freefall be perpetuated through non-transparent and exclusive processes.

It is also clear that the military’s ability to introduce sweeping constitutional amendments and the Legal Framework Order (LFO) is linked to the fact that it has received much support from the IFIs. Before September 11^th, the military government was largely ostracized and was struggling to secure much less substantial loan packages than are being finalized now. Now the military has garnered a large amount of support from the IFIs, has received kudos for implementing the IFI agenda without reservation, and has therefore consolidated its hold on power in the country.

The rhetoric in the I-PRSP reflects on extensive participatory exercises through which views and opinions of a wide variety of stakeholders have been solicited. In reality, the only “participatory” meetings that have taken place are those that have involved government functionaries with a scattering of individuals who have no formal affiliation with government. The involvement of district level officials does not translate into the claim that the views of people at the district level have been solicited. At no level have political parties been involved, the organizations from which a democratic process selects the representatives of the people. Neither is there evidence that trade unions, people’s movements, civic and professional bodies, academics, or a host of other potential stakeholders have been consulted.

Another essential point is that there is a serious problem with the notion of consultation and participation that the PRSP process espouses. It is grossly simplistic to claim that a process has effectively encapsulated diverse views of diverse groups of people on the back of a handful of meetings in which a handful of individuals and representatives of organizations are present. This is particularly so given the far from positive experience of public interest organizations (PIOs) both in Pakistan and around the world that have interacted with institutions such as the World Bank and Asian Development Bank (ADB) at what are called consultative meetings. The IFIs seem to believe that such meetings give them the mandate to rubber stamp a pre-determined policy agenda. These organizations have more or less admitted that the neo-liberal philosophy that underlies their policy prescriptions is not up for debate.

For all of these reasons, and many more, the PRSP process does not offer anything other than regurgitation of old policies and practices. Therefore, it is unlikely that the results will be any different from what they always have been. Indeed, it would be quite an achievement if the next three years saw the increases in poverty of the past three years being offset. Under the guise of poverty reduction, the IFIs are lending support to undemocratic process designed primarily to ensure that the basic neo-liberal policy paradigm is allowed to flourish unhindered.