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IMF: A BLESSING OR CURSE FOR PAKISTAN’S ECONOMY A CRITICAL ANALYSIS

By

Mian Abid Qayyum Advocate

B.A (Hons), M.A (Eco), LL.B, GCIP (Switzerland), LL.M (France)

Abstract:

Like other developing and least developed countries (LDCs) Pakistan also availing the funding opportunities from the world’s largest financial institution IMF (International Monetary Fund) since decades in order to get rid of poverty and for accelerating the economy growth. In this paper we will try to analysis whether the said financing proved helpful for the positive growth of the economy of Pakistan or it just add fuel to injury and played a vital role in enhancing poverty level instead of prosperity.

Introduction:

Pakistan has been suffering from economic crises since its inception. There are various reasons behind the plight of Pakistan economy mainly the corrupt leadership and volatile political situation; however, to keep the balance of payments in check and to meet the financial obligations government of Pakistan unfortunately always resorts to take loans. This is where IMF comes into play in Pakistan’s economy.

Over the past ten years, the International Monetary Fund (IMF) has emerged as a key player, which has greatly influenced the Pakistan’s macroeconomic policies. Since the late 1980s, it has been imposing various conditions on many governments who have been greatly crippled by debt servicing, including Pakistan. The main objective of Pakistan’s governments to take loans from IMF was to stabilize their deteriorating economy, exchange rates and balance of payments. IMF provides huge amount of loans for such purposes, which seems very lucrative and attractive offer at first sight for a short-term perspective but infact nothing is free in this world. IMF provides loans in exchange of many demands and conditions, which are to be fulfilled to get loans from IMF. Typical IMF conditions comprise contract based macroeconomic policies (fiscal and monetary), inflation targeting policies, financial deregulation and increased openness to international

capital flows, trade liberalization (including reduction of tariff and non-tariff barriers) and privatization of public-sector enterprises.

History of loans from IMF by Pakistan:

Pakistan joined the membership of IMF on July 11, 1950. Prior to the recently ended Stand-By Arrangement 1 , the country had availed the IMF loan facility 18 times since 1958. The country approached the IMF in 1958 for the first time to seek a loan worth 25 million Special Drawing Rights (SDR 2 ) equivalents to nearly US $ 24.80 million under the Stand- By Arrangement. It was, however, cancelled even before its date of expiry due to its non utilisation. An in-depth review of the performance of successive governments in availing of various IMF loan packages sanctioned for Pakistan unfolds a chronicle of both successes and failures in implementation of these loan facilities. 3

Pakistan received a loan of SDR 465, 000, 000 on 29 th November 2000 through standby arrangement. After one year, Pakistan borrowed a sum of SDR 1,033, 700, 000, after a span of almost seven years again borrowed a loan of SDR 7, 235, 900, 000. Standby agreement which was almost seven times the money it was loaned out in 2001. Moreover, in August 2009, standby agreement was increased to US$ 10.66 billion. In 2013 Pakistan again went to IMF for loan of an agreed amount of US$ 6.7 billion. 4 Latest Financial Arrangements:

 

Date of

Expiration

Amount Approved Amount Drawn

Type

Arrangement

Date

(SDR Million)

(SDR Million)

EFF

Sep 04, 2013

Sep 03, 2016

4,393.00

2,160.00

Stand-By

Nov 24, 2008

Sep 30, 2011

7,235.90

2,868.64

1 Stand By Arrangements (SBA) has been designed to provide short-term balance of payments assistance to middle income countries for meeting deficits of a temporary or cyclical nature. These arrangements are typically for 12 to 16 months. Drawings and disbursing are phased on quarterly basis, with their release made conditional on meeting performance (conditionalities) criteria after the completion of periodic program reviews. For details regarding this kind of facility along with others may be referred to web link[http://www.imf.org/external/np/exr/facts/howlend.htm] 2 Special Drawing Right (SDR) is an international monetary unit of account used by IMF for the purpose of maintaining international foreign exchange reserve assets for allocation to its member countries. It represents a claim to foreign currencies for which it may be exchanged in times of need. 3 Syed Nazre Hyder IMF STAND-BY ARRANGENT FOR PAKISTAN AND ITS INCONCLUSIVE END- WHAT WENT WRONG? Working Paper #126 4 The facts, figures and amount of borrowing directly taken from the website of IMF

https://www.imf.org/external/np/fin/tad/exfin2.aspx?memberkey1=760&date1Key=2015-02-28

ECF

Dec 06, 2001

Dec 05, 2004

1,033.70

861.42

Forthcoming or expected borrowings

 

2015

2016

2017

2018

2019

Principal

207.21

150.00

360.00

Charges/Interest

17.92

22.93

22.91

22.52

20.20

Total

Source: the above data taken from the data base of IMF.

The above mentioned IMF loans history greatly impact the economic indicators and bring change in the regulatory framework which has both positive and negative impacts on the country. Therefore, in the light of given facts and figures first we will analysis the positive of IMF loans on the economy and then critically examine the negative effects of borrowing.

Positives effects of borrowing from IMF -Pros:

The loan injected by the IMF to the economy of Pakistan helped in easing the BOP problems by stabilizing the foreign exchange reserves and settles its international import bills, trade liberalization encourages specialization and improve living standards. Privatization of public sector enterprises played a notable improvement in resource allocation and economic efficiency as well as its also assisted to achieve macroeconomic stabilization through reduction of government budget deficit. The IMF programmes in Pakistan is also proving helpful for enhancing the government revenue by increasing the new tax culture, reducing the unnecessary expenditures of the government and mitigating the energy crisis by encouraging to initiate targeted income support programme.

The immediate benefits include quick influx of liquidity, improvement in credit rating by reducing the country’s default risk, enhancement of foreign exchange reserves, stabilization of rupee (which faced 25% depreciation against U.S. dollar till November), increased investor ‟s confidence in both money and capital markets and increased financial assistance from the friends of Pakistan. However the negative impacts associated with the increase in

policy rate include increased costs for the banks, increase in unemployment (because many banks and organizations will go for restructuring and downsizing to reduce their operating costs) and increase in poverty rate.

Drawbacks of borrowing from IMF: A critical analysis:-

The strict and rigid “loan conditionalties” has impacted Pakistan macroeconomic policies in many ways especially in the last two decades, the key impacts are pointed out as follows:

Introduction of the central excise duty on service and agriculture sector.

Reduction in expenditures on public sector development program, devaluation of Pak Rupee and freezing of non development expenditure under the defense budget.

Non provision of supplementary grants to government departments and ending subsidy on gas and electricity which adding more suffering of a lay man.

Increase in markup rate of banks and on inter-bank transitions.

Uniformity in the interbank and open market dollar exchange rate.

Stoppage of government financial intervention in stock market.

Decline in GDP growth rate and other economic indicators right after infusion of IMF funds in the economy. In addition to all these, the Fund pays more importance to the creditors over the interest of the country, contractionary monetary policy dictated by IMF leads towards raising rate of interest. The Fund seems to be more concerned and insisting the government for spending fuels inflation, whereas most of the inflation in Pakistan is cost push 5

Is IMF an anti growth and anti poor Institution?

The comparison of foregoing scenario revealed the understanding at least in the case of Pakistan that the Fund’s borrowing is unhealthy for the growth of economy in a positive way. Now the question arises whether the IMF is anti growth and anti poor? And if it is then it is definitely infringing the provisions and objective of its creation. According to Dr.

5 A phenomenon in which the general price levels rise (inflation) due to increases in the cost of wages and raw materials.

Meekal Aziz Ahmad 6 , the Fund is accused of being anti-growth and anti-poor. Its antigrowth reputation stems from its perceived obsession with fiscal austerity. This approach, it is alleged, is recommended always and everywhere, irrespective of specific country circumstancesthe familiar “cookie-cutter” criticism of the Fund’s approach to adjustment. However, a crisis situation in any country has several common characteristics:

excessive internal and external deficits, slowing growth, accelerating inflation and rapidly diminishing foreign exchange reserves. In such a situation of extreme disequilibrium, the country has no choice but to stabilise the economy first via measures to reduce aggregate demand and bring it into better alignment with the economy’s aggregate supply potential, even at the cost of some short term sacrifice to growth. 7 The Fund is also accused of being anti-poor by allegedly imposing draconian cuts in development spending but more specifically on the “soft” social sectors, or so-called “pro-poor expenditures”, because the quality of fiscal adjustment to them is less important than the cold calculus of its magnitude. This is untrue. The prerogative of where to cut spending, generally considered a better and longer lasting route to fiscal adjustment than raising taxes, belongs to the country authorities, not the Fund. The Fund will certainly give advice and they will typically focus on non-interest current spending which they may see as being wasteful and/or excessive (such as 80- member cabinets of Ministers and Advisors, and their perks). In Pakistan’s present security environment, the Fund has probably refrained from suggesting cuts in defense spending or has accommodated the authorities’ proposals. In the past, Fund programmes would typically insist on a ratio of defense spending to GDP that falls over time while striving to ensure that development spending exceeds defense spendingwhich was not always or often the case and which would attract critical comment from several Executive Directors who would wonder what kind of programme, with such skewed priorities, they were being asked to approve. 8

Conclusion:

Our region too, has no sustained history of interaction with the Fund. India signed one facility with the IMF in 1991, Bangladesh has had three facilities since 1990, Sri Lanka has

6 Meekal Aziz Ahmed, Visiting Senior Fellow, PIDE, formerly Joint Chief Economist, Planning Commission of Pakistan, and Senior Advisor to Executive Director, IMF, Washington, D.C.

7 Dr Rashid Amjad, THE IMF AND PAKISTAN (A Road to Nowhere), Pakistan Institute of Development Economics Quaid-i- Azam University Campus, page 11

8 Dr Rashid Amjad, THE IMF AND PAKISTAN (A Road to Nowhere), Pakistan Institute of Development Economics Quaid-i- Azam University Campus, page 13

had two while Nepal has had three. Pakistan, by contrast, has had 12 IMF programmes

since 1988, more than all the other countries of the region combined. All of the 12

facilities that Pakistan has signed with the IMF since 1988 have had two objectives: one, to

close the gap between revenues and expenditures in order to prevent the deficit from

getting out of control and; two, to raise the level of the foreign exchange reserves. For

almost a quarter century now, these are the two core priorities that Pakistan has been

grappling with. In order to achieve these objectives, it was considered necessary to reform

the tax machinery and to grant autonomy to the State Bank to manage the reserves. Each

programme that Pakistan has signed has tried to accomplish these objectives, but in every

case the authorities have been unable to follow through with their commitments. In short,

the story of the IMF and Pakistan has been told very sparsely, and is not widely understood

and at the end I will conclude with one of the argument of Dr. Ehtisham Ahmad and

Azizali Mohammad 9 who argued in their paper, “the Fund’s role appears to have produced

an effect similar to Dutch disease 10 , except there is no oil or any other resource in the

picture. The resource that has produced continuous inflows of easy money that prevent a

broadening of the revenue base as well as hinder the accumulation of reserves through

broadening of the export base, is what they call a “locational rent”.

Bibliography:

A Working Paper by Syed Nazre Hyder on IMF STAND-BY ARRANGENT FOR

PAKISTAN AND ITS INCONCLUSIVE END- WHAT WENT WRONG?

IMF database online available at

https://www.imf.org/external/np/fin/tad/exfin2.aspx?memberkey1=760&date1Key

2015-02-28

Dr Rashid Amjad, THE IMF AND PAKISTAN (A Road to Nowhere), Pakistan Institute of Development Economics Quaid-i-Azam University Campus

Pakistan and the IMF, the ties that bind by Khurrram Husain, Published in Dawn, Sunday Magazine, January 11th, 2015

9 Two former IMF staffers of Pakistani origin and the authors of paper’s: Pakistan, the United States and the IMF, great game or a curious case of Dutch Disease without the oil? that was circulated amongst a select group and is now available online from the website of the Asia Research Center at the London School of Economics. The authors are have held senior positions in the Fund and have a reputation that is global in scope.

10 Dutch Disease is a technical term used by economists to describe a situation where a country is used to easy money from a particular source

Ahmed, Meekal, (2011) An Economic Crisis State? In Maleeha Lodhi (ed.) Pakistan: Beyond the Crisis State, Columbia University Press.

IMF Survey (2012) Engagement with IMF Helps Poorer Countries through Global Crisis. September 13.

Naqvi, Natalya (2012) The IMF and Us. Daily Express Tribune.

Impact of foreign aid, online access http://www.scribd.com/doc/30800414/Impact-

of-Foreign-Aid-on-Pakistan#scribd

Yaqub, Muhammad (2012) See series of hard-hitting articles by Stopping Economic Policy Madnesss. The News International, October 18, 2012 and “The Twist in the Tail”, The News International, Money Matters, November 5, 2012.