The current brief contains discussions and analysis till the developments revealed in the First Review of IMF

Country Report No. 19/380 in December 2019 for the ongoing Extended Fund Facility (EFF) program which
Pakistan has availed since July 2019.

I. Introduction membership has risen from 23 to 189 (including

In less than three years, Pakistan is back under the
financial support program of the International
Monetary Fund (IMF). The country remains a
‘prolonged’ user of IMF’s resources – in the 36-year
period from 1980 to 2016, it was under IMF support
programs for over 25 years. The 39-month EFF
Arrangement of SDR1 4,268 million (about US$6
billion) agreed in July 2019 further extends this period
by three years2. The often raised question is: why
Pakistan has been seeking IMF’s financial support so
frequently, and what is its role in the country’s
development? This paper deals with the issue,
especially in the context of the current program.
II. Background
Established in 1945 primarily to ensure exchange rate
stability (through fixed parity system), promote
monetary cooperation and assist member states facing
temporary balance of payments difficulties, the IMF
has assumed a critical role in the financial world
today. In place of fixed parity, a hybrid foreign
exchange system is now in vogue; its role of
surveillance and monitoring of global and members’
economies is strengthened, and program-linked
medium-term funding facilities introduced. The
almost all nations). Unlike other international
institutions where each member has one voice, in IMF
the voting power depends on quota subscription of
members. At present the USA has the largest quota
(17%) followed by Japan, Germany, France, China,
UK, Italy, Russia and Saudi Arabia (they hold more
than 50% of votes).
Pakistan joined the IMF in July 1950 with quota of
US$100 million and par value of rupee set at 0.288601
gram of fine gold (rupees 3.30852 to a US dollar). In
July, 1955 the rupee was devalued (by 25%, raising
the par value of US dollar to 4.76 rupees) to address
growing imbalance in trade. For the first time Pakistan
sought IMF assistance (US$25 million) under Stand-
By Arrangement (SBA) in December 19583. The
amount was not drawn due to inflow of bilateral aid
(mainly from the USA). An important measure having
implications with IMF relations was the introduction
of Bonus Voucher Scheme in 1959 to promote
exports. The Scheme was based on multiple exchange
rates system, which was a deviation from the IMF rule
of single exchange rate. Subsequent political and
economic developments (including break-up of the
country in 1971) and IMF pressure led to dissolution
of the Scheme, devaluation of rupee by 56% and

1
SDR (Special Drawing Rights) is international reserves asset created by IMF in 1969 to supplement members’ official
reserves. Its value is based on the basket of 4 leading currencies (US$, Euro, Japanese yen and British pound) and can be
exchanged freely in usable currencies.
2
IMF Country Report No. 19.212
3
Fasih Uddin, Pakistan Under IMF Shadow (Islamabad: Institute of Policy Studies, 2008)

[1]
adoption of single exchange rate in May 1972. The ‘oil SBA 13-12-95 562.59 294.69 Benazir
shocks’ of 1970s (i.e., surge in international oil prices Bhutto
(31-3-97)
in 1973 and 1979) worsened the balance of payments,
resulting in repeated resort to IMF assistance under EFF/E 20-10-97 454.92 113.75 Nawaz Sharif
SBA and newly created ‘Oil Facility’ during 1972 and SAF
(19-10- 682.38 265.37
19774.
2000)
In the early ’80s the Fund introduced Extended Fund SBA 29-11-2000 465.00 465.00 Pervez
Facility (EFF) to support medium-term structural Musharraf
reforms. Pakistan seized the opportunity and (30-9-2001)
concluded the first EFF Arrangement (1980-83) in
PRGF 7-12-2001 1,033.70 861.42 Pervez
1980 to address the balance of payments problem Musharraf
(which was also aggravated by the oil shock of 1979) (5-12-2004)
and to support its structural reforms program. This
SBA 24-9-2008 7,235 1,936 Asif Ali
turned out to be the beginning of a 40 years’ long
Zardari
relationship consisting of a dozen agreements signed (30-9-2011)
during all the regimes, from Zia5 to Imran6.
EFF 4-9-2013 4,393 4,393 Nawaz Sharif
Arrangements concluded during this period are
summarized in Table 1 below: (30-9-2016)
Table 1 EFF 3-7-2019 4,268 1,044 Imran Khan

IMF Financing Arrangements for Pakistan Source: IMF and author’s compilation (as of
December 2019)
Disbursement

during rule of
(SDR million)

(SDR million)
Arrangement

Arrangement

As on 31-12-
(expiration)

The root cause of repeatedly seeking IMF assistance

Amount
Date of

Signed

was a fragile and weak external sector. Imports were

19

not only large, they on average rose at a faster pace

than exports resulting in expanded current account
EFF 24-11-80 1,268.00 1,079.00 Zia ul Haq deficit; and foreign exchange reserves fell to
precariously low levels. Persistent foreign borrowings
(23-11-83) to meet the deficit led to accumulation of external debt
SBA 28-12-88 273.15 194.48 Benazir
and a situation where two-third of external borrowings
Bhutto are used for debt repayment. Heavy dependence on
(7-3-90) imports of such items as oil enhanced the external
vulnerability; in particular, as the international price
SAF 28-12-88 382.41 382.41 Benazir
Bhutto of crude oil fluctuates widely (e.g., international crude
(27-12-91) oil prices ranged between US$50 and US$120 per
barrel in recent years7). Apart from aggravating the
SBA 16-9-93 265.40 88.00 Nawaz Sharif
balance of payments problem, a sharp rise in oil price
(15-9-94) has other serious consequences for an economy whose
three-fourth requirement of this essential item is met
EFF/ 22-2-94 379.10 123.20
from imports.
(21-2-97)
Hence, Pakistan’s external sector had remained
ESAF 22-2-94 606.60 172.20 delicately balanced and dependent on outside support
mainly international financial institutions (World
(21-2-97)
Bank, Asian Development Bank, Islamic
Development Bank and IMF) and some friendly

4
Fasih Uddin, Pakistan Under IMF Shadow (Islamabad: Institute of Policy Studies, 2018)
5
General Zia ul Haq (Former President of Pakistan 1978-1988)
6
Imran Khan, Prime Minister of Pakistan (2018 to date)
7
https://www.statista.com/statistics/262858/change-in-opec-crude-oil-prices-since-1960/

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countries. Funding by bilateral and other multilateral
sources is generally tied to projects and programs. The
IMF financing has some advantages – (a) quick
disbursement; (b) support to balance of payments and
foreign exchange reserves; (c) low cost of financing;
(d) facilitating inflow of resources from other external
sources (IFIs, bilateral and private); and (e) support to
government’s reforms program. Thus all previous
governments had approached the IMF for financial
support; the present government is no exception. It
may be mentioned that the request for support is sent
to the IMF through a letter of intent (signed by Finance
Minister/Adviser and Governor of State Bank) along
with medium-term reforms program which is earlier
finalized in consultation with IMF appraisal mission.
III. EFF Arrangement (2019-22)8
The last IMF Support Program (2013-16), which
terminated in September 2016, showed some positive
results in 2015-16. On the external side, the current
account deficit came down to 1.7% of GDP, home
remittances touched US$20 billion and official
foreign exchange reserves reached US$18.1 billion.
On the domestic front, GDP growth slightly improved
(4.6%), inflation lowered (2.9%) and fiscal deficit
reduced (4.6%). This trend was not sustained in
subsequent two years. Though growth rate was higher,
the trend of inflation and fiscal deficit reversed. The
external sector came under severe pressure; current
account deficit enlarged, reserves declined, external
debt and its servicing cost escalated, and rupee
continued to depreciate. Selected indicators for 2015-
16 and 2017-18 are given in Table 2.
Table 2
Selected Indicators (2015-16 – 2017-18)
2015-16 2016-17 2017-18
GDP growth (%) 4.6 5.2 5.5
Inflation (CPI) 2.9 4.1 3.9
Fiscal Deficit (% 4.6 5.8 6.5
of GDP)
Current Account 1.7 4.1 6.3
Deficit
(% of GDP)
8
The discussion and analysis is based on developments revealed in the first review (December 2019) of IMF for ongoing
EFF program.
[3]
Official Reserves 18.1 16.1 9.8
($ Billion)
External Debt – 26.6 27.4 30.3
end of period
(% of GDP)
External Debt 112.6 128.2 177.3
Servicing –
Rs Billion (US$ (1214) (1400) (1787)
Million)
Source: State Bank of Pakistan and IMF
In 2017-18 the external sector assumed an alarming
situation. The financing requirements reached US$30
billion against available financing of US$24 billion,
leaving a gap of US$6 billion which was bridged by
draw-down in foreign exchange reserves. When the
PTI Government took office in late August 2018, the
condition had worsened. The current account deficit
grew further and the official reserves reached a
precarious level. This affected the currency market
also and the depreciation of the overvalued rupee
speeded up. The government arranged inflows of over
US$4 billion from friendly countries (including
China, Saudi Arabia and the UAE) on emergency
basis which eased the situation temporarily.
Simultaneously it initiated negotiations with IMF on a
medium-term support program.
Following months-long intensive negotiations
between Pakistani authorities and IMF Mission, a
medium-term program of stabilization and reforms
was prepared and a letter of intent (signed by Finance
Adviser and Governor of State Bank) seeking
financial support was submitted to IMF on June 19,
2019. The IMF Executive Board on July 3, 2019,
approved the EFF funding of SDR 4,268 million
(US$6 billion) after the Government had taken a
number of ‘prior actions’ (including flexible market-
determined exchange rate). The first installment of
SDR 716 million was released on July 8, 2019 with
the balance to be released in eight installments of
varying values on the basis of review of the program.
The IMF arrangement aims at ‘restoring economic
sustainability and laying the foundations for balanced
growth’. It is strategically anchored on: (i) effective
macroeconomic stabilization with protection to the
most vulnerable; (ii) governance and structural
reforms to strengthen institutional framework and
foster stronger growth; and (iii) adequate new (% of
financing to support the policy efforts. The program GDP)
covers:
Current 2.4 2.0 1.8 1.7 1.8
 Fiscal policy Account
 Poverty reduction and social protection Deficit
 Monetary and exchange policy (% of
 Energy sector policies GDP)
 Structural policies (state-owned enterprises, Official 11.2 14.8 20.7 27.1 30.5
business environment, regulation and
Reserves
governance, corruption, suspicious transactions). ($
The Arrangement also lays down quantitative Billion)
performance criteria, indicative targets and structural
External 41.2 40.9 40.1 38.9 36.8
conditionality that will be monitored before release of
Debt –
funds. The performance criteria set quarterly limits for
end of
international reserves, budgetary borrowing from
period
SBP, and government guarantees. Indicative targets
(% of
are set for government spending on Benazir Income
GDP)
Support Program, general health and education, FBR
revenue collection and power sector arrears payment; Source: IMF: Country Reports No. 19/212 (July
and the structural conditionality envisages a number 2019) and No. 19/386 (Dec. 2019)
of measures in fiscal, monetary, SOEs, and social
areas. The immediate impact of the IMF Program was
improvement in reserves, balance payments and
The IMF has projected that during 2019-20 and 2023- business confidence. This was however at a cost –
24 the GDP growth will improve (from 2.4% to 5.0%), steep depreciation of rupee, upward revision of fuel
inflation will subside (from 11.8% to 5.0%); fiscal and energy tariffs and raise in SBP policy rate
deficit will come down (from 7.5% to 2.6% of GDP); (13.25%) – which adversely impacted the people and
current account deficit will fall (from 2.4% to 1.8% of economy. The cost of living and production rose,
GDP); and foreign exchange reserves will go up (from investment and business activity slowed down and
US$11.2 billion to $30.5 billion) as shown in below cost of servicing government debt jumped. It may be
given Table 3. pointed out that hike in SBP policy rate, which was
intended to control inflation through demand-
Table 3
management, has not been effective. The current
Key Indicators (Projections)
inflation is not ‘demand-driven’ but mainly ‘cost-
2019-20 to 2023-24
push’ (a combination of such elements as upward
2019- 2020- 2021- 2022- 2023- revision in fuel and energy prices, shortfall in
20 21 22 23 24 production of some essential items and sharp
depreciation of rupee), backed by market
GDP 2.4 3.0 4.5 5.0 5.0 expectations.
growth
(%) In the first six months (i.e., July-December 2019) of
the Program, economic performance is reported to be
Inflation 11.8 8.3 6.0 5.0 5.0 on track and producing early results.9 The IMF
(CPI) Executive on December 19, 2019, completed the first
review of the Arrangement 10 and observed that
Fiscal 7.5 5.5 4.0 2.8 2.6
‘decisive policy implementation by authorities was
Deficit
helping to preserve economic stability aiming to put
the economy on the path of sustained growth.

9
IMF Report No. 19/212, July 2019
10
IMF Country Report No. 19/380, December 2019

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Transition to a market-determined exchange rate had
been orderly; inflation has started to stabilize,
mitigating the impact on the most vulnerable group of
population. The authorities remain committed to
expanding the social nets, reducing poverty, and
narrowing the gender gap. Following this review, the
second installment of SDR 328 million (about $452.4
million) was released on December 26, 2019, bringing
the total disbursement to SDR 1,044 million (about
US$1,440 million). This helped in raising the foreign
exchange reserves of State Bank to US$11.361 billion
by the end of December 2019.
The IMF review highlights the following areas of the
Program:
(a) Fiscal reforms to support revenue mobilization
and fiscal consolidation;
(b) Decisively address anti-money laundering and
counter-terrorism financing issues;
(c) Energy sector issues which also have linkage
with budget, and financial and real sectors; and
(d) Further improve business environment,
enhance governance, and reform state-owned
enterprises.
It identifies the global growth and trade prospects and
political and security instability as likely external and
internal risks to Program implementation.
The next one-and-a-half year (January 2020 to June
2021) is crucial. In addition to ensuring effective
implementation of IMF-supported Program, the
authorities should address other urgent important
matters from people’s perspective; curb inflation,
create job and income generating opportunities,
improve the availability and quality of basic services
(education, health, sanitation, water supply,
environment), and expand social safety net for
targeted groups. The second half of the current year
should be utilized in improving performance as well
as initiating such policies and measures that should
turn the next fiscal year into a springboard for
economic consolidation and sustained and inclusive
development.
IV. Conclusion
The deterioration in the external sector led to the
current Arrangement with IMF which helped in
improving the situation. However, as past experience
shows, by itself the Program may not be able to attain
its declared aims of ‘restoring economic sustainability
[5]
and laying the foundation for balanced growth’. The
IMF medium-term projections mentioned in Table 3
also support this view:
 Improvement in reserves will mainly depend on
external borrowings.
 Reduction in current account deficit is due to
import compression, which may not continue.
 Stock of external debt and its servicing will
remain high.
 Inflation is eroding export-competiveness,
requiring downward adjustment in exchange rate.
 SBP high policy rate is restraining investment
and business prospects.
 Projected rise in growth rate is below potential
and inadequate to address such critical issues as
unemployment and poverty.
 Growth will also continue as ‘debt-driven’ and
thus the possibility of falling back on IMF
support again cannot be ruled out. Pakistan needs
to move, as early as possible, from ‘debt driven’
to ‘investment and innovation driven’ strategy.
Thus while Program commitments should be adhered
to, high expectations for stability, sustained
development and greater self-reliance should not be
linked with it. More needs to be done within a medium
framework:
Firstly, urgent measures should be taken to increase
foreign earnings through exports of goods and
services, home remittances and other sources.
Secondly, other commitments including on China-
Pakistan Economic Corridor (CPEC), Sustainable
Social Goals (SDG), Environment and Climatic
Change should also be pursued to accelerate the
development pace.
Thirdly, reforms of institutions and systems, and
improvement in governance should be expedited.
Fourthly, these efforts should be integrated and
harmonized in a ‘Perspective Plan’ and ‘National
Agenda’ comprising objectives/vision, roadmap,
measures, goals/targets, and in particular, specific and
innovative measures to enhancing substantially the
level of human and capital resources.
Finally, the current atmosphere of mistrust and
confrontation be abandoned and attempts made to
build as wide a consensus and people’s participation
as possible in this ‘National Agenda’.
 Prepared by:

Fasih Uddin
Former Chief Economist, Planning Commission of Pakistan
and Member Governing Body & National Academic Council of
Institute of Policy Studies, (IPS) Islamabad

For queries:

Asim Ehsan
Research Officer
asim@ips.net.pk | www.ips.org.pk

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