TERM REPORT

ON
INTERNATIONAL MONETARY FUND

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Submitted on: 17th March 2009

Acknowledgement
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The research for this report has enlightened us with the insight and knowledge to how
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About the IMF

The IMF is an international organization of 185 member countries. It was established to

promote international monetary cooperation, exchange stability, and orderly exchange
arrangements; to foster economic growth and high levels of employment; and to provide
temporary financial assistance to countries to help ease balance of payments adjustment.

Since the IMF was established its purposes have remained unchanged but its operations
—which involve surveillance, financial assistance, and technical assistance—have
developed to meet the changing needs of its member countries in an evolving world
economy.

Why was it created?

The IMF was conceived in July 1944, when representatives of 45 governments meeting
in the town of Bretton Woods, New Hampshire, in the northeastern United States, agreed
on a framework for international economic cooperation. They believed that such a
framework was necessary to avoid a repetition of the disastrous economic policies that
had contributed to the Great Depression of the 1930s.

During that decade, attempts by countries to shore up their failing economies—by

limiting imports, devaluing their currencies to compete against each other for export
markets, and curtailing their citizens' freedom to buy goods abroad and to hold foreign
exchange—proved to be self-defeating. World trade declined sharply, and employment
and living standards plummeted in many countries.

Seeking to restore order to international monetary relations, the IMF's founders charged
the new institution with overseeing the international monetary system to ensure exchange
rate stability and encouraging member countries to eliminate exchange restrictions that
hindered trade. The IMF came into existence in December 1945, when its first 29
member countries signed its Articles of Agreement. Since then, the IMF has adapted
itself as often as needed to keep up with the expansion of its membership—184 countries
as of June 2006—and changes in the world economy.

What does the International Monetary Fund do?

The IMF is the world's central organization for international monetary cooperation. It is
an organization in which almost all countries in the world work together to promote the
common good.

The IMF's primary purpose is to ensure the stability of the international monetary system
—the system of exchange rates and international payments that enables countries (and
their citizens) to buy goods and services from each other. This is essential for sustainable
economic growth and rising living standards.

To maintain stability and prevent crises in the international monetary system, the IMF
reviews national, regional, and global economic and financial developments. It provides
advice to its 184 member countries, encouraging them to adopt policies that foster
economic stability, reduce their vulnerability to economic and financial crises, and raise
living standards, and serves as a forum where they can discuss the national, regional, and
global consequences of their policies.

The IMF also makes financing temporarily available to member countries to help them
address balance of payments problems—that is, when they find themselves short of
foreign exchange because their payments to other countries exceed their foreign
exchange earnings.

And it provides technical assistance and training to help countries build the expertise and
institutions they need for economic stability and growth.
Who runs the IMF?

The IMF is governed by, and is accountable to, its member countries through its Board of
Governors. There is one Governor from each member country, typically the finance
minister or central bank governor. The Governors usually meet once a year, in September
or October, at the Annual Meetings of the IMF and the World Bank.

Key policy issues related to the international monetary system are considered twice a
year by a committee of Governors called the International Monetary and Financial
Committee, or the IMFC. A joint committee of the Boards of Governors of the IMF and
the World Bank—the Development Committee—advises and reports to the Governors on
development policy and other matters of concern to developing countries.

The day-to-day work of the IMF is carried out by the Executive Board, which receives its
powers from the Board of Governors, and the IMF's internationally recruited staff. The
Executive Board selects the IMF's Managing Director, who is appointed for a renewable
five-year term. The Managing Director reports to the Board and serves as its chair and the
chief of the IMF's staff and is assisted by a First Deputy Managing Director and two
other Deputy Managing Directors.

Where does the IMF get its money?

The IMF's resources come mainly from the quotas that countries deposit when they join
the IMF. Quotas broadly reflect the size of each member's economy: the larger a
country's economy in terms of output, and the larger and more variable its trade, the
larger its quota tends to be. For example, the United States, the world's largest economy,
has the largest quota in the IMF. Quotas are reviewed periodically and can be increased
when deemed necessary by the Board of Governors.

Countries deposit 25 percent of their quota subscriptions in Special Drawing Rights or

major currencies, such as U.S. dollars or Japanese yen. The IMF can call on the
remainder, payable in the member's own currency, to be made available for lending as
needed.
Quotas, together with the equal number of basic votes each member has, determine
countries' voting power. Quotas also help to determine the amount of financing countries
can borrow from the IMF, and their share in SDR allocations.

Most IMF loans are financed out of members' quotas. The exceptions are loans under the
Poverty Reduction and Growth Facility, which are paid out of trust funds administered by
the IMF and financed by contributions from the IMF itself and a broad spectrum of its
member countries.

If necessary, the IMF may borrow from a number of its financially strongest member
countries to supplement the resources available from its quotas. It has done so on several
occasions when borrowing countries needed large amounts of financing and a failure to
help them might have put the international monetary system at risk.

Like other financial institutions, the IMF also earns income from the interest charges and
fees levied on its loans. It uses this income to meet funding costs, pay for administrative
expenses, and maintain precautionary balances. In the early 2000s, there was a decline in
the demand for the IMF's nonconcessional loans, reflecting benign global economic and
financial conditions as well as policies in many emerging market countries that had
reduced their vulnerability to crises. To diversify its income sources, the IMF established
an investment account in 2005. The funds in the account are invested in eligible
marketable obligations denominated in SDRs or in the securities of members whose
currencies are included in the SDR basket. The Fund also began to explore other options
for reducing its dependence on lending for its income.

The IMF's main business

Macroeconomic and financial sector policies

In its oversight of member countries, the IMF focuses on the following:

• macroeconomic policies relating to the government's budget, the management of
money and credit, and the exchange rate;
• macroeconomic performance—government and consumer spending, business
investment, exports and imports, output (GDP), employment, and inflation;
• balance of payments—that is, the balance of a country's transactions with the rest
of the world;
• financial sector policies, including the regulation and supervision of banks and
other financial institutions; and
• Structural policies that affect macroeconomic performance, such as those
governing labor markets, the energy sector, and trade.

The IMF advises members on how they might improve their policies in these areas so as
to achieve higher rates of employment, lower inflation, and sustainable economic growth.
How does the IMF help poor countries?
Most of the IMF's loans to low-income countries are made on concessional terms, under
the Poverty Reduction and Growth Facility. They are intended to ease the pain of the
adjustments these countries need to make to bring their spending into line with their
income and to promote reforms that foster stronger, sustainable growth and poverty
reduction. An IMF loan also encourages other lenders and donors to provide additional
financing, by signaling that a country's policies are appropriate.

The IMF is not a development institution. It does not—and, under its Articles of
Agreement, it cannot—provide loans to help poor countries build their physical
infrastructure, diversify their export or other sectors, or develop better education and
health care systems. This is the job of the World Bank and the regional development
banks.

Some low-income countries neither want nor need financial assistance from the IMF, but
they do want to be able to borrow on affordable terms in international capital markets or
from other lenders. The IMF's endorsement of their policies can make this easier. Under a
mechanism introduced by the IMF in 2005—the Policy Support Instrument—countries
can request that the IMF regularly and frequently review their economic programs to
ensure that they are on track. The success of a country's program is assessed against the
goals set forth in the country's poverty reduction strategy, and the IMF's assessment can
be made public if the country wishes.

The IMF also participates in debt relief efforts for poor countries that are unable to
reduce their debt to a sustainable level even after benefiting from aid, concessional loans,
and the pursuit of sound policies. (A country's debt is considered sustainable if the
country can easily pay the interest due using export earnings, aid, and capital inflows,
without sacrificing needed imports.)

In 1996, the IMF and the World Bank unveiled the Heavily Indebted Poor Countries
(HIPC) Initiative. The initiative was enhanced in 1999 to provide broader, deeper, and
faster debt relief, to free up resources for investment in infrastructure and spending on
social programs that contribute to poverty reduction. Part of the IMF's job is to help
ensure that the resources provided by debt reduction are not wasted: debt reduction alone,
without the right policies, might bring no benefit in terms of poverty reduction.

In 2005, the finance ministers and heads of government of the G-8 countries (Canada,
France, Germany, Italy, Japan, Russia, the United Kingdom, and the United States)
launched the Multilateral Debt Relief Initiative (MDRI), which called for the cancellation
of the debts owed to the IMF, the International Development Association of the World
Bank Group, and the African Development Fund by all HIPC countries that qualify for
debt reduction under the HIPC Initiative. The IMF implemented the MDRI in January
2006 by canceling the debt owed to it by 19 countries. Most of the cost is being borne by
the IMF itself, with additional funds coming from rich member countries to ensure that
the IMF's lending capacity is not compromised.
To ensure that developing countries reap full benefit from the loans and debt relief they
receive, in 1999 the IMF and the World Bank introduced a process known as the Poverty
Reduction Strategy Paper (PRSP) process. To qualify for loans under the Poverty
Reduction and Growth Facility and debt relief under the HIPC Initiative, countries must
draw up their own strategies for reducing poverty, with input from civil society. The IMF
and the World Bank provide an assessment of the strategies, but the latter are "owned" by
the countries that formulate them.

Economic growth—rising average income—is necessary for the sustained reduction of

poverty, and a considerable body of research has shown that international trade stimulates
growth. Developing countries face many obstacles, however, to expanding their trade
with other countries. Access to the industrial countries' markets is restricted by barriers
such as tariffs and quotas, and developing countries themselves have barriers that prevent
them from trading with each other. The IMF and the World Bank have been urging their
members for years to eliminate barriers to trade.

Even if their access to other markets is increased, however, many developing countries
may not be able to benefit from trade opportunities. Their export sectors may be weak
because of policies that discourage investment or trade, and they may lack appropriate
institutions (like customs administration) and infrastructure (for example, electricity to
run plants, and roads and ports to get products to markets).

In 2005, the IMF and the World Bank introduced the concept of Aid for Trade for the
least developed countries. Aid for Trade includes analysis, policy advice, and financial
support. The IMF provides advice to countries on such issues as the modernization of
customs administration, tariff reform, and the improvement of tax collection to
compensate for the loss of tariff revenues that may follow trade liberalization. The IMF
also participates in the Integrated Framework for Trade-Related Technical Assistance, a
multi-agency, multi-donor program that helps the least developed countries by
identifying impediments to their participation in the global economy and coordinating
technical assistance from different sources.

Criticism against IMF

Two criticisms from economists have been that financial aid is always bound to so-called
"Conditionality’s", including Structural Adjustment Programs. Conditionality’s, which
are the economic performance targets established as a precondition for IMF loans, it is
claimed, retard social stability and hence inhibit the stated goals of the IMF, while
Structural Adjustment Programs lead to an increase in poverty in recipient countries.
Typically the IMF and its supporters advocate a Keynesian approach. As such, adherents
of supply-side economics generally find themselves in open disagreement with the IMF.
The IMF frequently advocates currency devaluation, criticized by proponents of supply-
side economics as inflationary. Secondly they link higher taxes under "austerity
programmes" with economic contraction.
Currency devaluation is recommended by the IMF to the governments of poor nations
with struggling economies. Supply-side economists claim these Keynesian IMF policies
are destructive to economic prosperity.
The IMF sometimes advocates "austerity programmes," increasing taxes even when the
economy is weak, in order to generate government revenue and balance budget deficits,
which is the opposite of Keynesian policy. These policies were criticized by Joseph E.
Stiglitz, former chief economist and Senior Vice President at the World Bank, in his book
Globalization and Its Discontents. He argued that by converting to a more Monetarist
approach, the fund no longer had a valid purpose, as it was designed to provide funds for
countries to carry out Keynesian reflations.

Argentina, which had been considered by the IMF to be a model country in its
compliance to policy proposals by the Breton Woods institutions, experienced a
catastrophic economic crisis in 2001 , which some believe to have been caused by IMF-
induced budget restrictions — which undercut the government's ability to sustain national
infrastructure even in crucial areas such as health, education, and security — and
privatization of strategically vital national resources. Others attribute the crisis to
Argentina's mal designed fiscal federalism, which caused sub national spending to
increase rapidly. The crisis added to widespread hatred of this institution in Argentina
and other South American countries, with many blaming the IMF for the region's
economic problems. The current — as of early 2006 — trend towards moderate left-wing
governments in the region and a growing concern with the development of a regional
economic policy largely independent of big business pressures has been ascribed to this
crisis.

When Argentina erupted on the international news scene in 2001 for committing the
biggest default by a sovereign country on an international loan corporate media focused
on fixing the blame on Argentina. In reality, Argentina’s case is a particularly good
illustration of how a healthy, rich country was devastated under IMF tutelage.
Conversely, Argentina today can also be an inspiring example of how ordinary citizens
can organize themselves to rise above the problems created for them by local and
international elites.

Argentina’s economic and political health was dealt a deathblow not because it did not
follow the IMF dictates closely enough, but because it was indeed doing everything
according to IMF agenda. All through the 1990s, opinion makers like the Financial Times
hailed Argentina as the ‘star pupil’ of the IMF. The GDP rose by 60% over the decade,
and foreign investment poured in. However, this glorious facade hid a crumbling edifice.
The wealth flowing into Argentina during the 1990s was a combination of speculative
finance and one-off sales: the phone company, the oil company, the post, rails, and
airline. Between 1989 and 1999, national debt rose by $80bn and un-employment soared
from 6.5% in 1989 to 20% in 2000. Today 57% of Argentina’s population lives below the
poverty line.

Just before the default and right afterwards as well, mainstream economics machinery
pounced on the country for plunging itself into international isolation, a sin beyond
redemption according to the gods of globalization. The real fear underlying this hysteria
was that Argentina might set a bad example for other countries caught in the debt spiral.
Other indebted countries could also default and use default on multilateral debt as a
bargaining chip with creditors.

Another example of where IMF Structural Adjustment Programs aggravated the problem
was in Kenya. Before the IMF got involved in the country, the Kenyan central bank
oversaw all currency movements in and out of the country. The IMF mandated that the
Kenyan central bank had to allow easier currency movement. However, the adjustment
resulted in very little foreign investment, but allowed Kamlesh Manusuklal Damji Pattni,
with the help of corrupt government officials, to siphon off billions of Kenyan shillings in
what came to be known as the Goldenberg scandal, leaving the country worse off than it
was before the IMF reforms were implemented.

Overall the IMF success record is perceived as limited. While it was created to help
stabilize the global economy, since 1980 critics claim over 100 countries (or reputedly
most of the Fund's membership) have experienced a banking collapse that they claim
have reduced GDP by four percent or more, far more than at any time in Post-Depression
history. The considerable delay in the IMF's response to any crisis, and the fact that it
tends to only respond to them or even create them rather than prevent them, has led many
economists to argue for reform. In 2006, an IMF reform agenda called the Medium Term
Strategy was widely endorsed by the institution's member countries. The agenda includes
changes in IMF governance to enhance the role of developing countries in the
institution's decision-making process and steps to deepen the effectiveness of its core
mandate, which is known as economic surveillance or helping member countries adopt
macroeconomic policies that will sustain global growth and reduce poverty. On June 15,
2007, the Executive Board of the IMF adopted the 2007 Decision on Bilateral
Surveillance, a landmark measure that replaced a 30-year-old decision of the Fund's
member countries on how the IMF should analyze economic outcomes at the country
level.

The major argument against the IMF by leading economist is that the weaker are getting
weakest. When the IMF gives loans it imposes conditionality’s on the borrowing
countries. However, it does not make sure where the actual funds are going. The
borrowing countries are often not able to come out of the crisis and they fall in to a crazy
cycle of debt and interest payment. The corrupt politicians of the developing countries
then burden the general public with high taxes to pay out their debts.

The United States is the biggest shareholder in the IMF, holding nearly 18% in shares,
and the IMF is generally considered a tool of the US Treasury.
“There are plenty of good economists at the IMF and I do not have a problem with them,
but the problem lies with policy makers at the highest level,” says free-market proponent
and economist David DeRosa, who is opposed to IMF bailouts and its policy advice to
emerging markets.
DeRosa last week released a book titled “In Defence of Free Capital Markets” in which
he criticises aggressive interventions such as those carried out by the IMF in times of
currency and emerging-market meltdowns.
Widespread dissatisfaction with the way the IMF handled the 1997 Asian crisis and
subsequent financial crises has prompted calls for reform of the institution and, more
grandiosely, the global financial architecture.
“The question is whether IMF policy has changed with respect to its mission as the lender
of last resort,” says DeRosa. “In the days of managing director Michel Camdessus, the
IMF transformed itself into a bailout charity, dishing out billions to Mexico, Korea,
Southeast Asian nations, Brazil, Russia and a great many other countries in crisis.”
Critics of bailouts charge that they undermine one of the fundamentals of a free economy
by overriding market mechanisms. They say bailouts are expensive, bureaucratic and cut
investors’ losses rather than allow them to bear full responsibility for their bad decisions,
leaving the obligation to repay the subsequent debt to that country’s taxpayers. They say
bailouts also hinder free-market reforms.

The Cato Institute argues that while the IMF says it makes loans in exchange for policy
reforms, it has not been successful in turning countries to the free market.
“Instead, the fund has created loan addicts,” notes Ian Vasquez of the institute. “More
than 70 nations have depended on IMF aid for 20 or more years, 24 countries have
received IMF credit for 30 or more years.”

One of the institution’s most influential opponents has been the Meltzer Commission
appointed by the US Congress and which last year recommended the Fund be reduced to
a lender of last resort providing funds at punitive rates to solvent banks.
“Lending at a penalty rate avoids the abuse of the IMF as a channel for distributing
subsidies to member countries, particularly as a means of facilitating massive bailouts,”
says former Meltzer Commission member Charles Calomiris, professor of finance and
economics at Columbia University.
“That abuse, we argued, promotes international financial instability by encouraging risk-
taking in emerging-market banking systems, imprudent management of fiscal affairs and
reckless lending by international lenders,” Calomiris told a recent Congressional hearing.
Conditionality’s in the form of structural adjustment programs (SAPs)

Structural adjustment is a term used to describe the policy changes implemented by the
International Monetary Fund (IMF) in developing countries. These policy changes are
conditions (Conditionality’s) for getting new loans from the IMF, or for obtaining lower
interest rates on existing loans. Conditionality’s are implemented to ensure that the
money lent will be spent in accordance with the overall goals of the loan. The Structural
Adjustment Programs (SAPs) are created with the goal of reducing the borrowing
country's fiscal imbalances. The bank from which a borrowing country receives its loan
depends upon the type of necessity. In general, loans from IMF are claimed to be
designed to promote economic growth, to generate income, and to pay off the debt which
the countries have accumulated.
Through conditionality’s, Structural Adjustment Programs generally implement "free
market" programs and policy. These programs include internal changes (notably
privatization and deregulation) as well as external ones, especially the reduction of trade
barriers. Countries which fail to enact these programs may be subject to severe fiscal
discipline. Critics argue that financial threats to poor countries amount to blackmail; that
poor nations have no choice but to comply.

IMF has no effective authority over the domestic policies of its members. It is in no
position for example to force a member to spend more on schools or hospitals and buying
less military aircrafts, or constructing huge presidential palaces. It intervenes for weaker
countries. It can and often does urge members to make the best use of scarce resources by
refraining from unproductive military expenditures (only the weaker) or by spending
more money on health and education. What authority the IMF does posses is confined to
requiring the members to disperse information on its monetary and fiscal policies and to
avoid as far as possible putting restrictions on exchanging domestic for foreign currency
and making payments to other members.

Pakistan & the IMF

The IMF, directly and indirectly, has played a crucial role in the macroeconomic stability
of Pakistan since 1988. On the one hand, it has provided direct bilateral support to
Pakistan in order to cope with its macroeconomic imbalances like balance of payment
deficits. On the other hand, the IMF has indirect influence on lending by other donor
agencies. This is evident from the fact that whenever Pakistan enjoyed good relations
with the IMF, other lending agencies also provided money to Pakistan and vice versa.
The IMF credit rating of a borrowing country is taken very seriously by other donor
agencies. The IMF also influences policies of lending countries to a great extent.

The IMF enjoys excessive concentration of power and has a virtual monopoly of
knowledge and ideas in prescribing as to what are the right policies a country ought to
follow. It has disproportionately large influence on financing provided by other players—
development banks, fund managers, debt relief by Paris and London Clubs and syndicate
lending by commercial banks negative assessment by the IMF or even a failure to
complete on time places the reputational capital of the borrowing country at great risk,
erodes its credibility in the financial markets and reduces financial flows into the country.
There are instances where this created a snowball effect amplifying the disequilibrium in
macroeconomic balances as the IMF and other financiers collectively withheld their
assistance.

Since 1988, Pakistan has not enjoyed smooth relations with the IMF, because of the
latter's dissatisfaction with the economic performance of Pakistan. Pakistan signed
several agreements with the IMF, but due to a variety of factors most of them remained
incomplete, with the IMF refusing to lend the full amounts to Pakistan. It must be
remembered that in the 1990s, the nation suffered many losses on the economic front and
the era is thus considered a "lost decade" for the economy of Pakistan. All
macroeconomic indicators showed poor performance, bringing Pakistan to the brink of
default. Moreover, the IMF's relations with Pakistan were further strained by 1997 due to
the policies of former Prime Minister Benazir Bhutto (late). Large-scale corruption by her
People's Party and its resistance to structural reforms irritated the IMF and World Bank.
These programs have so far fallen short of resolving Pakistan's economic problems.
Poverty has increased in Pakistan, rather than declined. External debt has increased since
the IMF and World Bank became involved in Pakistan. Unemployment increased in the
country as a result of a downsizing policy adopted by the government under the
guidelines of these institutions.

IMF Support to the military dictators

As soon as the leader of the military coup, General Pervaiz Musharraf, appointed Aziz,
an executive of the US-based Citibank, the finance minister flew to New York. After
meeting IMF officials on October 29, Aziz said the talks were “very positive." He said he
had to return to Pakistan and "review what programs the IMF has proposed" before
initiating further discussions. According to reports, he also met various investment
bankers and executives of US companies while in New York.

It seems that the IMF officials may have informed the minister of the conditions it had
insisted on with the former Nawaz Sharif government. General Musharraf had already
indicated his desire to satisfy the IMF. In his policy statement on October 17 he promised
measures to rebuild investor confidence, increase domestic savings, make state
enterprises profitable and ensure austerity.

Squashing speculation that the IMF would impose sanctions on the military junta, an
official said the institution was not "politically motivated" and "it would not have a
problem with the nature of government in Pakistan". In fact, the IMF had no small role in
the events that led to the ousting of Nawaz Sharif.

Displeased by the Benazir Bhutto government's inability to implement its

recommendations, the IMF welcomed the Nawaz Sharif government when it came to
power in March 1997. In October that year, the IMF approved a three-year financing
package for Pakistan equivalent to $US 1,588 million in support of a medium-term
“adjustment and reform” program. It required tightened control of government
expenditure, fundamental changes to the tax administration machinery and an expansion
of the net of the general sales tax (GST) and the agricultural tax.

The resulting government spending cuts affected the poverty-stricken masses, and small
entrepreneurs opposed the GST and agricultural taxes. With the blessing of government,
landlords escaped from the tax net. The IMF then withheld the loan.
Following its nuclear tests in late May 1998, the Sharif government faced US-led
sanctions. Following suit, the IMF suspended its loan facility. The sanctions magnified
Pakistan's socio-economic difficulties, emptying government coffers, pushing the country
to the brink of defaulting on foreign loans and worsening conditions for the poor.
When US wheat growers lobbied the Clinton administration, it waived sanctions on the
export of agricultural products from US to Pakistan. Only then did the IMF and World
Bank agree to advance credit to the Sharif government.
Even though the Sharif regime was eager to implement the package, a political crisis and
socially explosive conditions did not allow it to do so. In May this year the IMF
management released a meagre sum of $US51 million to the country.
When the Sharif government prepared its budget for July 1999 to June 2000, an IMF
team was in Islamabad to ensure its recommendations were included in the budget paper.
According to the Dawn newspaper, the visiting mission head to Pakistan told the finance
minister Isaq Dar he had “no option but to go for the new VAT (GST) on the service
sector". The News reported, "The finalisation of the budget took place after intense
discussions with the international financial institutions, chiefly the IMF". But when the
budget was presented, the regime backed away from the IMF proposals on taxes, fearing
opposition, not only from the poor but small traders as well.

In the aftermath of the Kashmir conflict with India—when US administration forced

Sharif to withdraw the Pakistani-backed forces from Kargil heights—opposition parties
launched a campaign demanding Sharif's resignation. In a desperate bid to head off mass
support for the opposition campaign, Sharif pretended that he was concerned about the
plight of the people. He launched a mega-housing project with much fanfare.
When Sharif's finance minister visited New York in July to plead with the IMF for a
withheld loan tranche of $280 million, he was sent back empty-handed, with instructions
to stop the housing project and implement the GST. The cash-strapped cabinet then
decided to impose the 15 percent GST. The small traders, with the help of opposition
parties, launched a strike that shut down the whole country on September 4. Sharif
immediately met representatives of the small traders and promised to reduce the tax to a
nominal 0.75 percent.

On September 11, Dawn reported that "IMF officials have been privately saying that they
would need a firm and unequivocal commitment by the Nawaz Sharif government at the
highest level" to implement its conditions, mainly the 15 percent tax.
The IMF intervention contributed to economic collapses, ignited socially explosive
conditions and added to the political destabilisation in Pakistan. It was no surprise that
the military exploited the situation to grab power. Now the new regime is preparing to
implement the IMF conditions while tightening its grip in the country by launching a so-
called anti-corruption drive to distract popular attention. The All-Pakistani Organisation
of Traders and Cottage Industries has warned that it will initiate a countrywide indefinite
strike if the regime implements the GST.

IMF intervention to secure an "open economic policy" in Pakistan started in 1988 at the
end of military dictator Zia Ul Haq's tenure. The US State Department, evaluating the
program, wrote in a report in November 1997: "Market-based reform began to take hold
in 1988, when the government launched an IMF-assisted structural adjustment program
in response to chronic and unsustainable fiscal and external account deficits." It praised
the removal of barriers to foreign trade and investment, reform of the financial system,
relaxed exchange controls and the privatisation of dozen of state-owned enterprises.
None of Pakistan's economic ills have been healed, however. Instead, they have been
aggravated by the IMF interventions. The promised prosperity has not arrived. An IMF
report, while sketching the failure of its structural adjustment program, demanded more
of the same policy: "The authorities intensified their efforts in 1993, with IMF support
but by 1995 the situation deteriorated again.” The report blamed "loose monetary policy"
and weather conditions. The IMF admitted that the trade deficit had widened, external
reserves declined, and inflation remained "stubbornly high”.

A recent UN-sponsored Human Development in South Asia 1999 report analysing the
impact of the IMF's measures referred to "worsening poverty and income inequality in
the wake of structural adjustment programs. Programs have hurt the poor in Pakistan,
since the real incomes of lowest groups have declined by nearly 52 percent since the
[IMF] adjustment."

Performance during the Shaukat Aziz Tenure

The biggest criticism for the previous government, when it used to compare its economic
performance keeping 1999 as the base year was that the economy then was surviving
heavy economic and military sanctions in the wake of nuclear tests conducted in May,
1998. The government of Shuakat Aziz claimed that it has come out of the clutches of
foreign lending agencies, especially World Bank (WB) and International Monetary Fund
(IMF). They also claim that the inflation declined and they were ready to say good bye to
World Bank and IMF.

Although Pakistan received record aid, investments and remittances, its external debt
went up from $33.6 billion in 1999 to $36.9 billion in June 2007. Over the years the
country received $10bn in economic and military and development aid from the US. On
the other hand, there were about $6bn privatisation proceeds and a relief of $1.6 billion in
loan write offs by foreign governments during the last eight years.

The rescheduling of Paris club debt provided an additional relief of $1.2 to $1.5 billion
annually in terms of debt service payments. Pakistan became the fourth-largest borrower
of World Bank and the fifth-largest recipient of American aid. This still shows its heavy
reliance on foreign governments and multilateral institutions, despite declaration of
economic sovereignty. The domestic resources have not been mobilised for
developmental purposes. On the other hand, the proceeds from privatisation were not
used in a completely transparent manner. Some policy-makers consider borrowing
acceptable as long as they are invested for productive purposes. However, the situation
becomes completely different when borrowing data is littered with corruption and
wasteful spending, plus players in the major sectors of the economy do not pay tax at all.
The government claimed that it does not carry around a begging bowl and does not
depend on borrowings from IMF anymore. On the other hand, it borrowed more and
more from WB and (Asian Development Bank) ADB. World Bank unveiled a lending
programme of up to 6.5 billion dollars for Pakistan under a new four-year aid strategy.
The new lending shows “a substantial increase over the previous period”, WB claimed.
As the government is telling lies to the people the biggest question is: where all the
money has gone?
.
The relevance of Argentina’s experience for Pakistan

Pakistan owed $2.07 billion to the IMF at the end of March 2003. This represents a sharp
rise from $1.55 billion in June 2000. The power that the IMF exerts on our policy
formulation as a result of this immense and increasing indebtedness cannot be
underestimated. Almost everyday, newspapers report the pressure that the IMF is
exerting on Pakistan to make policy decisions that have become a dogma with the IMF
and are recommended to country after country regardless of its particular situation. Just in
the month of May, the IMF has linked disbursal of loans in Pakistan to privatisation of a
bank, submission of a fiscal responsibility law in parliament, and elimination of tax
exemptions. IMF has also asked the Pakistan government to impose 15 per cent General
Sales Tax in the 2003-04 budget on bricks, cement blocks, computer hardware, software,
specific machinery etc.

Predictably, a recent World Bank and IMF Joint Staff Assessment (JSA) report cited by
the Dawn identifies four risks to the implementation of reforms in Pakistan, including
political opposition to reforms, lack of continuity, insufficient institutional capacity and
exogenous shocks. No mention of the failure of these policies in countries all over the
world from Latin America, to South East Asia. Argentina is a prime example of a country
that followed the policy recommendations of the IMF to the letter and now that the
country is economically, politically and socially a complete basket case, the IMF has, as
in other cases, abdicated all responsibility. We can do no better than to learn from the
experience of Argentina to temper our enthusiasm for the IMF and a blind obedience to
its dictates.

Argentinean (or Pakistani) citizens are not unique in having military/civilian dictatorships
imposed upon them, which are then sustained by massive doses of international loans.
Around the world, this recursive relationship between dictators and global capital serves
the purpose of enslaving people through increased indebtedness while forcing them to
open up their markets for increasing the profits of large multinationals through threats of
loan recalls etc. The insecurity of dictators and their need to silence all opposition is a
well-calculated advantage in this relationship to international capital. An added
advantage is that once the dictators have been deposed, the people of that country remain
indebted as the loans were taken in their name, regardless of the fact that beyond lining
the pockets of the ruling junta these loans served little developmental purpose. As the
IMF imposes devastating demands for privatisation of public resources that will increase
social polarization, our government only responds with pleas for patience. At the same
time we are told that the government is set to increase the budget for ‘law and order’.
The increased violence in our society is a direct result of the incredible polarisation that
has gone on as schools, hospitals, two square meals and the prospect of employment have
moved out of the reach of an increasing number of Pakistanis. The service that our public
hospitals and schools provide in spite of a pitiful budget allocation, barely 5% for health
and education combined, is remarkable (51% of our budget is used to service loans). We
can only imagine how much better the system could be with adequate funding. Throwing
more people in jails and more policemen on the streets is likely to only increase the
magnitude of the problem. As Delia Garcilazo de Ríos, whose son was killed by prison
guards, claims, "Police repression and low salary are forms of having social control.
When the people ask for things in a blockade or in a march and there's a kid who breaks a
window, we are violent. But I ask what's more violent, a youth dying of starvation, a kid
being shot from behind, or if we break a window? A window is a material thing; you can
fix it, life you can't ever get back."

Current IMF loan facility for Pakistan

Pakistan has decided to borrow $7.6 billion from the International Monetary Fund (IMF)
to save its sinking economy. Pakistan thus becomes the first Asian country to be bailed
out by the IMF ever since the current global meltdown began.

As a part of the agreement, the loan carries a variable interest rate based on the market
conditions. The rate may vary between 3.51 per cent and 4.51 per cent. The loan will be
extended over a 23 month period and needs to be repaid between the financial years
2011-12 and 2015-16.

A major section of the society in Pakistan is of the opinion that the loan has been
procured at terms which will do more harm than good to the economy. They contend that
this bailout loan will bring with it more wretchedness for the people in general and
industry in particular.

As on date, Pakistan’s foreign exchange reserves were less than $7billion which might
have landed the country in a situation wherein it cannot honour its foreign debts.
Shaukat Tareen, the adviser to the Prime Minister on Finance said that the loan will boost
Pakistan's currency reserves, will prevent a run on the local currency and ward off a
balance of payments crisis.

Economist Dr Asad Saeed said regarding the loan, "This can be short-term solution to
shore-up the depleting stocks. The long-term solution lies with development of our real
sectors and to curtail the unprecedented growth of imports, which are eating up major
chunk of precious forex reserves."

The Pakistan government has pegged its economic growth at 4.3 percent for the current
fiscal year. IMF, on the other hand has a more pessimistic estimate of 3.5 percent.
Pakistan's finances have not only been plagued due to the current financial crisis but also
due to a shaky political system, terror campaigns and soaring oil and food prices.
IMF has released the strings attached to its Pakistan credit, which binds the government
of Pakistan not borrowing any more during the current fiscal year from the State Bank of
Pakistan, while the subsidy on electricity would be withdrawn by June 2009.
International Monetary Fund (IMF) has made public the binding clauses incorporated in
the finalized agreement for $7.6 billion loan extended to Pakistan. IMF 23 months long
loan program conditions spread over a document containing 24 pages said that Pakistan
would have to raise its national growth rate to 7 percent and bring down the inflation rate
to 5 percent by 2012, while the target of keeping the foreign current account deficit
restricted to $10.6 billion i.e. 6.5 percent of the GDP by the end of the current fiscal year
has been given. The target for Pakistan’s economic growth for the next fiscal year has
been set at 5 percent, while that of inflation at 13 percent.

After minor changes in the 11-point agenda of the International Monetary Fund (IMF),
the Pakistan government has agreed to gradually impose the Central Excise Duty (CED)
on services and agriculture sectors at the rate of eight to 18 per cent in place of the
General Sales Tax (GST).

“In view of the IMF demand, the Pakistani currency will also be devalued after slight
changes in the discount rate and exchange rate will be decreased officially by six to seven
per cent,” an official in the Ministry of Finance disclosed, wishing to remain anonymous.
Moreover, the official said the release of 60 per cent funds for the next three quarters of
the current financial year, under the Public Sector Development Programme (PSDP),
would be reviewed downward to 45 per cent.

According to the official, the foreign assistance flow had already declined by 40 per cent
because donors had refused to provide funds for new projects at the federal and
provincial levels under the PSDP against the ongoing projects funded by the Japan-
IBRD, the World Bank, the Islamic Development Bank and the Asian Development
Bank.

The IMF proposal received by the federal government in the last week of October
contained 16 conditions having 180 points that were discussed in four meetings between
Pakistani and IMF officials in Dubai the official disclosed. Eleven of the 16 conditions
have been accepted with slight changes. The major conditions accepted by the Pakistan
government included changes in the Islamic Development Bank loans and differentiation
between loans and grants, devaluation of rupee, freezing of non-development expenditure
under the defense budget for the last three quarters of the current financial year, non-
provision of supplementary grants to government departments, ending subsidy on gas and
electricity, 20 per cent reduction in non-development expenditure of civil departments
and federal ministries, increase in mark-up rate of banks and on inter-bank transactions,
uniformity in the inter-bank and open market dollar exchange rate and stoppage of
government financial intervention in stock markets.

Under the conditions accepted by the government, the IMF will be informed at the time
of the issuance of credit line by any international financial institution, including the
World Bank or immediately after it the official said.

The matters on which the government and its financial managers have differed with the
IMF include release of $1.5 billion to$2 billion for the current financial year under the
annual assistance package he said.

The government wants the IMF to provide $3 billion and another $1.5 billion to $2
billion for adjustment of the loan instalments and maintenance of the balance of
payments during the current financial year.
But the IMF wants to release $2 billion for repayments in the first six months after
reaching the agreement for saving Pakistan from default and another $500 million for the
stability of the national economy he said. For this too, the IMF wants increase in the
mark-up rate on the already approved 600 million World Bank loan and grant he added.
Despite all the tough conditions, objections and differences, Pakistan has no option but to
seek the IMF assistance package because under the IMF pressure on the Friends of
Pakistan, no friendly country has so far agreed to extend loan to Islamabad to meet its
repayment obligations.

Finance Secretary Dr Waqar Masood Khan claimed that the loan would have no direct
impact on the poor. He said the home-grown package carried safety nets for the
wellbeing of the people.

He said the government had decided to reduce the budget deficit to 4.3 per cent and
current account deficit to 4.5 per cent. He said reducing the deficits was part of this year’s
budget.

Dr Khan ruled out imposition of agriculture tax or increase in toll tax. “We have only to
plug the loopholes in the taxation system.” He said the target for general sales tax
collection would be increased in view of over 24 per cent inflation.

He said other conditions agreed with the IMF included reducing non-development and
other expenditures, free float of exchange rate, zero borrowing from the SBP and
increasing interest rate to tame core inflation.
He said the country’s credit rating would improve in the next few weeks because of the
IMF loan which would boost investors’ confidence.

Recommendations

• The central bank needs to be proactive in dealing with economic and financial
issues
• The fiscal and monetary policy must be in line with each other.
• Government should avoid excessive borrowing from the central bank.
• To avoid conditionalities the government should not borrow from IMF and other
donor agencies.
 • Increase investor confidence, encourage overseas Pakistanis to send remittances
through legal channels.
• Privatization process must be transparent and more organized.
• Exports should be increased through value addition and quality.
• Revival of major sectors such as cotton and textile
• Imports should be curtailed.
• Improve tax collection to increase government revenue
Above all, steps must be taken to put an end to corruption and VIP culture.

Bibliography

Introduction to IMF
www.wikipedia.org

Pakistan and Argentina

by Humeira Iqtidar; June 08, 2003
ZNet | Corporate Globalization
www.dawn.com
www.geo.tv
http://www.jang.com.pk/

The IMF on the Run

The International Monetary Fund Tries to Outrun Its Critics
by Robert Weissman
Multinational Monitor magazine, April 2000

Criticism against IMF

by Gumisai Mutume

Pakistan’s military regime prepares IMF Program

By Vilani Peris
25 November 1999- World Socialist Website
www.wsws.org

Pakistan turns to IMF for financial aid

The money times