1. Itroduction
2. 3. 4. 5. Literature Review History IMF and the economy of Pakistan IMF Relationships with Pakistan

Benazir Bhutto Government The Sharif Government The Musharraf Government 6. Why Pakistan Need loan 7. 8. IMF conditions for Pakistan Conclusions


After World War II, economists and politicians created the International Monetary Fund (IMF) to help keep the international financial system stable. From the beginning, the Fund’s specific roles were to promote balanced growth of international trade, provide funding to countries in economic problems, and protect income levels which is necessary for people to purchase essential goods and services. IMF provides funds to the member country when it faces balance of payments problems that cause severe macroeconomic Under a stand-by arrangement, an IMF member country is provided a specified amount during a given period, usually in tranches, subject to the borrower’s compliance with performance criteria and other conditions embodied in the agreement. Typically, IMF conditionality regime stipulates reducing fiscal deficit, devaluation of the domestic currency, a flexible exchange rate, liberalization of trade and investment regime, privatization of state-owned enterprises, tightening of the monetary policy and overall de-regulation of the economy. These targets not only lack a sound economic basis but prompted cutbacks in public spending on health, education, and other vital services that poor and vulnerable populations rely on governments to provide. It does not really matter what the intentions of the IMF are. The fact is that the Fund is not a charity institution. Regardless of its noble claims of strengthening countries, it is at the end an institution working in its own interests, and one should not be naive enough to either deny or criticized that. The loans may be meant to stir up the economy, but history has shown us the failures of this policy. The International Monetary Fund IMF adjustment programs are of two types: a) short-term, in which the macroeconomic disequilibrium is thought to be reversible in one or two years, and b) medium-term in which the macroeconomic disequilibrium is caused by structural impediments to growth or a heavy external debt burden. The Standby Arrangement (SBA) is an example of the IMF short-term program. The priority course of action in SBA is expenditure reduction. IMF medium-term programs aim to correct a serious external payments disequilibrium due to structural impediments to growth and debt overhang. The program involves a strategy that keeps expenditures in line with output and increases growth. Examples of these programs are the Structural Adjustment Facility (SAF), Extended Structural Adjustment Facility (ESAF) and Poverty Reduction and Growth Facility (PRGF). Pakistan accepted fund supported adjustment programs in the 1980’s and has become a prolonged borrower with more than 15 years of borrowing with “Adequate Safeguards”.

Literature Review
As we that the economy of Pakistan presents a very good case impact on of fund support of IMF. There is not much literature available for the assessment of the fund-supported program of IMF. Quite a few studies are available but they also need to be modified in terms of the assessment of the macroeconomic outcomes. There is even more of a lack of literature about the sequencing and ordering of the policy reforms. Certainly this would be a originality to bring the sequencing and ordering into the picture while assessing the outcomes of the IMF fund-support programs and analyzing the macroeconomic impacts of the programs on the Pakistan economy. Economists of different schools of thought

have analyzed the stabilization policy and structural adjustment programs and their impacts on the balance of payments in different ways. Conflict over the results of these fund-supported programs on the macroeconomic variables, especially on balance of payments is there from the very beginning of these programs. In 2001 Bengali and Ahmad have concluded “Stabilization and growth are not mutually exclusive and any policy has to incorporate both the elements. However, the manner in which the policy has been implemented in Pakistan has tended to pursue stabilization at the expense of growth. It has dampened investment and shortened purchasing power, leading to a recessionary situation. It has contributed directly to the increase in unemployment and poverty”. Monetary growth in Pakistan is to some extent anticipated

Pakistan becomes member of IMF in 7th November, 1950. in that time Pakistan was the 89th member of IMF. The first time when the Government of Pakistan asked for a loan was 1958. As the IMF’s funding amount and pattern changed after the 1970’s, right after a couple of shocks of oil price and debt crises of 1980’s, it was 1988 when Pakistan accepted policy packages suggested by the IMF. The total loan condition of, Pakistan is $7.6 Billion which is approved from IMF to Pakistan on 24th November, 2008

IMF and economy of Pakistan
The IMF, directly and indirectly, has played a crucial role in the macroeconomic stability of Pakistan since1988. it has provided direct bilateral support to Pakistan in order to handle 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. 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 essential control of knowledge and ideas in prescribing as to what are the right policies a country have to follow. It has excessively large influence on financing provided by other development banks, fund managers. A negative assessment by the IMF or even a failure to complete on time places the reputation 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 effect amplifying the disequilibrium in macroeconomic balances as the IMF and other financiers collectively withdrawn their assistance. Since 1988, Pakistan has not enjoyed smooth relations with the IMF, because of the latter’s satisfaction 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.

Pakistan has had a long and rather checkered relationship with the IMF. Since1988 alone we have entered into nine different agreements with the organization, out of which only the last one (under Gen. Musharraf’s regime) was implemented successfully

Benazir Bhutto Government
In 1990, the nation suffered many losses o the economics the period is thus considered a “lost decade” for the economy of Pakistan. All macroeconomic indicators showed poor performance, bringing Pakistan to the point of default. Moreover, the IMF relations with Pakistan were further strained by 1997 due to the policies of former Prime Minister Benazir Bhutto. A large-scale of corruption by her Party and its conflict to structural reforms irritated the IMF.

The Sharif Government
When the new government of Nawaz Sharif is started in 1997, A positive relations were revived between the IMF and the government of Pakistan. As a result of previous conference, the IMF had already resumed its assist to Pakistan, approving to restore a stand-by loan program in December 1996 after six month. It also increased the total of these loans to $831 million from the original $600 million. However, the resumption of IMF lending brought new conditionalities and forced large-scale budget cuts of Rs 45 billion ($1.13 billion) between October 1996 and January 1997. Almost 90 percent of these cuts were in the annual development budget, which affected economic performance in the short run. In March 1997, relations with the IMF again break. The breakdown in the relations stemmed from IMF concern over Pakistan’s economic performance. The IMF was particularly concerned with “the large increase in official rupee borrowings from domestic banks during the current economic year (July 1996–June 1997), which rose to Rs 73 billion ($1.8 billion) by end-March 1997, up from a target of Rs 44 billion ($1 billion) for the whole financial year, and the growing budget deficit, which was expected to reach 6 percent of GDP at the end of the financial year ending in June 1997,against an earlier target of 4 percent. The relationship between the IMF and government of Pakistan brightened when Sharif promised to introduce economic reforms to the country. The reforms included “cuts in the top rate of import tariffs by 20 percent, bringing them down to a maximum of 45 percent. He also lowered personal income tax rates across the board. Corporate tax rates for publicly listed companies were lowered to 30 percent, down from 33 percent, rates for non-listed companies to 35 percent from 43 percent and for banks to 55 percent from 58 percent. Furthermore, the reforms emphasized a reduction in the general sales tax to a maximum rate of 12.5 percent from 18 percent and 3 percent tax on retail units. The purpose of these reforms was to improve tax collection and reduce the budget deficit to meet the 4 percent of GDP target in the fiscal year 1997–98, compared with the unfavorably viewed 6 percent deficit in financial year 1996–97. The IMF appreciated the reforms, but concluded that only after successful implementation of reform measures and associated macroeconomic improvements would the fund consider renewing its concessional Enhanced Structural Adjustment Facility (ESAF) and Extended Fund Facility (EFF) with Pakistan. On October 20, 1997, Pakistan reached an agreement with the IMF for a three-year, $1.6 billion Structural Adjustment Loan (SAL) package. About $935 million was committed

to an ESAF, a concessional loan bearing interest of only one-half percent aimed at supporting a medium-term reform program. The first expense worth $208 million occurred in October 1997.11 This loan package also provided crucial balance of payment support at a time when export growth was dreary, foreign exchange reserves were less $1.3 billion, and external debt was high. At the beginning of 1998, the IMF agreed to give Pakistan the second payout (worth another $208 million) of the $1.6 billion SAL agreed to the previous October. This was made possible by hard negotiations and lastminute pledges by the government to stay to the tough conditionalities attached to the loan. These included, among many others, an emphasis on reduction of the budget deficit, improving access of foreign investors to the oil and gas sector, and the imposition of Goods and Services Tax (GST), and the privatization of public sector organizations. However, the government failed to impose the 3 percent sales tax on selected retail trade that continued to figure high on the IMF list of conditionalities, which created anger among IMF officials. At the beginning of 1999, the IMF agreed on the renewal of its lending program, paving the way for short-term stabilization with a Balance of Payments (BOP) loan. Under the new package, Special Drawing Rights (SDR) of $575 million were immediately disbursed. This included a $37.9 million SDR installment under the concessional ESAF, an $18.97 million SDR extended arrangement under EFF, and a $352.7 million SDR under the Compensatory Contingency Finance Facility (CCFF).The ESAF/EFF loans were made on comparatively soft terms as part of the restored $1.6 billion SAL program agreed to by Pakistan and the IMF in 1997. The CCFF was extended on commercial terms to compensate for shortfalls in export earnings in 1998. These packages constructed by the Fund were accompanied by tough economic performance targets for Pakistan for1998–2001, including: • Doubling of the GDP growth from the 3-4 percent range to 5-6 percent • The current account deficit from 3 percent of the GDP in 1998–99 to less than 1.5 in 2001–02 • Reducing inflation from about 9 percent to 6 percent in 2001–02 • Increasing the rate of domestic savings from 12 percent of GDP to 16 percent • Stabilizing the ratio of public debt to GDP The IMF, in pursuance of the above-mentioned targets, asked Pakistan to attempt structural problems as well as rescind some recent policy changes. • Further phased reduction in electricity rates • Unification and devaluation of the exchange rate • Imposition of a Goods and Services Tax (GST) on services, petroleum, electricity, and Agricultural inputs • Increase of the taxes • restructure of public sector enterprises in preparation for privatization • Reduction of the government payroll through massive staff reduction In May 1999, relations between the IMF and Pakistan again soured. The IMF sent a five-member commission to Islamabad to review the economic performance of the country. The commission reported that the government of Pakistan had failed to meet several IMF conditionalities. Disputes over the pricing of electricity were complicated by

continuing conflict over how to resolve charges of past corruption and rate-gouging during the Bhutto government. The government pledged that it would apply a flat-rate GST before March 31, 1999 in order to boost revenue and reduce the fiscal deficit; instead, it abandoned plans to impose a GST on retail trade. Furthermore, Pakistan also delayed settling its dispute with the Independent Power Producers (IPP). Consequently, the IMF postponed the release of a $280 million expense to Pakistan, which was due in July 1999, because of non-cooperation by the government with IMF conditionalities. Sharif’s government failed to meet IMF conditionalities throughout its residence (1997– 99). Negative international reaction to the 1998 nuclear tests only aggravated an already difficult financial situation. The growth rate of the economy remained below the target. Pakistan’s fiscal deficit also remained above the target, as the government was unable to control non-developmental expenditures. Despite the budget deficit remaining high, the Government was unable to implement the 15 percent GST on all goods, including agriculture. Furthermore, privatization and deregulation of the economy remained an unfulfilled dream given Sharif’s earlier support for privatization, as most of the public sector remained under the control of government. As a result, the relationship between the IMF and Pakistan remained tense.

The Musharraf Government
After the October 12, 1999 due to the military government, Pakistan’s economy continued in crisis. In the initial days of General Pervez Musharraf’s government, the international community suspended assistance to Pakistan and imposed coup-related sanctions on the country. The IMF was no exception, likewise suspending aid to Pakistan. The restoration of economic assistance was made conditional on the restoration of democracy in the country. However, this public stand soon changed. As a result of a meeting between General Musharraf and the US ambassador to Pakistan, William Milam, the United States indicated it would likely support further IMF aid, if General Musharraf continued to recognize certain elements of democracy, such as human rights and press freedom. The Musharraf government, from the beginning, appealed to the IMF for restoration of economic assistance and showed its willingness to meet the associated conditionalities. The IMF responded by noting a number of key conditionalities it required of Pakistan in order for the new government to demonstrate good faith. Even if these actions were taken, IMF management only recommended a ten-month Stand By Agreement (SBA) for Pakistan and the resumption of the medium term ESAF/EFF Program . Around a year after the military government of General Musharraf took power in Pakistan, the Executive Board of the IMF approved a Stand-by-Credit of $596 million. The program was to run until the end of September 2001, supporting the government’s economic program for 2000–01. The SBA was focused on moving Pakistan to high, sustainable growth by growth its balance of payments position, building reserves, and reducing public sector indebtedness. At this critical period in the economy of the country, Pakistan was left with very few options, as default on its external debt appeared quite pending. Thus, an agreement with the IMF was essential in order to obtain rescheduling of Pakistan’s Paris Club debt. The government paid a heavy price for reestablishing the country’s lost credibility and was

forced to take some immediate and very tough measures. Fulfillment of these requirements triggered approval of the SBA by the IMF board. after, the government implemented an equally tough set of additional measures to meet the performance criteria and structural benchmarks during the next ten months

IMF conditions for Pakistan;
Industrial and agriculture tax has to be increased. • reducing foreign exchange market intervention by the State Bank of Pakistan • Focus on quarterly quantitative targets for: government borrowing from the State Bank of Pakistan • Reduce the budget deficit. • Contracting or guaranteeing of non concessional loans by the public sector. • Phasing out electricity subsidies. • Phasing out fuel subsidies. • Interest rate has been increased to tighten monetary policy. • Government expenditure must be reduced. • Reduce 1/3 of Military spendindings • Reduced 50% of pensions • The GST was to be implemented by retail outlets with turnovers in excess of PRs 5million • The budget deficit was to be reduced from 6.4 percent of GDP to 5.2 percent of GDP • Petroleum prices was to be adjusted in line with international market changes The number of tariff steps was to be reduced from 5 to 4 in July 2001, to 3 in January 2002, and the maximum import tariff from 35 percent to 30 percent by June 2001, and to 25 percent by June 2002 .The SBA was fully implemented and all the allotted funds were disbursed. Pakistan addressed most of the conditionalities and met the IMF targets. As a result, relations between the IMF and government of Pakistan improved and the IMF approved a three-year Poverty Reduction and Growth Facility (PRGF) loan to Pakistan in December 2001 to help fight poverty. The PRGF is a package initially valued at $1.3 billion. So far, this program is going well and, as of September 2003, Pakistan had received six (totaling $738 million) out of a scheduled twelve disbursements. Elected civilian governments in Pakistan since 1988 had resisted IMF conditionalities and reforms. This was one of the main reasons behind the lack of a cordial relationship with the IMF. the military government of General Musharraf implemented unpopular reforms because: • The country was on the verge of serious financial crisis and the new government had assumed power with a commitment to avert this crisis • These reforms fitted in well with the strategic vision of President Musharraf • The team of technocrats commissioned to carry out the reforms possessed the requisite capacity and commitment to design a home-grown program

why Pakistan need loan?
• for financial resources and resolving the balance of payment problems • To secure access to funds from other financial institutions and bilateral donors • To obtain a “seal of approval” for seeking commercial and export credit facilities • To shift the blame for some politically unpopular decisions to external pressures and compulsions • The desire of reformist economic managers to restrain and block the pursuit of populist policies of political leaders • In the post-1998 period, to pursue debt relief and rescheduling. It can be concluded that political instability, economic corruption, large-scale budget deficits, balance of payment deficits, and increasing debt led to Pakistan’s engagement with the IMF after 1988. The IMF provided different loans to Pakistan, all of which were accompanied by conditionalities. Most of the time, civilian governments resisted these conditionalities, causing a souring of Pakistan’s relationship with the IMF. The relationship between Pakistan and the IMF improved after the 1999 coup, when General Musharraf took over the government. The main reason for this improved relationship was the military government’s willingness to implement the IMF-imposed reforms. Pakistan The IMF Arrangement and its Implications In fact by providing large financial support to Pakistan, the IMF is sending a strong signal to the donor community about the country’s improved macro-economic prospects. The IMF arrangement is part of a broader package which involves other multilateral institutions and donor countries. It aims to restore macro-economic stability and investor confidence through a reduction of economic and monetary policies, while simultaneously preserving social stability and enough support for the poor, stated the press release issued by the IMF. The loan tranches are subject to quarterly reviews by the IMF which has set forth certain conditions. Nevertheless, most of the conditions are already part of the government’s economic agenda announced during the budget in June this year. The Fund stipulates bringing Pakistan’s financial deficit down from 7.4 percent of GDP to 4.5 percent and 3.3 percent in 2009/10 by phasing out energy and electricity subsidies and strengthening revenue mobilization through tax policy and administration measures. These measures, if implemented successfully, will help to meet the target to some extent, particularly the phasing out of subsidies. In the short run, reforms in tax administration and, particularly the one percent increase\in the general sales tax from 15 to 16 percent implemented in the 2009 budget will help raise tax-to-GDP ratio. In the medium-term, the government will have to take a number of measures such as eliminating exemptions in the general sales tax and the income tax, and introducing a commercial agriculture tax. To provide support to the poor, spending on the social safety net will be increased from 0.6 to 0.9 percent of GDP in 2009 with the help of IMF.

IMF conditions effect on the economy;
IMF support programs have a big and a clear effect on the economy of Pakistan so the first effect is that IMF worsened the unemployment situation in the economy, which was 1.7% of the total labor force in 1970 and has worsened to 7.8% of the total labor force in 2000. Reduction in public expenditure is one of the main conditionalities of the IMF in all these programs. The reduction in public expenditure can be achieved either by

restricting the acquisition of the supplies or limiting the employment cost through reduction in employment or limiting the increase in the nominal income below the inflation rate. The decline in the employment cost has been brought about by containing the increase in the nominal income of government employees and even imposing a complete ban on recruitments and encouraging early retirement. Privatization has also inversely affected the level of employment, the new owners have laid off workers employed in the public sector. The continuous contractionary policies have caused little expansion of the economy which has been unable to employ the growing labor force in the country. During the programs the Pakistani economy witnessed not only complete bans on recruitment but also schemes such as the “golden hand shake” that were introduced to encourage early retirement and on the other hand a continuous decrease in development expenditures has also caused worsened the employment situation in the country. IMF programs have improved the budgetary balance. They have reduced the budget deficit, which is a big problem for the economy of Pakistan. The bank rate policy variable has also a positive coefficient that is significant at the 5 percent level of significance. So the bank rate has also contributed to the reduction of the budget deficit. This is the only area where the Pakistan economy has been slightly better off due to fund supported programs. The fiscal deficit has come down from 8 percent of GDP in 1987 to 5 percent of GDP in 2000. The conditionality posed by the IMF to reduce the public expenditure and increase tax collection has contributed to the reduction of the budget deficit. Pakistan has cut the public expenditure from the very beginning of the programs though the share of tax collection to GDP does not show much improvement. Second, increasing the independent power of the central bank and financial reforms set by the fund has increased the cost of domestic financing of the government. IMF programs have brought a large increase in the rate of inflation. The policy variables, money supply and the exchange rate and other contributors to increase rate of inflation. The depreciation of the Pak Rupee increased the prices of machinery and crude oil. Both are the basic inputs in domestic industry, and the rise in their prices increased the pressure of cost-push inflation, the main source of inflation in Pakistan. But for the last three years the rate of inflation has come down due to the continuous contractionary policies on both counts in terms of fiscal policy by reducing public expenditure and by monetary policy by reducing the growth of the money supply. But price stability has been achieved at the expense of GDP growth, increasing unemployment and increasing poverty. Gradual stabilization policies play in important role in the success of reform programs. Pakistan initiated financial reforms during the early years of the programs. The sequencing of financial reforms has been critical in the sense that these reforms were undertaken before the

reduction in the budget deficit. Financial reforms increased the competitiveness of the government in generating funds from the public, which increase the funds rates. Increases in the interest rate on the funds bills and other government securities caused the debt servicing of the government to accelerate. As the government faced the conditionality of reducing public expenditure an increase in debt servicing put pressure on the government to reduce development expenditure, which resulted in a rapid increase of poverty incidence. Privatization was adopted, but prior to the adoption no safety nets were formed for those workers who would be laid off after the privatization. This wrong sequencing of privatization has led to chronic unemployment that is still increasing. In the trade regime, immediate openness to trade and reductions in tariffs and other quantitative and non-quantitative measures in order to enhance efficiency and competitiveness have caused many domestic units to be closed, and during these reforms around 3000 units have been shut down.So shortly that IMF programs have increased the unemployment rate, increase of poverty, increased the inflation rate, worsened the current account deficits and contributed to slowing down the pace of the economy. Besides the other reasons, inadequate sequencing of economic reforms is also a contributor to these results. The first indicator of the implementation of reforms can be the completeness of the arrangements settled with the IMF, as these arrangements are based on the conditionalities set by the IMF. Inability to meet the minimum requirements causes the termination of disbursement of a loan before the expiration date and completing the approved amount

It is conclude that Pakistan is one of the best member and having a long relations with IMF.IMF play an important rule in the economy of Pakistan. IMF provides $7.6 billion loan to Pakistan under a certain programs and seem that it help the economy of Pakistan, but on other hand impose a harsh condition which spoil the economy of a country . IMF as an institution which provides emergency credits to those countries which needs funds and they assures the IMF that they can repay the loan., effect of poor economic policies and financial crisis in a member country. In from return they inflict or impose painful policies, which extract the deficit budget, through spending cuts or increased revenue (taxation), a rise in interest rates to reduce inflation, and variation of the exchange rate etc. Now from earlier discussions IMF increase the price level of Pakistan during the last twelve years. while on the other side all of the program policies were mainly contractionary, in order to bring price stability, the supply side (cost push inflation) has come into the picture during program years, which is mainly due to deflation and liberalization of trade that has increased the cost of the domestic industries by pushing

up the prices of inputs used in these industries. while the effect of fund-supported programs on economic growth is negative, it is not statistically significant. But the IMF programs have succeeded in bringing a slight reduction of the budget deficit during the last twelve years. Public expenditure cuts and increases in tax revenue are among the main conditionality of the IMF economic improvement packages, but in the case of Pakistan the share of revenue to GDP has not shown much improvement. However development expenditure shows a continuous declining trend, bringing improvements in the budget surplus at the cost of increasing unemployment and rapid increase in power .From earlier study we also know that the governments of Pakistan have changed between 1988 and1999,which shows a climate of political uncertainty and weak support for the Federal government. Therefore the weak governments in order to implement reformist policiesand block the pursuit of populist policies by political leaders, agreed to join the Fund’s programs, so many agreements were signed but only one the Musharraf’s resigme were successfully implemented. which shows that in this period IMF and Pakistan were passing through a harsh relations.


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