IMF: A BLESSING OR CURSE FOR PAKISTAN’S ECONOMY

A CRITICAL ANALYSIS

By

Mian Abid Qayyum Advocate

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

Abstract:

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

Introduction:

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

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

History of loans from IMF by Pakistan:

Pakistan joined the membership of IMF on July 11, 1950. Prior to the recently ended
Stand-By Arrangement1, the country had availed the IMF loan facility 18 times since 1958.
The country approached the IMF in 1958 for the first time to seek a loan worth 25 million
Special Drawing Rights (SDR2) equivalents to nearly US $ 24.80 million under the Stand-
By Arrangement. It was, however, cancelled even before its date of expiry due to its non
utilisation. An in-depth review of the performance of successive governments in availing of
various IMF loan packages sanctioned for Pakistan unfolds a chronicle of both successes
and failures in implementation of these loan facilities.3

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

Date of Expiration Amount Approved Amount Drawn

Type Arrangement Date (SDR Million) (SDR Million)

EFF Sep 04, 2013 Sep 03, 2016 4,393.00 2,160.00

Stand-By Nov 24, 2008 Sep 30, 2011 7,235.90 2,868.64

1
Stand –By Arrangements (SBA) has been designed to provide short-term balance of payments assistance to middle
income countries for meeting deficits of a temporary or cyclical nature. These arrangements are typically for 12 to 16
months. Drawings and disbursing are phased on quarterly basis, with their release made conditional on meeting
performance (conditionalities) criteria after the completion of periodic program reviews. For details regarding this kind
of facility along with others may be referred to web link[http://www.imf.org/external/np/exr/facts/howlend.htm]
2 Special Drawing Right (SDR) is an international monetary unit of account used by IMF for the purpose of maintaining

international foreign exchange reserve assets for allocation to its member countries. It represents a claim to foreign
currencies for which it may be exchanged in times of need.
3 Syed Nazre Hyder IMF STAND-BY ARRANGENT FOR PAKISTAN AND ITS INCONCLUSIVE END- WHAT WENT WRONG?

Working Paper #126

4 The facts, figures and amount of borrowing directly taken from the website of IMF
https://www.imf.org/external/np/fin/tad/exfin2.aspx?memberkey1=760&date1Key=2015-02-28
ECF Dec 06, 2001 Dec 05, 2004 1,033.70 861.42

Forthcoming or expected borrowings

2015 2016 2017 2018 2019

Principal 207.21 150.00 360.00

Charges/Interest 17.92 22.93 22.91 22.52 20.20

Total 225.13 22.93 22.91 172.52 380.20

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

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

Positives effects of borrowing from IMF -Pros:

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

The immediate benefits include quick influx of liquidity, improvement in credit rating by
reducing the country’s default risk, enhancement of foreign exchange reserves, stabilization
of rupee (which faced 25% depreciation against U.S. dollar till November), increased
investor ‟s confidence in both money and capital markets and increased financial assistance
from the friends of Pakistan. However the negative impacts associated with the increase in
policy rate include increased costs for the banks, increase in unemployment (because many
banks and organizations will go for restructuring and downsizing to reduce their operating
costs) and increase in poverty rate.

Drawbacks of borrowing from IMF: A critical analysis:-

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

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

 Reduction in expenditures on public sector development program, devaluation of
Pak Rupee and freezing of non development expenditure under the defense budget.
 Non provision of supplementary grants to government departments and ending
subsidy on gas and electricity which adding more suffering of a lay man.
 Increase in markup rate of banks and on inter-bank transitions.
 Uniformity in the interbank and open market dollar exchange rate.
 Stoppage of government financial intervention in stock market.
 Decline in GDP growth rate and other economic indicators right after infusion of
IMF funds in the economy.
In addition to all these, the Fund pays more importance to the creditors over the interest of
the country, contractionary monetary policy dictated by IMF leads towards raising rate of
interest. The Fund seems to be more concerned and insisting the government for spending
fuels inflation, whereas most of the inflation in Pakistan is cost push5

Is IMF an anti growth and anti poor Institution?

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

5A phenomenon in which the general price levels rise (inflation) due to increases in the cost of wages and raw
materials.
Meekal Aziz Ahmad6, the Fund is accused of being anti-growth and anti-poor. Its
antigrowth reputation stems from its perceived obsession with fiscal austerity. This
approach, it is alleged, is recommended always and everywhere, irrespective of specific
country circumstances—the familiar “cookie-cutter” criticism of the Fund’s approach to
adjustment. However, a crisis situation in any country has several common characteristics:
excessive internal and external deficits, slowing growth, accelerating inflation and rapidly
diminishing foreign exchange reserves. In such a situation of extreme disequilibrium, the
country has no choice but to stabilise the economy first via measures to reduce aggregate
demand and bring it into better alignment with the economy’s aggregate supply potential,
even at the cost of some short term sacrifice to growth.7 The Fund is also accused of being
anti-poor by allegedly imposing draconian cuts in development spending but more
specifically on the “soft” social sectors, or so-called “pro-poor expenditures”, because the
quality of fiscal adjustment to them is less important than the cold calculus of its
magnitude. This is untrue. The prerogative of where to cut spending, generally considered a
better and longer lasting route to fiscal adjustment than raising taxes, belongs to the
country authorities, not the Fund. The Fund will certainly give advice and they will
typically focus on non-interest current spending which they may see as being wasteful
and/or excessive (such as 80- member cabinets of Ministers and Advisors, and their perks).
In Pakistan’s present security environment, the Fund has probably refrained from
suggesting cuts in defense spending or has accommodated the authorities’ proposals. In the
past, Fund programmes would typically insist on a ratio of defense spending to GDP that
falls over time while striving to ensure that development spending exceeds defense
spending—which was not always or often the case and which would attract critical
comment from several Executive Directors who would wonder what kind of programme,
with such skewed priorities, they were being asked to approve.8

Conclusion:

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

6 Meekal Aziz Ahmed, Visiting Senior Fellow, PIDE, formerly Joint Chief Economist, Planning Commission of Pakistan, and
Senior Advisor to Executive Director, IMF, Washington, D.C.
7 Dr Rashid Amjad, THE IMF AND PAKISTAN (A Road to Nowhere), Pakistan Institute of Development Economics Quaid-i-

Azam University Campus, page 11

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

Azam University Campus, page 13

had two while Nepal has had three. Pakistan, by contrast, has had 12 IMF programmes
since 1988, more than all the other countries of the region combined. All of the 12
facilities that Pakistan has signed with the IMF since 1988 have had two objectives: one, to
close the gap between revenues and expenditures in order to prevent the deficit from
getting out of control and; two, to raise the level of the foreign exchange reserves. For
almost a quarter century now, these are the two core priorities that Pakistan has been
grappling with. In order to achieve these objectives, it was considered necessary to reform
the tax machinery and to grant autonomy to the State Bank to manage the reserves. Each
programme that Pakistan has signed has tried to accomplish these objectives, but in every
case the authorities have been unable to follow through with their commitments. In short,
the story of the IMF and Pakistan has been told very sparsely, and is not widely understood
and at the end I will conclude with one of the argument of Dr. Ehtisham Ahmad and
Azizali Mohammad9 who argued in their paper, “the Fund’s role appears to have produced
an effect similar to Dutch disease10, except there is no oil or any other resource in the
picture. The resource that has produced continuous inflows of easy money that prevent a
broadening of the revenue base as well as hinder the accumulation of reserves through
broadening of the export base, is what they call a “locational rent”.

Bibliography:

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

PAKISTAN AND ITS INCONCLUSIVE END- WHAT WENT WRONG?
 IMF database online available at
https://www.imf.org/external/np/fin/tad/exfin2.aspx?memberkey1=760&date1Key
2015-02-28
 Dr Rashid Amjad, THE IMF AND PAKISTAN (A Road to Nowhere), Pakistan
Institute of Development Economics Quaid-i-Azam University Campus

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

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

10Dutch Disease is a technical term used by economists to describe a situation where a country is used to easy money
from a particular source
 http://www.ukessays.com/essays/economics/the-role-of-the-imf-and-world-bank-in-
pakistan-economics-essay.php
 Ahmed, Meekal, (2011) An Economic Crisis State? In Maleeha Lodhi (ed.)
Pakistan: Beyond the Crisis State, Columbia University Press.

 IMF Survey (2012) Engagement with IMF Helps Poorer Countries through Global
Crisis. September 13.
 Naqvi, Natalya (2012) The IMF and Us. Daily Express Tribune.
 Impact of foreign aid, online access http://www.scribd.com/doc/30800414/Impact-
of-Foreign-Aid-on-Pakistan#scribd
 http://www.pakistantoday.com.pk/2014/11/15/comment/imf-and-world-banks
restructuring-agreement-for-pakistan/
 Yaqub, Muhammad (2012) See series of hard-hitting articles by Stopping
Economic Policy Madnesss. The News International, October 18, 2012 and “The
Twist in the Tail”, The News International, Money Matters, November 5, 2012.