IMF Sponsoring and Pakistan

Cases in Management
Assignment: IMF SPONSORING AND PAKISTAN

Submitted By
Name Roll Number
Syed Umair Qadri MB-F15-280013
Nabi Bukhsh Qasir EMBA-S17-270104
Shoaib Ahmed MB-F15-280011

Class: MBA-28

Submitted To: Ma’am Dr. Zeb Jan

Date: November 30, 2018

ARMY PUBLIC COLLEGE OF MANAGEMENT SCIENCES

NUML 2018

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Table of Contents
PART ONE....................................................................................................................................................2
IMF Introduction.........................................................................................................................................2
What Does It Do?....................................................................................................................................2
How Does It Work?.................................................................................................................................3
IMF Benefits................................................................................................................................................4
Opinion against IMF....................................................................................................................................5
Pakistan and the IMF: a (very) brief history.................................................................................................6
Re politicizing the Pakistani economy.........................................................................................................7
PART TWO...................................................................................................................................................8
CURRENT DEVELOPMENT IN THE ECONOMY OF PAKISTAN........................................................................8
Expected GDP of Pakistan.......................................................................................................................9
Program Financing, its Aims and Modalities of Implementation...............................................................10
Pakistan Begins Talks with IMF on Three-Year Bailout Package................................................................13
IMF sets stricter conditions for bailout package........................................................................................14
PART THREE...............................................................................................................................................15
Pakistan’s debt repayment capacity..........................................................................................................15
IMF loan won’t solve all of Pakistan’s problems........................................................................................17
Recommendations.....................................................................................................................................18
Conclusion.................................................................................................................................................20

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IMF Sponsoring Pakistan

PART ONE

IMF Introduction

The International Monetary Fund (IMF) is an international organization that provides financial

assistance and advice to member countries.

What Does It Do? 

The IMF was born at the end of World War II, out of the Bretton Woods Conference in 1945. It
was created out of a need to prevent economic crises like the Great Depression. With its sister
organization, the World Bank, the IMF is the largest public lender of funds in the world. It is a
specialized agency of the United Nations and is run by its 186 member countries. Membership is
open to any country that conducts foreign policy and accepts the organization's statutes. The IMF
is responsible for the creation and maintenance of the international monetary system, the system
by which international payments among countries take place. It thus strives to provide a
systematic mechanism for foreign exchange transactions in order to foster investment and
promote balanced global economic trade. To achieve these goals, the IMF focuses and advises on
the macroeconomic policies of a country, which affect its exchange rate and its government's
budget, money and credit management. The IMF will also appraise a country's financial sector
and its regulatory policies, as well as structural policies within the macro economy that relate to
the labor market and employment. In addition, as a fund, it may offer financial assistance to
nations in need of correcting balance of payments discrepancies. The IMF is thus entrusted with
nurturing economic growth and maintaining high levels of employment within countries.

How Does It Work?

The IMF gets its money from quota subscriptions paid by member states. The size of each quota
is determined by how much each government can pay according to the size of its economy. The
quota in turn determines the weight each country has within the IMF - and hence it’s voting
rights - as well as how much financing it can receive from the IMF. Twenty-five percent of each
country's quota is paid in the form of special drawing rights (SDRs), which are a claim on the
freely usable currencies of IMF members. Before SDRs, the Bretton Woods system had been

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based on a fixed exchange rate, and it was feared that there would not be enough reserves to
finance global economic growth. Therefore, in 1968, the IMF created the SDRs, which are a kind
of international reserve asset. They were created to supplement the international reserves of the
time, which were gold and the U.S. dollar. The SDR is not a currency; it is a unit of account by
which member states can exchange with one another in order to settle international accounts. The
SDR can also be used in exchange for other freely-traded currencies of IMF members. A country
may do this when it has a deficit and needs more foreign currency to pay its international
obligations.

The SDR's value lies in the fact that member states commit to honor their obligations to use and
accept SDRs. Each member country is assigned a certain amount of SDRs based on how much
the country contributes to the Fund (which is based on the size of the country's economy).
However, the need for SDRs lessened when major economies dropped the fixed exchange rate
and opted for floating rates instead. The IMF does all of its accounting in SDRs, and commercial
banks accept SDR denominated accounts. The value of the SDR is adjusted daily against
a basket of currencies, which currently includes the U.S. dollar, the Japanese yen, the euro, and
the British pound. The larger the country, the larger its contribution; thus the U.S. contributes
about 18% of total quotas while the Seychelles Islands contribute a modest 0.004%. If called
upon by the IMF, a country can pay the rest of its quota in its local currency. The IMF may also
borrow funds, if necessary, under two separate agreements with member countries. In total, it has
SDR 212 billion (USD 290 billion) in quotas and SDR 34 billion (USD 46 billion) available to
borrow.

IMF Benefits

The IMF offers its assistance in the form of surveillance, which it conducts on a yearly basis for
individual countries, regions and the global economy as a whole. However, a country may ask
for financial assistance if it finds itself in an economic crisis, whether caused by a sudden shock
to its economy or poor macroeconomic planning. A financial crisis will result in
severe devaluation of the country's currency or a major depletion of the nation's foreign reserves.
In return for the IMF's help, a country is usually required to embark on an IMF-monitored
economic reform program, otherwise known as Structural Adjustment Policies (SAPs).

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There are three more widely implemented facilities by which the IMF can lend its money. A
stand-by agreement offers financing of a short-term balance of payments, usually between 12 to
18 months. The extended fund facility (EFF) is a medium-term arrangement by which countries
can borrow a certain amount of money, typically over a three- to four-year period. The EFF aims
to address structural problems within the macro economy that are causing chronic balance of
payment inequities. The structural problems are addressed through financial and tax sector
reform and the privatization of public enterprises. The third main facility offered by the IMF is
known as the poverty reduction and growth facility (PRGF). As the name implies, it aims to
reduce poverty in the poorest of member countries while laying the foundations for economic
development. Loans are administered with especially low interest rates.

The IMF also offers technical assistance to transitional economies in the changeover
from centrally planned to market run economies. The IMF also offers emergency funds to
collapsed economies, as it did for Korea during the 1997 financial crisis in Asia. The funds were
injected into Korea's foreign reserves in order to boost the local currency, thereby helping the
country avoid a damaging devaluation. Emergency funds can also be loaned to countries that
have faced economic crisis as a result of a natural disaster. (For a better look at how economies
make the transition from being state run to free markets.

All facilities of the IMF aim to create sustainable development within a country and try to create
policies that will be accepted by the local populations. However, the IMF is not an aid agency, so
all loans are given on the condition that the country implement the SAPs and make it a priority to
pay back what it has borrowed. Currently, all countries that are under IMF programs are
developing, transitional and emerging market countries (countries that have faced financial
crisis).

Opinion against IMF

Because the IMF lends its money with "strings attached" in the form of its SAPs, many people
and organizations are vehemently opposed to the activities. Opposition groups claim that
structural adjustment is an undemocratic and inhumane means of loaning funds to countries
facing economic failure. Debtor countries to the IMF are often faced with having to put financial

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concerns ahead of social ones. Thus, by being required to open up their economies to foreign
investment, to privatize public enterprises, and to cut government spending, these countries
suffer an inability to properly fund their education and health programs. Moreover, foreign
corporations often exploit the situation by taking advantage of local cheap labor while showing
no regard for the environment. The oppositional groups say that locally cultivated programs,
with a more grassroots approach towards development, would provide greater relief to these
economies. Critics of the IMF say that, as it stands now, the IMF is only deepening the rift
between the wealthy and the poor nations of the world.

Indeed, it seems that many countries cannot end the spiral of debt and devaluation. Mexico,
which sparked the infamous "debt crisis" of 1982 when it announced it was on the verge of
defaulting on all its debts in the wake of low international oil prices and high interest rates in the
international financial markets, has yet to show its ability to end its need for the IMF and its
structural adjustment policies. Is it because these policies have not been able to address the root
of the problem? Could more grassroots solutions be the answer? These questions are not easy.
There are, however, some cases where the IMF goes in and exits once it has helped solve
problems. Egypt is an example of a country that embarked upon an IMF structural adjustment
program and was able to finish with it.

Providing assistance with development is an ever-evolving and dynamic endeavor. While the
international system aims to create a balanced global economy, it should strive to address local
needs and solutions. On the other hand, we cannot ignore the benefits that can be achieved by
learning from others. 

Pakistan and the IMF: a (very) brief history

Though Pakistan began its borrowing history with the IMF under Ayub Khan, its first Structural
Adjustment Package (loans disbursed with added conditions of macroeconomic policy changes
to ensure repayment) was accepted by Ziaul Haq in 1982.

Since then, various governments have accepted 12 conditional loan packages from the Fund, all
of which have sung quite similar policy tunes: privatization of state assets, liberalization of the
terms of trade, indirect taxation, subsidy cuts and an almost singular focus on reducing budget

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deficits. Socioeconomic casualties at the hands of the IMF conditions have included social sector
spending (most notably, health and education), employment and accessibility to essential items
like oil and electricity.

The Fund’s macroeconomic prescriptions have been so consistent over the past three decades
that, whether it be 1988 or 2018, it seems one can fairly confidently predict the contents of any
loan package, without a single document in hand. And though there are now claims emerging
from both within and outside the IMF that it has moved away from any dogmatic adherence to
the Washington Consensus, there is very little evidence to show for it.

In a March 2018 IMF Country Report on Pakistan, the Fund’s diagnosis of the country’s
economic woes sounds familiar: insufficient exchange-rate flexibility, too many burdensome
public-sector enterprises, not enough “growth-supporting structural reforms”. Indeed, such an
approach is not unique to Pakistan — Joseph Stieglitz, Nobel Prize winner and former chief
economist at the World Bank, has criticized the Fund for its ‘cookie-cutter’ approach to
conditional lending and structural reform, with countries as diverse as Argentina, Nigeria and
Pakistan receiving virtually identical loan packages over the years.

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Re politicizing the Pakistani economy

Three decades and very little to show for it — it is clear that the Pakistani economy is far from
stable after structural adjustment. And yet, as this next government gears up for another go, there
is nothing but the slow simmering of protest in a few think-pieces and opportunistic political
challenges. There is something alienating about economics. At its core, it is merely a framework
through which a society decides how to divvy up the goods. These decisions should be socially-
deliberated, stemming from a value-led, justice-driven consensus. Instead, when the flurry of
dizzying demand curves, maddening models and indecipherable equations are thrown at us in the
hopes we will defer to the ‘experts’, we capitulate.

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PART TWO

CURRENT DEVELOPMENT IN THE ECONOMY OF PAKISTAN

Economic growth has positive relation with job creation. Worldwide, the trend is that growth in
services sector and industries tend to impact job creation more than agriculture. Most of the
developed economies are now tending to focus on services and manufacturing growth. This
increases job creation, reduces unemployment, helps economy and maintains social stability.
Growth in agriculture has less impact on job creation. According to various Bureaus of Labor
Statistics, unemployment rate of 4-6% is considered healthy for economy. When unemployment
exceeds 6%, it has negative impact. When it reaches 16% and above, it’s highly likely that civil
unrest, rising crime rates and even protests against the government would continue.
Policymakers try to keep it below 6%.

Pakistan's unemployment is now at 5.9%. It shows healthy trend but is vulnerable to changes in
the future. Pakistan produces 1.3 million graduates every year and needs almost 1.0 million jobs
to accommodate the new job seekers for social stability. Rising frictional unemployment would
tend to slow growth and lead to deflationary spiral in an economy. For this kind of momentum,
Pakistan needs to grow its services and manufacturing sector. Pakistan's services and
manufacturing sectors are not growing since last decade and stand at 34.25% and 23.4% of total
GDP. This is alarming and dangerous according to State Bank of Pakistan because it shows that
the future job seekers would be in socially unstable situation which would destroy the social
fabric of this country.

State Bank of Pakistan has documented to Ministry of Finance that roughly 1.3 million jobs
should be created per annum for social stability and healthy economic foundation. This needs
growth. Pakistan's GDP growth has remained at an average 4.8%. This is not covering the
demand for future job prospects and may lead to deflationary spirals in already fragile
economy.Pakistan needs 6.6% of its GDP growth on average to keep unemployment within
healthy range. For this, the growth in services sector and manufacturing is of utmost importance.

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As PTI-led administration has its manifesto promising 10 million jobs and 5 million houses, the
GDP growth should be well above 6%. However, the PTI economic policy and framework for
macroeconomic stabilization and growth led strategy submitted to IMF for loan sanctioning for
helping its dwindling foreign exchange reserves would slow growth rate for the next three years.
These three years would be critical for Pakistan's overall and future economic growth. The next
two years would see macroeconomic stabilization and then PTI would work for job placements
and service structures for its employed and unemployed youth. By year 2020, if the framework
suggested to IMF has been implemented in its true sense, macroeconomic stabilization and
export driven growth would help social stability in the long-run.

Expected GDP of Pakistan

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Program Financing, its Aims and Modalities of Implementation

While evaluating the request for financial assistance, the IMF staff supported the proposal
backed by their analysis that “even with the envisaged narrowing of external current account
deficit, the overall gross external financing needs would remain large, particularly during the first
year of the program” . It realized that financial account would remain under constant strain in
spite of large pledges from polygonal sources and privatization proceeds likely to be received in
future. They identified that a sizeable financing gap would remain taking into account the
inadequate private financial inflows and thus the financing by the Fund will be essentially
required to help build reserves from the current low levels. Since the IMF appraisal concluded
that Pakistan met all the ‘Exceptional Access Criteria’ it sanctioned a loan on exceptional access
under ‘upper credit tranche’ terms. According to IMF since Pakistan had a relatively moderate
external debt burden, it may be able to meet its obligations towards the Fund in a timely manner
in case the government’s owned Structural Performance Criteria and Benchmarks targets are
fully and effectively implemented as per schedule.

As stated earlier, the conclusion drawn by the Fund was based on its scientific analysis as well as
on the ground of a good record of the country in servicing the fund’s obligations, especially in
the recent past. These considerations became the basis for approval of SBA program with
exceptional access” under “upper credit tranche. In case of Pakistan, although the crisis was
basically of current account, the Fund approved this facility in spite of realizing that the balance
of payment needs in Pakistan are unlikely to be short-lived and the country will be facing a
prolonged need for current account adjustment.

The IMF fully realized that overcoming the current economic and financial crisis of Pakistan will
require hard choices and sustained actions. The government and IMF both, therefore, strongly
felt that the success of the financial assistance programme hinged on its unrelenting and vigorous
implementation of economic reforms to restore the economy and stabilize it for sustainable
growth. A package of financial assistance, as stated earlier, amounting to US $ 7.6 billion worth
SDR 5.17 billion (500% of the country’s quota), albeit with some conditionalities was, therefore,
approved by IMF in a record time of four days following the request. However, prior to the

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acceptance of the request a thorough interaction of the Fund’s technical mission had taken place
with the authorities to delineate the future policies of structural economic reforms attached to
loan financing which were to be pursued by the government.

Keeping in view the urgency of financial assistance, the loan was approved in November 2008
under the Fund’s ‘Emergency Financing Mechanism’ procedure. The access was, therefore,
made frontloaded, given the needs at the beginning of the programme. The first release
amounting to billion worth SDR 2.067 billion (200 per cent of SDR quota) was, therefore, paid
on emergency basis, while the remaining tranches were originally planned for disbursement
through seven installments. Later, in August 2009, it was augmented to US $ 11.33 billion worth
SDRs 7.24 billion (700 per cent of the quota), covering a period of 25 months ending in
December, 2010. It was enhanced on the ground that a hefty dose of financial help was necessary
on account of the country’s sizeable external imbalance and also due to the risk of large capital
outflows, which had already started gaining momentum. It may, however, be noted that the
amount of loan approved under the SBA was more than double of the entire amount of the 19
loans sanctioned so far to Pakistan by the IMF since 1958. At the time of granting the financial
support, the Fund also held the view that while macroeconomic tightening will definitely hurt, it
was necessary to achieve long-term sustainable growth.

It was also hoped that the consequential burden of adjustment would fall least on the most
vulnerable members of Pakistani society. That is why the IMF was in full agreement with the
social safety network program proposed by the government and considered it mandatory for the
SBA program to be simultaneously oriented towards ensuring key protection measures for the
have-nots for which the expenditure on social safety warranted a substantial increase. This was
meant to ensure by incorporating social security for the poor as an element of the conditionalities
attached to the programme. The disbursement under the program was, therefore, subjected to
satisfactory quarterly review of the principle of “exceptional excess” is provided to any member
state, only in case it faces crisis in its capital account through resources of the Supplementary
Reserve Facility (SRF), where SRF conditions apply. It is meant for colossal short-term
financing requirements reflected by stress on capital account and the country’s foreign reserves
observance of conditionalities i.e., performance criteria (PCs) and benchmarks (BMs) targets
attached to the program by IMF, said to have been set out in consultation with the government.

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The SBA programme approved by the IMF had three overarching objectives which were said to
be designed by IMF and the government authorities with mutual consultations. The financing
program aimed to “(i) restore financial stability through tightening of fiscal and monetary
policies to bring down inflation, strengthen foreign currency reserves and develop the confidence
of local and foreign investors; (ii) protect the poor to preserve social stability through a well-
targeted and adequately funded social safety net; and (iii) raise budgetary revenues through
comprehensive tax reforms to enable significant increase in public investment and social
spending required for achieving sustainable growth.”

Pakistan Begins Talks with IMF on Three-Year Bailout Package

Pakistan has begun talks with the International Monetary Fund (IMF) on a possible bailout
package to help the country overcome a deepening economic crisis. Finance Ministry spokesman
Noor Ahmad said on November 7 that Pakistan expected to receive a three-year assistance
package from the international lender of last resort.

The talks on what would be the 13th IMF bailout package since the 1980s are scheduled to finish
on November 20. Islamabad last received an IMF bailout of $6.6 billion in 2013. Hours ahead of
the IMF delegation's arrival in Islamabad, Finance Minister Asad Umar announced that an
immediate balance of payment crisis has been averted with the help of China and Saudi Arabia.
Pakistan was facing a $12 billion financing gap for the current fiscal year. Umar told a press
conference late on November 6 that Saudi Arabia had already committed $6 billion and another
$6 billion would come from China. Last month, Saudi Arabia announced it would lend $3 billion
to Pakistan's central bank for a year to help maintain reserves at a safe level, and provide another
$3 billion through deferred payments on oil purchases. Chinese leaders pledged to help Pakistan
during Prime Minister Imran Khan's visit to Beijing last week. Details of the Chinese assistance
are still under negotiation.

Umar said Pakistan's finance secretary and central bank governor will travel to Beijing on
November 9 to finalize terms of the assistance. Khan's government has sought to minimize the

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amount borrowed from the IMF by getting loans from "friendly" countries. The conditions the
IMF typically attaches to its loans include such unpopular measures as devaluing the country's
currency, balancing the budget with spending cuts and tax increases, and curbing imports to tame
the trade deficit. Pakistani officials are concerned tough IMF conditions would hit economic
growth in the short term and prevent Khan from fulfilling populist campaign pledges. Khan's
government has pledged to create an "Islamic welfare state" and help build 5 million homes for
the poor. Pakistan's current account deficit widened by 43 percent to $18 billion in the last fiscal
year and its budget deficit has ballooned to 6.6 percent of economic output, creating a financial
crunch that economists say will require IMF intervention to overcome.

IMF sets stricter conditions for bailout package

As talks enter the final phase, the International Monetary Fund (IMF) has set even stricter
conditions for Pakistan to implement in exchange for a bailout package – much needed for
economic revival. Some of the major conditions include imposition of more taxes worth Rs150
billion, further reduction in the rupee value as well as a tighter monetary policy. Led by its
mission chief Harald Finger, the IMF delegation is holding meetings with government officials
to know their viewpoint on the reforms. However, the government officials said no such
conditions – affecting the country’s welfare and sovereignty – would be accepted, adding that
already the government was working on the agenda of economic reforms and development.
Apprehensions were rife that implementing the IMF terms could slow down economic growth,
stoke inflation and raise unemployment rate. According to sources, the IMF review mission
would stay in Pakistan till November 22. Until then, it would work on making a Technical
Memorandum of Understanding as well as Memorandum of Economic and Financial Policies
(MEFP) and Letter of Intent (LoI) for disbursing the loan and setting terms and conditions. In
the wake of reaching an agreement, the LoI and MEFP would be inked. However, sources said
besides the IMF, Pakistan was focusing on alternate sources and during the current visit of
Prime Minister Imran Khan to the United Arab Emirates, possibility of making headway for
economic revival and overcoming financial troubles exists. They said after that, PM Imran’s
visit to Malaysia could also prove beneficial. Sources said talks were under way with the IMF
in which the international lender had presented proposals to reduce the budget deficit, adding

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that the fund had suggested 1.0 per cent increase in the rate of general sales tax (GST), taking
it to 18 per cent from the current 17 per cent. The increase in the rate of GST would give
additional revenue of Rs70 billion, they added. The other day, the IMF reached out to
parliamentarians and sought their support in the implementation of its reforms. But only
Pakistan Tehreek-e-Insaf (PTI) Senator Shibli Faraz, who is Leader of the House in Senate,
and Pakistan Muslim League-Nawaz (PML-N) Member of National Assembly Dr Ayesha
Ghaus Pasha turned up for discussions. The Pakistan People’s Party (PPP) members did not
attend the meeting. “The meeting had been arranged by the government without first seeking
our consent,” said PPP Senator and Senate Deputy Chairman Saleem Mandviwalla, who had
also been invited.

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PART THREE

Pakistan’s debt repayment capacity

Undersecretary of the United States Treasury David Malpass informed a US Senate Foreign
Relations Committee hearing that Pakistan is likely to pay off loans to the International
Monetary Fund (IMF) before loans to China become due. This almost certainly refers to the
Extended Fund Facility (EFF) repayments (interest and principal) as and when it becomes due.

According to the First Post-Programme Monitoring Report uploaded on the Fund website on 14
March 2018, the interest payments due by Pakistan to the IMF in 2018 were 93 million dollars
and it was the first year when the principal amount of 150 million dollars was payable. In 2019,
85.1 million dollars would be due as interest payments with 420 million dollars due on account
of principal, while in 2020, the interest payment due would be 70.7 million dollars and the
principal due would be 660 million dollars. Repayments would continue and in 2023, the interest
charges would be 31.8 million dollars while the principal due is 732.2 million dollars. In other
words, repayments on the EFF would continue during the tenure of the Khan administration. The
report adds that "repayments to the Fund are scheduled to start at SDR 243 million (including
GRA charges and surcharges) in 2018 and peak at SDR 820 million dollars in 2021 with a
gradually declining schedule until 2026." However, in the event that the country decides to go on
yet another IMF programme, the Khan administration not having decided as yet whether it would
seek another IMF bailout package with Finance Minister Asad Umar stating that 'we aren't in a
hurry...we are covered even if it [the bailout package] delays for two months,' the repayment
schedule of the new loan would consist of interest repayments less than around 30 million dollars
a year starting in 2022-23. In other words, in the event that the government decides to seek a
package then depending on its size the repayments to the Fund would be manageable.

The IMF report also indicates that Pakistan's total external debt servicing was 7.73 billion dollars
in 2018 with total external debt of 93 billion dollars and projected 12.7 billion dollars as external
debt servicing for the current year with total external debt rising to 103.3 billion dollars. The
Fund projected total external debt at 144.9 billion dollars in 2023, the year of the next elections,
and total servicing of 19.7 billion dollars. The Khan administration may well challenge this

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projection on the grounds that it is committed to reducing dependence on foreign loans, and that
export revenue would rise as a consequence of fiscal and monetary incentives as well as due to
the depreciating rupee (which would also discourage imports) raising the country's foreign
exchange reserves.

Malpass acknowledged that "China is lending in many countries where the terms of the loans are
simply not given and that gives China a lot of leverage within its programmes... they [Pakistan]
haven't disclosed the terms of that debt... in general terms we think the maturity of the Chinese
debt comes after the IMF would have been repaid." Thus given that neither China nor Pakistan
shared details of the debt under the China Pakistan Economic Corridor the Fund projection of
"continued scaling up of CPEC investments could accelerate the buildup of related external
payment obligations" may be completely off the mark. The other factors that led to "staff's
downside scenario, based on partial materialization of these risks, Pakistan's capacity to repay
could deteriorate at a faster pace, with faster depletion of foreign exchange reserves and
significant implications for economic growth" with the risks referred to, including deterioration
of security conditions negatively impacting on investment confidence, lower growth in key
trading partners as well as tightening global conditions or appreciation of the exchange rate.
Again these risks may not materialize.

To conclude, Malpass' assessment appears to be more informed and up to date than the one made
by the IMF mission over nine months ago when the PML-N was in power. However, the
government needs to develop a strategy for reforms that is doable, and acknowledge that by
simply rehashing the previous administration's policies and maintaining that it would succeed
while its predecessors failed, may not be enough to convince foreign and local investors,
multilaterals or bilaterals. The prevailing uncertainty is not due to the indecision to seek an IMF
bailout package but to the failure to announce a viable strategy focused on stabilisation 100 days
after assuming power.

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IMF loan won’t solve all of Pakistan’s problems

Support and technical assistance from the IMF would help the government achieve
macroeconomic stability and make structural reforms. However, the country will continue to face
challenges, particularly in light of investments, imports and external borrowing related to
projects under the China-Pakistan Economic Corridor (CPEC), it says.
On October 11, the IMF confirmed that Pakistan had formally requested financial assistance to
address ongoing macroeconomic and fiscal challenges, the most urgent of which is the critically
low level of the country’s foreign exchange reserves. Pakistan’s macroeconomic and external
imbalances have risen since the country’s previous IMF programme finished in 2016. In
particular, the dollar reserves adequacy has fallen from $18 billion at the end of the 2016 fiscal
year to $8 billion today, barely covering two months of goods imports. This is below the IMF’s
minimum adequacy threshold of three months.
The critically low level of dollar reserves means Pakistan faces risk of a default. In order to
continue paying for essential imports, like oil and machinery and repay its foreign debt, the
country needs to shore up its dollar reserves by at least another $8 billion — it needs $30 billion
to meet its total external financing needs for the current financial year, which ends in June 2019.
We have reached this situation because of a high current account deficit. This is because our
imports (dollars going out) are more than twice our exports (dollars coming in). Basically, for
every dollar we earn, we spend $2.2. In the 218 fiscal year, we imported goods worth $55.8
billion but our exports amounted to only $24.7 billion.

To deal with the situation, the central bank has depreciated the Pakistani rupee approximately
25% against the dollar since December 2018 and brought up the interest rate (made borrowing
expensive to achieve stability) by a cumulative 2.75% to a three-and-a-half year high of 8.5%.
But the current account deficit is still high.

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An IMF programme will not only bridge the financing gap but also serve as a strong signal to
other official sector creditors that will be crucial to meet financing requirements over the coming
years, Moody’s says.
The government has pledged a reform-based policy agenda, including raising economic
competitiveness through pro-business policies, addressing corruption issues, reforming state-
owned enterprises, enforcing greater discipline in government spending and broadening the tax
base. For example, it has started a drive against tax evasion and has already served notices to
about 400 suspects earlier this month.

Recommendations

 The logical argument made by analysts in Pakistan here is that the government needs to
bring meaningful reforms to our economy. So, in due course, we are in a fiscally sound
enough condition that we not require bailouts like the ones we get from the IMF.
 This is a perfectly accurate demand. But, it often masks the politicalcauses to our
economic despair. The problem with talking about the economy divorced from politics is
that we end up with superficial reforms.
 This is because any meaningful reforms are impossible if the political structure does not
allow them. For this to change, our public discourse needs to take a holistic overview of
our institutions. This is a contribution to that end.
 The most direct culprits are lack of exports and the increasing cost of imports. Pakistan
imports nearly twice as many products and services than it exports. In turn, there are
many causes for low exports, some are macroeconomic determinants. The unsound
infatuation of the previous government with an appreciated rupee is an example of this.
 Dig deeper, we are exposed to the fact that Pakistan has developed little comparative
advantage over the years. This means that we mostly export basic textiles, cotton and rice
and other related products.

 Most of them are low-value items in the global value chain, so we earn little revenue
from exporting them, and are hence unable to over our import bill. We find that even in
products which we do export, we face structural problems  —  such as lack of capital,
whether it is human or financial.
SHOAIB AHMED

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 Hence, exporters struggle to grow, move up the value chain, compete with foreign firms,
and boost productivity. But, why is this? Why does Pakistan fail to provide an
environment which is conducive to developing globally competitive enterprises?
 There are many explanations here — but one persuasive thought is that our institutions do
not create the set of incentives needed for the growth of a competitive market. Our
economic failure is a symptom of our collective political choices. Once we can allocate
political power more fairly, we can make better economic outcomes.
 But, if the new government wants to break this cycle and make a sincere attempt at
reforming Pakistan into some sort of an egalitarian, prosperous nation, it needs to start by
looking at political power and the political institutions which rise from them, as they are
the real constraints to our growth. Even if it can make marginal changes on the economic
front, they would not unlock the kind of transformative shift we need for widespread
prosperity.

Conclusion

A delegation of the International Monetary Fund (IMF) visited Pakistan last week to hold talks
with the new government regarding the country’s economic situation. The government in
Pakistan is weighing options to raise funds to shore up its dwindling foreign currency reserves.
The current government’s approach to avoid the IMF by looking for different financial options
has not produced any tangible results. Before coming to power, the Pakistan Tehreek-e-Insaf
(PTI) promised not to go to the IMF and rather to generate necessary funds by expanding the
existing tax base and exploring other options. Contrary to what the PTI promised, it appears that
the party has no workable option but to reach out to the IMF for another financial bailout.

Currently, Pakistan’s foreign currency reserves have plunged to $9.3 billion dollars. According
to some reports, a number of international creditors have given loans of $716.5 million for the
first two months of the fiscal year 2019, which are said to be only sufficient for “35 percent of
estimated foreign debt serving requirement of the first quarter, further draining the foreign
currency reserves.” But there’s more to worry about:AHMED
SHOAIB according to the Ministry of Finance and
the state bank of Pakistan, the country’s external debt payments in the 2019 fiscal year are likely

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to rise to $11.7 billion. Moreover, for this year, Pakistan’s overall external financing
requirements are estimated at $31 billion, which also includes the payments of debt.

This entire situation puts Pakistan’s financial stability in jeopardy. While a number of countries
have promised to help Pakistan financially, none of the international states or monetary
institutions are offering Pakistan funding without tough conditions. While some states, including
China, are open to giving Pakistan loans, they have placed tough monetary or trade conditions in
place that have over the last few years put the country’s domestic industries at a disadvantage. A
number of reports have come out suggesting that Islamabad could have negotiated the China-
Pakistan Economic Corridor (CPEC) more effectively as currently Pakistan continues to take
money from Beijing, which has mostly gone to debt servicing. Recently, the Kingdom of Saudi
Arabia decided to join CPEC, and it has been reported that the country will fund three major
infrastructure schemes under the project. While it’s encouraging that the Kingdom is joining the
project, it is unclear what the new government in Pakistan had to offer to Riyadh in terms of
assurances that are expected to be in the realm of military support. Other international creditors
such as the IMF, the World Bank, and the Asian Development Bank always include
tough monitoring conditions before offering necessary funds.

A number of reforms that are likely to be demanded by such institutions always put a burden on
any country’s domestic economy. It is likely that the IMF, before offering any new loan program
to Pakistan, will ask for a number of reforms that may not be in the interest of Pakistan’s middle
and poor classes. It is expected that the tax base targeting the salaried class is expected to grow
and more direct and indirect taxes are likely to be called into action. Meanwhile, subsidies in the
field of agriculture and other areas are likely to see a significant reduction in the coming weeks
and months.

However, while this may help the Imran Khan government in gaining the necessary funds to
keep Pakistan’s economy afloat for the next few years, any such measure is not only going to
offer the control of the country’s economy to international actors, but will also increase the debt
burden on Pakistan in the coming years. Pakistan should be preparing to pay more debt — not
only on previous debts, but also on loans that
SHOAIBthe country is likely to negotiate with various
AHMED
international actors in the coming weeks.

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This doesn’t bode well for Pakistan’s long-term economic viability as any such plan cannot assist
the country in becoming fiscally self-sufficient. Moreover, there doesn’t appear to be an effort
underway to support the country’s domestic industries in order to increase Pakistan’s overall
exports, which have fallen significantly over the last few years. Pakistan may continue to take
funds from international lenders, but any such policy is not likely to help Pakistan stand on its
own economically. The government in Pakistan needs to take drastic measures in order to
introduce major reforms in the economic sector, which is essential to guarantee the country’s
economic viability and financial sovereignty.

REFERENCE LINKS SHOAIB AHMED

An Introduction To The International Monetary Fund

(IMF) https://www.investopedia.com/articles/03/030703.asp#ixzz5YA73spUX 

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https://tribune.com.pk/story/1850034/1-imf-sets-stricter-conditions-bailout-package/
https://www.rferl.org/a/pakistan-begins-talks-imf-three-year-bailout-package-
khan-/29588927.html
https://www.aeaweb.org/articles?id=10.1257/jep.30.1.3
https://www.cambridge.org/core/journals/british-journal-of-political-science/article/mixed-
signals-imf-lending-and-capital-markets/2786C3E5F3ECFEA53512616BAA4FDEC7
https://opus4.kobv.de/opus4-hwr/frontdoor/index/index/docId/1148
https://link.springer.com/chapter/10.1007/978-1-4615-5155-3_20
https://www.samaa.tv/news/2018/10/the-imf-loan-wont-solve-all-of-pakistans-problems/

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