Why Pakistan Should Exit The Imf Programme Ishrat Husain

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Why Pakistan Should Exit The Imf Programme? Ishrat Husain

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Pakistan and IMF
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1
WHY PAKISTAN SHOULD EXIT THE IMF PROGRAMME?Ishrat Husain

1

Pakistan has form
ally conveyed its
decision that the c
ountry does not wi
sh to enter into as
uccessor agreeme
nt with the IMF o
n completion of th
e current PRGF Pr
ogramme at the en
d of2004. This de
cision has evoked
two kinds of respo
nses – one that of
relief that we will
no longer be subje
cted to the harsh c
onditionalities of t
he Fund and secon
d that of disbelief
that the countryis
not yet ready to sh
ed off this yoke an
d even if this is do
ne it will only be f
or a temporarydur
ation – in other w
ords, it will not be
sustainable.As I h
ad earlier written
a paper in January
2001 on “Why Pa
kistan had to adop
t the IMFProgram
me?” providing th
e rationale behind
Pakistan’s decisio
n to go through th
at route, this paper
, written three yea
rs later, attempts t
o outline the reaso
ns which have no
w prompted us tot
erminate financial
arrangements with
the IMF. In order t
o understand these
reasons in the pro
per context, we sh
ould begin by aski
ng the following q
uestions:a)

When does a Cou
ntry approach the
IMF? b)

Why did Pakistan
approach the IMF
?c)

What did Pakistan
get out of the Agr
eements with the
Fund?d)

What are the facto
rs that call for exit
and are they sustai
nable?e)

What is it that we
will be able to do
differently?The I
MF is a cooperati
ve institution of d
eveloping and dev
eloped countries
which wasestablis
hed at Bretton-
Woods in 1945 to
provide stability t
o international fin
ancial system.Unli
ke its twin, The W
orld Bank, which i
s a long-term deve
lopment partner of
developingcountri
es, the IMF comes
into action only w
hen a country face
s dire financial dif
ficulties. Thus,its
assistance is for te
mporary and limit
ed duration and no
t for longer term.
A prolongedassoci
ation with the IM
F shows that the e
conomy is sufferi
ng from chronic ai
lment and has not
been able to come
out of the woods.
This carries a stig
ma in the internati
onal financial mar
kets
This Article appeared
in the Daily Dawn on
February 29, and Mar
ch 1, 2004
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2which become r
eluctant to provid
e financing to suc
h IMF dependent
economies. The so
oner acountry is a
ble to sever its fin
ancial programme
s with the IMF, th
e better off it is in
signalingthat the e
conomy has beco
me normal and he
althy.
(a)

When does a Cou
ntry approach the
IMF?
A normal healthy
and well functioni
ng economy does
not approach the I
MF forfinancial as
sistance. It is only
when an economy
is in a crisis situati
on or likely to hit
acrisis in near ter
m, the authorities
invite the IMF to
engage in negotiat
ions for a possible
financial package
that can be quickl
y disbursed over a
given period of ti
me to overcomeor
avert the crisis. Th
e occasions for su
ch a recourse arise
(a) when the count
ry is havingseriou
s current account i
mbalances and is
unable to meet its
external payment
obligationsout of i
ts own generated r
esources including
the normal flows f
rom external sour
ces suchas Foreig
n Direct Investme
nt (FDI), disburse
ments of loans, et
c. or (b) when the
externaldebt oblig
ations falling due i
mmediately are in
excess of the coun
try’s capacity to p
ay.This occurs ma
inly when comme
rcial creditors refu
se to roll over mat
uring debt ordema
nd high roll-over
premiums, or (c)
when a country ha
s been hit by spec
ulative attackon it
s currency (partic
ularly under a fixe
d exchange rate) a
nd is depleting its
foreignexchange r
eserves rapidly to
avert that attack or
(d) when the bank
ing sector or finan
cialsector suffers f
rom a systemic fai
lure and the depos
itors’ money is at
risk or acombinati
on of these and ot
her factors.The ex
amples of Mexico,
Russia, East Asian
Countries, Turkey
and Argentina int
he late 1990s can
be used to illustrat
e one or the other
of the above descr
ibed motivatingfa
ctors for their appr
oaching the IMF.
Most of African C
ountries have bee
n prolonged users
of IMF resources
–reflecting the un
healthy state of th
eir economies. In
Asia, Pakistan, Ph
ilippines andIndon
esia have been res
orting to the Fund
for assistance mor
e frequently and f
or longer periods t
han other countrie
s. India entered int
o an agreement in
1991 but exited th
e programme a fe
w years later as it
recovered from th
e crisis situation.
China hasn’tappro
ached the IMF as i
t has a strong and
healthy economy.
Error! Filename not specified.

3(b)
Why did Pakistan
approach the
IMF?
There were three
main motivations
behind Pakistan’s
decision to
approach theIMF
in 2000 (i) as the
country was
almost on the
brink of a default
on external
payments,we
needed quick
infusion of funds
to sustain and
support our
balance of
paymentssituation
, (ii) to find a
permanent and
durable solution
to our external
debt
problem.Instead
of approaching
the IMF every
three years or so
and obtain a
rescheduling of
ourflows, we were
determined to
seek a stock
reprofiling that
will align our debt
paymentcapacity
with the new
profile of
payments, and
(iii) to restore the
lost credibility
ofPakistan in the
international
financial
community as
Pakistan was
called a one-
tranchecountry. W
e used to enter
into
agreements and
draw down the
first tranche and
seldomfulfilled all
the obligations
and
conditionalities
contained in the
agreement.It was
quite clear from
the beginning that
this will not be an
easy ride and
the people of
Pakistan will
have to suffer
pain in the short
term. But
the idea was
that aftergoing
through this tough
period of
tribulations and
avoiding the crisis
situation,
thecountry will be
able to stand on
its own two feet
and regain its
national
sovereignty
ineconomic
decision
making. We won’t
have to run to the
IMF or the US
Governmentevery
now and then with
a begging bowl to
bail us out of one
crisis or the
other. Thiswas the
objective with
which the stand-
by agreement of
2000 and the
Poverty
Reductionand
Growth Facility
(PRGF)
agreement of
2001 were
negotiated with
the IMF.(c)
What did we get
out of
the Agreements
with the IMF?
Pakistan has been
able to establish
its credibility as a
serious player in
the
internationalfinan
cial community
by drawing down
eleven successive
tranches from the
IMF without
anydelay or
interruption over a
period of three
years. This is
an unprecedented
record in the
historyof
economic
management of
Pakistan and has
led to the
upgradation of
Pakistan’s credit
ratingfrom
selective default
in 1999 to B2 in
2003, almost a
universal
appreciation of
our track
record by bilateral
and multilateral cr
editors and has op
ened the way to ac
cessing credit fro
m theinternational
markets at
affordable price.
Error! Filename not specified.Error! Filename not specified.
4As the IMF agre
ements remained
on track and the p
erformance was i
mpressive, the Par
isClub - a group o
f officials of bilate
ral creditors – agr
eed to re-profile th
e entire stock of e
xternal bilateral d
ebt of $12 billion
on a long-term bas
is. The grace perio
d for the re-
profiled debt wasf
ixed at 15 years a
nd the repayment
period was extend
ed to 38 years. Th
us, in net present
valueterms, the st
ock of the debt wa
s reduced by one-
third. This treatme
nt was exceptional
and onlyfour other
countries had rece
ived such a genero
us package. Pakist
an will no longer
by obligatedto hav
e future agreemen
ts with the IMF to
seek debt resched
uling. In one go w
e have been ableto
find a permanent a
nd durable resolut
ion of our bilateral
external debt by c
utting back our sto
ckof bilateral debt
. Those who argue
that debt reprofili
ng has simply post
poned the D-day a
resadly mistaken.
The payments due
after next 15 years
in relation to the c
ountry’s earningca
pacity will be min
iscule.The IMF’s f
inancial assistance
combined with tha
t from the World
Bank and AsianD
evelopment Bank
in form of quick d
isbursing concessi
onal loans provide
d the cash flow in
theinitial years to
meet our balance
of payments oblig
ations. The substit
ution of concessio
nalloans for hard-
term loans from th
ese institutions wa
s part of our debt r
eduction strategy.
Thisinfusion also
helped restore the
confidence of othe
r private commerc
ial creditors and sl
oweddown flight
of capital by resid
ent Pakistanis. Th
e slow build-up of
foreign exchange
reservesfrom less
than a $1 billion i
n 2000 to $3.2 bill
ion by June 2001
also stemmed the
speculativeattack
on rupee and calm
ed the foreign curr
ency markets.It is
fair to surmise tha
t Pakistan was abl
e to achieve all th
e three objectives
it had set outfor it
self in approachin
g the IMF in the y
ear 2000. There is
no denying the fac
t that the postSept
ember 2001 devel
opments have im
mensely helped st
rengthen Pakistan’
s external sector b
utthe sacrifices m
ade by the ordinar
y Pakistanis in me
eting the harsh co
nditionalities of th
e IMFshould not b
e ignored or overl
ooked. Had there
been no Septembe
r 11 it would have
takenanother two
more years to achi
eve the results we
have witnessed in
2002/03. Septemb
er 11 didhelp acce
lerate the process
of economic recov
ery and external s
ector viability.
(d)

What are the fact
ors that call for ex
it and are they sus
tainable?
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Why Pakistan Should Exit The Imf Programme Ishrat Husain

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