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Intervention of Imf in Pakistan

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SaveSave Intervention of Imf in Pakistan For Later
INTERVENTION
OF IMF IN PAKI
STAN
The funding by Int
ernational Monetar
y Fund (IMF) to d
eveloping countrie
s has always raised
adebate on its posi
tive and negative i
mpacts on the eco
nomy of the credit
or country. Pakista
n hasan extended h
istory of funding fr
om IMF starting fr
om 1958 to 2004 i
n various time spa
ns andnow the curr
ent agreement fro
m 2008. This articl
e discusses the inte
rvention of IMF fu
nding inPakistan.
Article not only di
scusses the interve
ntion and funding i
mpact but also foc
us the policies of I
MF that are being i
mposed on Pakista
n.
IMF and its Origi
n
It is not possible to
understand the pre
sent role of IMF in
the third world cou
ntries withoutconsi
dering its origins. I
n late nineteenth a
nd early twentieth
century the major t
rading nations ofth
e world had tied th
eir currencies to th
e value of gold. Th
ese currencies wer
e stable to eachoth
er. The great depre
ssion of 1930s saw
the final abandon
ment of internation
al gold standard. I
nattempt to salvag
e something from t
he collapse of inter
national trade, the
major trading natio
nsdevalued their c
urrencies, which m
eans they set their
own price for them
independent of gol
d, towin back expo
rt market by lower
ing the internation
al price of their pr
oducts. The poor n
ationsand colonies
were no longer abl
e to pay for their i
mports with export
s. Poor countries st
oppedimporting an
d began to produce
import substitutes
at home or they en
tered into a bilater
al tradingagreeme
nt.According to Pa
yer, C. (1974)
, “The second worl
d war itself gave th
e coup de grace no
t only toGermany‟
s imperial pretensi
ons but also to gre
at Britain‟s one
-time pre-
eminence in world
trade
and finance.” As t
he war drew close,
the American lead
ers, who identified
the national interes
t
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with a world econ
omy, open to their
trade and investme
nt, tried to devise a
system which wasf
ashioned at Breton
Woods to be impo
sed by Internationa
l Monetary Fund
was called par val
uesystem, of fixed
but adjustable exc
hange rates. IMF h
as never played a d
eciding role in the
adjustment of exch
ange rates and trad
e practices among
wealthy developed
nations, but it has
made large sums a
vailable for the def
ense of their curre
ncies. Cheryl paye
r has explained we
llthe true role of I
MF in his book Th
e Debt Trap,
“The gigantic spec
ulative crises of re
cent years have sh
own that the Fund
can, be at most,a f
orum for negotiati
ons; it cannot dicta
te policies when th
ere are fundamenta
ldisagreements am
ong the titans of in
ternational finance
. It is rather the we
aker nationswhich
are subjected to th
e full force of IMF
principles, for the r
ich nations (the U
S,Japan, and major
European countrie
s) can agree suffici
ently to present a u
nited front in
the IMF to the poo
r countries which l
ook to the fund an
d the rich countrie
s, for credit”
Joyce and Gabriel
, K, in their book
The Limits of Pow
er: The World and
United States Fore
ignPolicy, (1945-
1954) have done a
complete study of
post-war aid to Eu
rope. For about do
zenyears after the
end of Second Wo
rld War the US wa
s the main source
of foreign aid. As t
he onlysignificant
creditor country of
the era, the US fou
nd the IMF inadeq
uate instrument for
theredistribution o
f its own huge reso
urces, which was t
he condition for th
e rehabilitation of t
heinternational tra
de. It therefore inst
ituted bilateral aid
programmes whic
h served both tore
distribute dollars
which enabled oth
er countries to buy
US exports and to
purchase military,
political, and econ
omic advantages a
round the world fo
r US. In beginning
this aid was untied
there was no restri
ction that aid mon
ey should be spent
on US goods beca
use US products w
eremost in demand
so US goods were
to be purchased an
yway and another
reason of this untie
d is

that even if the mo
ney is spent in a th
ird country it woul
d still serve to redi
stribute theembarr
assingly large US r
eserves.Towards t
he end of 1950s, a
number of circums
tances contributed
to a major shift of
emphasisand mode
of operation in aid
giving a chance so
significant that Ch
eryl payer called it
s results
“
The New Style of
Aid Giving
”. The architect of
this new style was
an American offici
al, C.
Douglas Dillon, th
e Deputy Secretary
of state for Econo
mic Affairs. (Sey
mour J. Rubin, Th
eConscience of the
Rich Nation)After
this brief review of
the origin and hist
ory of IMF it starts
to makes sense tha
t how the thirdwor
ld countries are tra
pped by the FUND
and the strings of f
oreign agendas an
d policiesattached
to it.
IMF AND Third
World Countries
Singh, R.S. (1996)
in his book
“IMF Policies tow
ards Less Develop
ed Countries LDC
‟s”
discusses the shift
ing roles of the IM
F as the IMF has e
merged as a small
cushion to thedeve
loped countries in
exchange availabil
ity but as a source
lending it has beco
me veryimportant
for less developed
countries (now the
y are termed as de
veloping countries
). From the beginn
ing the institution
has been particular
to the fact that rest
rictive clauses in t
he fundagreement
be waved out for it
s smooth functioni
ng. With the passa
ge of time it has ve
ntured toaddress it
self to the question
of generating reser
ves multilaterally a
nd in that wake en
hancedquotas of th
e Fund members, i
ntroduced a numbe
r of reforms in its
policies and metho
ds ofoperations alt
hough those have
only been half- he
arted, peripheral, e
xtremely conservat
ive,narrowly focus
ed and with almost
pathological reluct
ance to break new
paths. The Fund ha
s

engaged itself fro
m time to time in b
orrowings from so
me countries in or
der to increase itsa
bility to extend cre
dits but it has refra
ined so far from ra
ising funds directl
y from the capital
market has been e
ngaged increasingl
y.Andrew B & Bra
dford J, 2004 sugg
ests that internatio
nal capital markets
perceive IMFinter
vention as a negati
ve development. R
egardless of factor
s driving their deci
sions, Jensen'srese
arch provides stron
g evidence that de
veloping countries
pay a serious price
when they takeadv
antage of IMF assi
stance. His researc
h strongly reveals
a negative relation
ship between IMF
funding and foreig
n direct investment
in the country. Acc
ording to him inve
stors don‟t perceiv
e
this funding in a p
ositive way that w
hy reducing net in
vestment level in t
he country and as
aresult hindering e
conomic growth.T
he key feature of I
MF is that it is ma
de under condition
s designed to prom
ote effectiveadjust
ment and ensure th
at the use of resour
ces by members is
temporary and con
sistent with the
IMF‟s objective.
Like it is mention
ed before that IMF
favored and ensure
d free trade to ben
efitUS economy in
the same way IMF
keeps on introduci
ng new policies an
d reforms to benefi
t richdeveloped co
untries for exampl
e new education re
forms and hospital
or health reforms i
n thename of auto
nomy.
IMF and Pakistan
IMF funding has b
een one of the mos
t debated issues fr
om the last few ye
ars in terms of its
policies, restriction
s and its impact on
the economy of co
untries under IMF
programs. A numb
erof studies have b
een done in this re
gard. However the
results of these stu
dies are contradicti
ngmaking this issu
e still debatable. R
ecent studies have
produced mixed an
d sometimes puzzl
ing

results regarding t
he impact of IMF
programs on a nati
on's balance of pay
ments, current acc
ount balance, forei
gn direct investme
nt, real GDP, per c
apita income and l
ong-run economic
growth.Pakistan be
came a member of
IMF in July 1950.
Pakistan did not av
ail any facility fro
m IMFsince 1958
when the country f
aced problems in b
alance of payment.
This was the start
ofrelationship with
IMF began or as s
ome people refers
it as start of living
in shades of IMF.
Laterin 1965 when
the war began in I
ndia and Pakistan,
Pakistan again had
to seek help of IM
F in1965 and 1968
.When (OPEC) Or
ganization of petro
leum exporting co
untries increased p
etroleum prices in
1973, the balance
of payments deteri
orated and Pakista
n once again had t
o goto IMF in 197
3and1979. The 19
80-1983 facility w
as suspended by I
MF for non compli
ance.Over the year
s, the International
Monetary Fund (I
MF) has emerged
as a key influence
on
Pakistan‟s macroe
conomic
policies. Since the
late 1980s, it has b
een imposing vario
us conditionson su
ccessive governme
nts increasingly cri
ppled by debt servi
cing. Surprisingly,
one finds that
almost all discussi
on centers on Paki
stan‟s failure to m
eet targets set by t
he IMF and h
ardly any
on what „success‟
might mean for Pa
kistan‟s own devel
opment.
Typical IMF cond
itions comprise co
ntractionary macro
economic policies
(fiscal and moneta
ry),inflation targeti
ng regimes, financ
ial deregulation an
d increased openne
ss to international
capitalflows, trade
liberalization (incl
uding reduction of
tariff and non-
tariff barriers) and
privatizationof pub
lic-sector enterpris
es. In short an aba
ndonment of state-
led development st
rategy.Feldstein,
M, (1998) argues i
n"Income Inequali
ty and Poverty," N
ational Bureau of
EconomicResearc
h, that the IMF req
uired excessively l
arge reductions in
government deficit
s andrestrictions o
n monetary policy.
These restrictions r
esulted in substanti
al increases in tax
rates,interest rates
and increase in cur
rent account defici
t. Feldstein also ar
gues that Asian ec
onomies
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have experienced a
recession that wors
ened their economi
c problems as a res
ult of these policyc
hanges. Feldstein a
rgues that many of
the mandated refor
ms involve unjusti
fied interferencewi
th national autono
my and have little
or no relationship t
o the goal of resol
ving the payment
problem. He notes
that it would have
been better to allo
w more time for ne
gotiations between
borrowers and len
ders before providi
ng IMF loans to a
country experienci
ng payment proble
ms.One might begi
n by asking what t
he aim of macroec
onomic policy sho
uld be in a develop
ingcountry. First a
nd foremost, it sho
uld facilitate and n
ever impede long-
run development g
oals.There is enou
gh evidence now t
o suggest that it sh
ould also be count
er-cyclical. In othe
r words,governme
nt spending should
expand to fill in fo
r a fall in private s
pending during a d
ownturn
and contract durin
g an upturn. The I
MF‟s argument th
at government spe
nding will crowd o
ut private investme
nt does not stand u
p to scrutiny, nor i
s it backed by emp
irical evidence. In
deed,as research b
y the United Natio
ns Conference on
Trade and Develop
ment (UNCTAD)
and theUnited Nati
ons Development
Programme has sh
own, government s
pending, especiall
y oninfrastructure,
health, education, t
echnology and co
mmunication, has
actually had the ef
fectof
„crowding
-
in‟ private investm
ent in a number of
countries (UNCT
AD 2003, Roy and
Weeks
2004). This is espe
cially true in times
of crisis when priv
ate investors beco
me even more risk
averse.
It is difficult to see
how the IMF‟s rec
ommended contrac
tionary policies ai
med at controllingi
nflation and reduci
ng the deficit are c
onsistent with Paki
stan‟s developmen
t goals
. Indeed, arecent st
udy by the Centre
for Economic Poli
cy Research (CEP
R) finds that in 20
08-09, 31 outof the
41 IMF agreement
s made with countr
ies in response to t
he global recession
included pro-
cyclical fiscal or m
onetary policy, wit
h 15 having both.
This inclination of
the IMF has been

criticized by sever
al other economist
s including the No
bel Laureate Josep
h Stiglitz,who
criticized the IMF‟
s handling of the E
a
st Asian Crisis
in the following te
rms: “All the IMF
did was make East
Asia‟s recessions
deeper, longer, and
harder”. Slashing t
he development
budget in Pakistan
so that the deficit c
ould be reduced, e
ven when the Paki
stani economy was
battered by the 20
10
floods, was consist
ent with the IMF‟s
general policy but
counteredPakistan
‟s own developme
nt needs.

The IMF‟s insiste
nce that governme
nt deficits cause in
flation is both theo
retically and
empirically disput
ed in academic cir
cles. The reality is
far more complex;
inflation comes fro
mvarious sources i
ncluding escalatin
g global commodit
y prices, currency
devaluation, wage-
pricespirals and lo
w productivity, iss
ues that would not
be solved merely b
y cutting the defici
t. Thisdoes not me
an that inflation is
not a serious issue
in Pakistan. On the
contrary, it present
s a huge burden fo
r the common man
, but this is more b
ecause of stagnant
wages due to the a
bsence ofindustrial
ization than due to
the deficit. It is wo
rth noting that cou
ntries such as Japa
n, SouthKorea and
Brazil grew rapidl
y with higher infla
tion than Pakistan
did. This was mad
e sociallyand politi
cally sustainable b
ecause real wages
were rising too. In
Pakistan, another I
MF favorite
—
slashing subsidy o
n basic commoditi
es
—
only serves to enh
ance the pain inflic
ted byinflation rath
er than leading to a
ny competitivenes
s.Ironically, even i
f we were to make
deficit reduction o
ur primary goal, o
ver and above any
developmental goa
ls that we may hav
e, the IMF dictated
policies are unlikel
y to achieve event
hat. This is due to t
he fact that the nat
ure of cuts the IM
F advocates stifle
prospects for long-
term growth by ret
arding developme
nt. The IMF‟s poli
cy towards Public
Sector Enterprises
(PSE) is a case in
point. The policy i
s to privatize PSEs
and use the procee
ds to repay debt an
d

prevent the PSEs f
rom being a furthe
r drain on the exch
equer. This view c
ontinues to holdde
spite the fact that c
ompeting countrie
s have created nati
onal champions ou
t of their PSEs.Rat
her than driving th
em into the ground
, they have used th
em to develop valu
able capabilitiesan
d develop key sect
ors.
Conclusion
Existence of IMF
bailouts creates a
moral hazard probl
em that encourage
s countries to not s
olvetheir fundame
ntal problems. All
nations would ben
efit if healthy econ
omies "quarantine
d" sickeconomies i
nstead of providin
g economic assista
nce. IMF assistanc
e programs increas
e risk forhealthy e
conomies and do n
ot provide long-
term benefits for tr
oubled economies.
Most IMF borrowe
rs have received ai
d for a decade or
more like Pakistan
.A pro-cyclical ma
croeconomic polic
y that is not cohere
ntly tied to develo
pment aims is likel
y tomake the debt
situation worse by
retarding economi
c growth. Pakistan
i policymakers sho
uld dowell to consi
der different polic
y options; as long
as the IMF continu
es to prioritize cre
ditors overthe inter
ests of the country
as a whole, growth
will not only remai
n low, but the debt
burden willcontinu
e to be unsustainab
le.

References
Andrew B & Brad
ford J, 2004."Entr
y, Expansion, and
Intensity in the U.
S. Export Boom, 1
987-1992," Center
for Economic Stud
ies, U.S. Census B
ureauABDUHU, S
.September 07, 20
13. IMF Loan to H
ave Devastating I
mpact On Econom
y.Tribune express
Bandow, D, March
/April 1999. Doug
Bandow on the dra
ft,

Policy Report.Feld
stein, M, 1998."In
come Inequality an
d Poverty," Nation
al Bureau of Econ
omic Research,Inc
.Joyce and Gabriel
, K, 1945-1954. Th
e Limits of Power:
The World And U
nited States Foreig
nPolicyPayer, C. (
1974). The Debt T
rap the Third Worl
d IMF. Penguin B
ooks: EnglandRub
in, S. J. (1966) Th
e Conscience of th
e Rich Nation
Singh, R.S. (1996)
. IMF Policies tow
ards Less Develop
ed Countries LDC
‟s.Zaidi, S Akbar.
(2004). Issues in P
akistan‟s Econom
y. Oxford Universi
ty
Press: London
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Intervention of Imf in Pakistan11

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