1.

Background
The International Monetary Fund (IMF) was established at a United Nations Monetary and
Financial Conference, also known as Bretton Woods Conference, on 22 July 1944 as an organ
under the UN System. The IMF headquarters is located in Washington D.C., U.S.A.

Under its Articles of Agreement (http://www.imf.org/external/pubs/ft/aa/index.htm), the IMF is

responsible for promoting international monetary cooperation; facilitating the expansion and
balanced growth of international trade; promoting exchange stability; assisting in the
establishment of a multilateral system of payments; and providing resources available to
members experiencing balance of payments difficulties.

2. Main Functions
The IMF employs three main functions – surveillance, financial assistance, and technical
assistance – to promote the stability of the international monetary and financial system.

Surveillance : The IMF closely monitors each member country's economic and financial
developments and holds a policy dialogue with a member country on a regular basis (also known
as Article IV Consultation), usually once each year, to assess its economic conditions with a
view to providing policy recommendations. The IMF also reviews global and regional
developments and outlook based on information from individual consultations. The IMF
publishes such assessment on the multilateral surveillance through the World Economic Outlook
and the Global Financial Stability Report on a semi-annual basis.

Financial Assistance : The IMF lends to its member countries facing balance of payments
problems in order to facilitate the adjustment process and restore member countries' economic
growth and stability through various loan instruments or "facilities". An IMF loan is usually
provided under an "arrangement," requiring a borrowing country to undertake the specific
policies and measures to resolve its balance of payments problem as specified in a "Letter of
Intent." Most IMF loans are primarily financed by its member countries through payments of
quotas. Thus, the IMF's lending capacity is mainly determined by the total amount of quotas.
Nevertheless, if necessary, the IMF may borrow from a number of its financially strongest
member countries through the New Arrangements to Borrow (NAB) or the General
Arrangements to Borrow (GAB) (http://www.imf.org/external/np/exr/facts/gabnab.htm) to
supplement the resources from its quotas.

Technical Assistance : The IMF provides technical assistance to help member countries
strengthen their capacity to design and implement effective policies in four areas, namely, 1)
monetary and financial policies, 2) fiscal policy and management, 3) statistics and
4) economic and financial legislation. In addition to technical assistance, the IMF also offers
training courses and seminars to member countries at the IMF Institute in Washington D.C., and
other regional training institutes (Austria, Brazil, China, India, Singapore, Tunisia and United
Arab Emirates).
3. Organizational Structure
The Board of Governors, comprising one governor from each member
country(http://www.imf.org/external/np/sec/memdir/members.htm), is the highest decision-
making body of the IMF. The Board of Governors usually meets once each year at the
IMF/World Bank Annual Meetings. The International Monetary and Financial Committee
(IMFC), consisting of 24 members, which reflects the composition of the IMF's Executive
Board, acts as the advisor to the Board of Governors. It meets twice each year to review issues
relating to the Board of Governors' functions in supervising the management of the international
monetary and financial system as well as make recommendations to the Board of Governors.
The day-to-day work of the IMF, as guided by the IMFC, is carried out by the Executive Board
(http://www.imf.org/external/np/sec/memdir/eds.htm) and IMF staff. The Managing Director is
Chairman of the Executive Board and Head of IMF staff.

Membership : IMF's members have grown from 29 at its inception in 1945 to 185 at present.
The latest member country is Montenegro who joined the IMF in January 2007. Countries must
first join the United Nations to be eligible for IMF membership.

Quotas : Upon joining the IMF, each member country is assigned an initial quota comparable to
its relative economic size to the global economy and those of existing member countries
(http://www.imf.org/external/np/sec/memdir/members.htm). Quotas are denominated in Special
Drawing Rights (SDRs) 1/ General quota reviews are conducted at regular intervals – usually
every five years, allowing the IMF to assess the adequacy of quotas in terms of members' needs
for liquidity and its ability to finance those needs.

A member's quota determines its voting power and access to IMF financing. The quota largely
determines a member's voting power in IMF decisions. Each IMF member has 250 basic votes
plus one additional vote for each SDR 100,000 of quota. In general, a member can borrow up to
100 percent of its quota annually and 300 percent cumulatively.

The IMF's Changing Role

The role of the IMF has increased since the onset of the 2008 global financial crisis. In fact, an
IMF surveillance report warned about the economic crisis.8 World leaders soon regretted that
they ignored it.

As a result, the IMF has been called upon more and more to provide global economic
surveillance. It's in the best position to do so because it requires members to subject their
economic policies to IMF scrutiny. They have also committed to policies that keep prices stable.
For example, they agree to avoid manipulating exchange rates for an unfair competitive
advantage.9

For example, the 2010 eurozone crisis prompted the IMF to provide short-term loans to bail out
Greece. That was within the IMF's charter because it prevented a global economic crisis.10
IMF Structure
The IMF chief has been Managing Director Kristalina Georgieva since Sept. 25, 2019. The
Managing Director is the chief of the IMF’s 2,700 employees from 147 countries.11 She
supervises four Deputy Managing Directors. She is Chair of the 24-member Executive Board.12

The IMF Governance Structure begins with the IMF Governing Board which sets direction and
policies. Its members are the finance ministers or central bank leaders of the member countries.
They meet each year in conjunction with the World Bank. The International Monetary and
Financial Committee meets twice a year. These committees review the international monetary
system and make recommendations.13

Members
Rather than listing all 189 members, it's easier to list the countries that are not members.14 The
seven countries (out of a total of 196 countries) that are not IMF members are Cuba, East Timor,
North Korea, Liechtenstein, Monaco, Taiwan, and Vatican City. The IMF has 11 members that
are not sovereign countries: Anguilla, Aruba, Barbados, Cabo Verde, Curacao, Hong Kong,
Macao, Montserrat, Netherlands Antilles, Saint Maarten, and Timor-Leste.

Members do not receive equal votes. Instead, they have voting shares based on a quota. The
quota is based on their economic size. If they pay their quota, they receive the equivalent in
voting shares. The Member Quotas and Voting Shares was updated in 2010.15

History
The IMF was created at the 1944 Bretton Woods conference. It sought to rebuild Europe after
World War II. The Conference also set up a modified gold standard to help countries maintain
the value of their currencies.16 The planners wanted to avoid the trade barriers and high-
interest rates that helped cause the Great Depression.

Role of IMF in Pakistan

1. INTRODUCTION

A. Economy of Pakistan

The economy of Pakistan is the 27th largest economy in the world in terms
of purchasing power, and the 48th largest in absolute dollar terms. Pakistan is the second
largest economy in South Asia. Pakistan’s economy mainly encompasses,
  Textiles
 Chemicals
 Food processing
 AgricultureÂ
 And other industries.

B. Economic History

At the time of independence in 1947, Pakistan was a very poor country and its economy majorly
depends on agriculture. Since independence, Pakistan’s average economic growth rate has been
higher than the average growth rate of the world economy during the period. Average
annual was 6.8% in the 1960s, 4.8% in the 1970s, and 6.5% in the 1980s. Average annual
growth fell to 4.6% in the 1990s with significantly lower growth in the second half of that
decade. Industrial-sector growth, including manufacturing, was also above average. During the
1960s, Pakistan was seen as a model of economic development around the world, and there was
much praise for its economic progression.

The table which gives every five years progress of GDP, US Dollar Exchange Rate, Inflation
Index, and Per Capita Income is given on the next page.

C. INTERNATIONAL monetary fund

The International Monetary Fund (IMF) is an organization of 186 countries, working to help the
development of global monetary cooperation, secure financial stability, facilitate international
trade, promote high employment and sustainable economic growth, and reduce poverty around
the world. The IMF works to help development of global growth and economic stability. It
provides policy advice and financing to members, in economic difficulties and also works with
developing nations to help them achieve macroeconomic stability and reduce poverty.

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The IMF’s fundamental mission is to help ensure stability in the international system. It does so
in three ways: keeping track of the global economy and the economies of member countries;
lending to countries with balance of payments difficulties; and giving practical help to members.

The International Monetary Fund (IMF) is the international organization that oversees the global
financial system by following the macroeconomic policies of its member countries, in particular
those with an impact on exchange rate and the balance of payments. It is an organization formed
with a stated objective of stabilizing international exchange rates and facilitating
development.[1] It also offers highly leveraged loans, mainly to poorer countries. Its
headquarters are in Washington, D.C., United States.
D. History

The International Monetary Fund was conceived in July 1944 during the United Nations
Monetary and Financial Conference. The representatives of 45 governments met in the Mount
Washington Hotel in the area of Bretton Woods, New Hampshire, United States, with the
delegates to the conference agreeing on a framework for international economic cooperation.[2]
The IMF was formally organized on December 27, 1945, when the first 29 countries signed its
Articles of Agreement. The statutory purposes of the IMF today are the same as when they were
formulated in 1943 (see #Assistance and reforms). The International Monetary Fund was
established, along with the World Bank, at a conference in Bretton Woods, New Hampshire,
USA, in the closing stages of World War II. The participants represented the governments soon
to win the war against fascism. They were concerned about the rebuilding of Europe and of the
global economic system after a devastating war.

The key debate at Bretton Woods was between the British and US delegations representing,
respectively, liberal and conservative visions of global economic institutions. The British
delegation, led by Maynard Keynes, imagined that the new IMF should be a cooperative fund
which member states could draw upon to maintain economic activity and employment through
periodic crises. This view suggested an IMF helping governments to act as the US government
had during the New Deal in response to the great recession of the 1930s.

By contrast, the US delegation to Bretton Woods foresaw an IMF more like a bank, making sure
that borrowing states could repay their debts on time. This more conservative view was less
concerned to avoid recession and unemployment. The US view prevailed, and set the stage for
how economic crises have been handled since World War II (Harris 1988).

Since the Second World War, the International Monetary Fund has provided loans to
governments facing economic crises. The loans have come to be known as structural adjustment
loans because they aim to help borrowing governments adjust the structure of economic activity.

The presence of the IMF as an international lending institution continues to evolve with the
changing conditions of globalization. Most recently the IMF has begun to focus its policy-
making stratgies to incorporate poverty reduction policies in addition to creating economic
stability (New Generation – HIPC)

E. Organization and purpose

The International Monetary Fund was created in July 1944, originally with 45 members,[3] with
a goal to stabilize exchange rates and assist the reconstruction of the world’s international
payment system. Countries contributed to a pool which could be borrowed from, on a temporary
basis, by countries with payment imbalances (Condon, 2007). The IMF was important when it
was first created because it helped the world stabilize the economic system. The IMF is still
important because it works to improve the economies of its member countries.[4]

The IMF describes itself as “an organization of 186 countries (as of June 29, 2009), working to
foster global monetary cooperation, secure financial stability, facilitate international trade,
promote high employment and sustainable economic growth, and reduce poverty”. With the
exception of Taiwan (expelled in 1980), North Korea, Cuba (left in 1964), Andorra, Monaco,
Liechtenstein, Tuvalu and Nauru, all UN member states participate directly in the IMF. Member
states are represented on a 24-member Executive Board (five Executive Directors are appointed
by the five members with the largest quotas, nineteen Executive Directors are elected by the
remaining members), and all members appoint a Governor to the IMF’s Board of Governors. [5]

F. What does the IMF do?

Most people think of the IMF as an institution that provides emergency credits to countries that
have found themselves in difficulties, either as a consequence of poor economic policies or
through external circumstances, such as a sudden drop in commodity prices, or a financial crisis
in a neighboring country. In return the country is obliged to impose painful austerity policies,
usually involving reductions of budget deficits, through spending cuts or increased revenue
(taxation), a rise in interest rates to reduce inflation, and an alteration of the exchange rate (a
devaluation).

This view, while not inaccurate, gives only a partial picture of the reality of the Fund’s
operations, or of what it is supposed to do. Its mandate, as laid down in the first Article of
Agreement in 1944 in Bretton Woods, NH, is very general: to promote international monetary
cooperation, facilitate the growth of world trade, promote exchange rate stability, and to help to
create a multilateral system of payments. In order to achieve these objectives, the Fund was
supposed to provide short term balance of payments support to countries in need of additional
international reserves.

It is now an almost universal financial institution, having grown from the 44 states represented at
the 1944 Bretton Woods conference to 182 countries today. Now it includes almost every
economy of the world. (There are only a few exceptions: Cuba, North Korea, and Taiwan.)

Who runs it? The IMF is owned by the governments of its member countries, represented
through a Board of Governors. The Governor for each member country is usually the Minister of
Finance or sometimes the Central Bank Governor (in the case of the United States, the Secretary
of the Treasury). Voting is in accordance with the size of a country’s share-holding in the Fund
(or “quota”), and many important decisions require special majorities (85% of the vote). There is
no attempt to give an equal voice to every country, as there is in the United Nations. Periodically,
quotas are recalculated to reflect changing economic size.

The United States, the largest member of the IMF, currently has 17.78% of the vote, and thus can
veto any major decision of the Fund it feels is unacceptable. Under the terms of its Articles of
Agreement, the IMF’s headquarters are located in the largest member country: they have always
been in Washington D.C..

Meetings of the full Board of Governors are a rather cumbersome annual event; a smaller and
more manageable body is the so-called “Interim Committee”, of 24 Governors, which meets
twice a year and is charged with reporting to the Governors (and in practice making
recommendations which stand a good chance of success) on “the management and functioning of
the international monetary system and on proposals to amend the Articles of Agreement”.

Day to day decisions are made by an Executive Board. Countries are grouped into constituencies
to elect 24 Executive Directors as members of the Board, with the exception that the five largest
members of the IMF (the United States, Germany, Japan, France and the United Kingdom) have
their own Executive Directors. The Executive Board also appoints a Managing Director. The
staff of the IMF (currently 2,660) is recruited internationally, but without any quotas as to
nationality (as is the practice in the United Nations).

How big is it? Fund quotas for member countries are initially determined by a calculation based
on the size of the national economy (GDP, current account transactions in the balance of
payments). They are periodically increased, in response to perceived needs for the IMF’s
operations. The Articles of Agreement provide for a general review of the quotas every five
years. There have been a total of 12 such quota reviews, in 4 of which it was decided that no
increase was needed. In the other 8, there was a general increase, and some redistribution of
quotas to reflect changing positions in the world economy. In the most recent round of increases,
the total quota was raised by 45%, from SDR 146 bn. to 212 bn. (approx. $291 – on September
3, 1999, SDR= $1.37494), with the U.S. share being set at SDR 37,149.3. The size of the IMF,
measured by the total of IMF quotas, measured as a proportion of world trade fell sharply
between 1946 and the mid-1970s; since then this ratio has been stable, and even shown a slight
increase.

2. Factors affecting economy

 Growth And Investment

 Agriculture
 Manufacturing
 Fiscal Development
 Money and Credit
 Inflation
 Capital Market
 Trade and Payments
 External and Domestic Debt
 Education
 Health And Nutrition
 Population, Labor Force and Employment
 Poverty
 Transport and Communication
 Energy

A. Manufacturing:

Pakistan’s manufacturing sector is growing from 2000. In 1999, large scale manufacturing is
1.5% and it is 19.9% in 2004-05. So it makes an average 8.8% by the end of 2007.

B. Finance:
Pakistan’s finance and insurance sector department also showed a great development from 2000.
In 2005, it is at Rs.311, 741 million. It shows a growth of 166% since 2000.

C. Stock market:

“Business Week” the international magazine declared Pakistan’s stock market, the best
performing stock market index in the world, in the first four years of 21st century. But in 2008,
there is a great decline in Pakistan’s economy due to uncertain political environment and many
other reasons.

D. Tourism:

Pakistan has diverse cultures, people and landscapes. Tourism in Pakistan is a growing
industry. To promoting Pakistan’s unique and various cultural heritages, PM launch “Visit
Pakistan” marketing campaign in 2007. In 2009, The World Economic Forum’s Travel &
Tourism Competitiveness Report ranks Pakistan as one of the top 25% tourist destinations for its
World Heritage sites. Some famous tourist spots are shown below,

 K2, world’s second-highest mountain, in northern

 Damn-e Koh Park in Islamabad
 DHA Marina Club in Karachi
 The Badshahi mosque in Lahore epitomizes the beauty, passion and grandeur of the Mughal
era.

E. Revenue:

The income of a government from taxation, excise duties, customs, or other sources,
appropriated to the payment of the public expenses. The Board of Revenue has collected
nearly one trillion Rupees ($14.1 billion) in taxes in the 2007-2008.

3. Sectors of Pakistan economy

A. Agriculture:

Pakistan ranks fifth in the Muslim world and twentieth worldwide in farm output. About
25% of Pakistan’s total land area is under cultivation and is watered by one of the largest
irrigation systems in the world. Agriculture accounts for about 23% of GDP and employs about
44% of the labor force.  Zarai Taraqiati Bank Limited is contributing a lot in our agriculture
sector.

B. Industry:

Pakistan ranks forty-first in the world and fifty-fifth worldwide in factory output. Pakistan’s
industrial sector accounts for about 24% of GDP. Cotton textile production and apparel
manufacturing are Pakistan’s largest industries, accounting for about 66% of the merchandise
exports and almost 40% of the employed labour force. Merchandise exports mean export of
goods not services. Other major industries include cement, fertilizer, edible oil, sugar, steel,
tobacco, chemicals, machinery, and food processing.

C. Automobile industry:

Pakistan is an emerging market for automobiles and automotive parts. The total contribution of
Auto industry to GDP in 2007 is 2.8%. Auto sector presently, contributes 16% to the
manufacturing sector which also is expected to increase 25% in the next 7 years. But in my
opinion this prediction can’t be correct due to high inflation and shortage of CNG.

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D. CNG industry:

Compressed Natural Gas (CNG) is a substitute for gasoline (petrol) or diesel fuel. It is
considered to be an  environmentally “clean” alternative to those fuels. In 2009, Pakistan is
one of the largest users of CNG (compressed natural gas) in the world. Presently, more than
2,900 CNG stations are operating in the country in 85 cities and towns. It has provided
employment to many people. But now this industry has a decline and shortage of CNG is
creating a big problem for CNG station owners and the employs working at these stations. Many
CNG stations closed and many are going to close if we don’t fight with the shortage problem of
CNG.

E. Cement industry:

Growth of cement industry is rightly considered a barometer for economic activity. In 1947,
Pakistan had inherited 4 cement plants with a total capacity of 0.5 million tons.

The industry comprises of 29 firms, with the installed production capacity of 44.09 million
tons. There are four foreign companies, three armed forces companies and 16
private companies listed in the stock exchanges. The cement sector is contributing above Rs
30 billion to the national exchequer in the form of taxes. Exchequer was a part of the
government’s hat was responsible for the management and collection of revenues.

Cement industry is also serving the nation by providing job opportunities and presently more
than 150,000 persons are employed directly or indirectly by the industry.

F. IT industry:

Pakistan’s IT industry has been rising steadily. The Government of Pakistan has been proactively
developing the IT sector in Pakistan. A few of the incentives offered include tax exemption till
2016, establishment of IT Parks with low rent, foreign ownership of equity invested in IT and
100% repatriation of profit allowed to IT companies. Profit repatriation is an important factor
that determines whether ‘foreign direct investment’ in another country is actually profitable for
the parent firm.

G. Textiles:

Pakistan’s textile industry and clothing sector has always been a major contributor to
the foreign exchange earning and still contributes about 55% to the total exports.

Textile exports in 1999 were $5.2 billion and rose to become $10.5 billion by 2007. Textile
exports managed to increase at a very decent growth of 16% in 2006. There is development in
other sectors and exports of other sectors increases therefore textile exports share in total export
of Pakistan has declined from 67% in 1997 to 55% in 2008.The top buyers of Pakistani textile
goods are:

USA, UK, Japan, Korea, Saudi Arabia, Italy, Turkey, Germany, Etc.

4. IMF assistance to Pakistan

When IMF is advancing loans to their members, they not only analyze the economic conditions
of their members but the borrower will also have to frame its policies in the light of directions
given by IMF authorities.

The question in my mind is that when and how much was lent to Pakistan by IMF. And what
were the conditions imposed by IMF and what were the consequences of these loans.

Pakistan joined IMF on 11th July, 1950. IMF is providing financial assistance to Pakistan since
1952. According to 1977 statistics, Pakistan borrowed 1193 million dollars from IMF. Since
1980, the fund has made four main agreements with Pakistan as,

In November,1980

In December, 1988

In February, 1994

In July, 1997

A. THE YEAR 2008:

As a result of elections of 18th February 2008, General Musharaf had to surrender and Asif Ali
Zardari became the president of Pakistan. At that time, the country was entrapped into economic
difficulties. Not only trade deficit had gone to $20 billion, but the fiscal deficit also reached 4.7%
of GDP. Foreign reserves had touched at lowest level.

The IMF’s Executive Board has approved a $7.6 billion loan for Pakistan to support its program
to stabilize and rebuild the economy while expanding its social safety net to protect the poor.

“The Government’s program has two objectives: first, to restore overall economic stability and
confidence through a tightening of macroeconomic policies, and second, to do so in a manner
that ensures social stability and adequate support for the poor during the adjustment process,”
said Juan Carlos Di Tata, the IMF mission chief to Pakistan.

Of the $7.6 billion loan, $3.1 billion will be made available by the IMF immediately to
strengthen the reserve position. And the regular monitoring of the economy by the IMF will
show how the macroeconomic objectives set by the Government are being met and whether they
need to be adjusted in the light of changing circumstances.

The Pakistan authorities have already taken some difficult steps to achieve these objectives:
energy subsidies have been cut and the interest rate has been increased to tighten monetary
policy. The authorities’ program for the coming 24 months envisages a number of additional
steps:

The fiscal deficit, excluding grants, will be brought to down from 7.4 percent of GDP in 2007/08
(starting July 1) to a more manageable 4.2 percent in 2008/09 and 3.3 percent in 2009/10-in line
with what it was three years ago. This fiscal adjustment will be primarily achieved by phasing
out energy subsidies and strengthening revenue mobilization through tax policy and
administration measures.

The State Bank of Pakistan (SBP) will act on monetary policy to build its international reserves,
bring down inflation to 6 percent in 2010, and eliminate central bank financing of the
government. The program includes measures to improve monetary management and enhance the
SBP’s bank resolution capacity, and avoid the use of public resources to support the stock
market.

Expenditure on the social safety net will be increased to protect the poor through both cash
transfers and targeted electricity subsidies. The fiscal program for 2008/09 envisages an increase
in spending on the social safety net of 0.6 percentage points of GDP to 0.9 percent of GDP.

B. THE YEAR 2009:

The IMF’s Executive Board agreed to increase lending to Pakistan by an extra $3.2 billion to
fund priority spending and help the government provide assistance to nearly three million people
displaced by military operations and a difficult security situation.

The Board reviewed progress under a $7.6 billion Stand-By Arrangement for Pakistan that was
agreed in November last year. During the August 7 discussion, Directors agreed to increase
lending by $3.2 billion, after a request from the Pakistan government to meet the country’s
increased balance of payments needs resulting from higher oil prices.

C. EFFECTS OF IMF PROGRAMES:

IMF authorities think that the problem of Pakistan increased because of non-compliance with the
IMF programs. But it is not true. The IMF program has led to increase the charges of gas,
electricity, petrol and telephone. The imposition of sales tax and cut in tariff rates on the advice
of IMF has greatly affected the incomes of the poor and middle class earners. They have
widened the gaps between the incomes. The absolute poverty has increased which has promoted
unsocial activities. But this is not all because of IMF, we are responsible for it. If our fiscal
deficit and trade deficit decreases then we should not go to IMF for financing. But we should be
prepared to pay more in the form of taxes and reduces imports; particularly oil etc, the
dependence on IMF may go down.

Role of IMF in Pakistan

Current IMF-Supported Program
A 36-month extended arrangement under the Extended Fund Facility (EFF) for
SDR 4.393 billion (US$6.68 billion, 425 percent of quota), approved by the
Executive Board of the IMF on September 4, 2013. The 6th program review was
completed on March 27, 2015.
Background
Macroeconomic imbalances and longstanding structural impediments to
growth have prevented full realization of Pakistan’s potential. Problems in the
energy sector, security concerns, and a difficult investment climate have
combined with adverse shocks to undermine economic performance in the past
decade. As a result, GDP growth has only averaged 3 percent over the past few
years, well below what is needed to provide jobs for the rising labor force and to
reduce poverty. With the population still increasing rapidly, per capita income
growth has lagged behind many emerging economies.
Prior to the onset of the current IMF-supported program, the fiscal deficit
widened, driven by weak tax collections, energy sector subsidies, and increased
provincial government spending. Domestic deficit financing crowded out private
sector borrowing and contributed to inflation. The external position weakened
significantly, and, reinforced by an absence of access to external market
financing, central bank reserves declined to critical levels.
Role of the IMF
The current government took office with a strong mandate to implement
ambitious economic reforms to stabilize the economy and put Pakistan on the
path to growth and prosperity. The government’s plan focuses on strengthening
macroeconomic and structural policies to shore up confidence, reduce
economic imbalances, foster sustained inclusive growth, and provide
employment opportunities.
Since September 2013, the IMF has been supporting the government’s
economic program by means of a 36-month extended arrangement under the
Extended Fund Facility (EFF). The EFF arrangement, together with other
multilateral and bilateral program support, provides needed external financing
for Pakistan, and signals the authorities’ determination to implement sound
policies, thereby bolstering market confidence and catalyzing private
investment and other inflows. That way, the EFF provides a framework in
helping Pakistan to retain macroeconomic stability, and therefore to promote
growth and protect the most vulnerable part of the population.
The Challenges Ahead
Much has been accomplished in the first half of the program. The fiscal deficit
has been reduced, international reserves have increased substantially, and the
threat of a crisis has greatly receded. Macroeconomic prospects are favorable.
However, more remains to be done to consolidate and reinforce the gains in
economic stability and strengthen reforms for higher growth and job creation.
Pakistan’s aspiration is to catch up over time with other emerging market
countries in key macroeconomic and business climate indicators.
The key challenges facing the authorities are to:
Continue to build external buffers and maintain price stability. Central
Bank reserves reached over 2.5 months of imports and inflation is under 4
percent. The central bank should continue to rebuild its foreign exchange
reserves, making use of Fund disbursements, financial support from other
donors, foreign exchange interventions, and exchange rate flexibility. A
continued focus on price stability will also be important.
Continue with prudent fiscal policy to ensure medium-term fiscal
sustainability. The reduction in the headline deficit from 8.8 percent of GDP in
2012/13 to 5.5 percent of GDP in 2013/14 (an improvement of about 1.5
percent of GDP after accounting for one-off factors), and further to 4.9 percent
of GDP in 2014/15 are important achievements. Building on these, further
efforts will be needed in the coming years to strengthen Pakistan’s resilience to
shocks.
Facilitating higher investment. Despite recent successes in reinforcing
economic stability, investment as a share of GDP has remained too low to
generate the desirable high rates of sustainable economic growth. Over time,
public investment needs to increase significantly. To generate the necessary
resources for this and other priority spending such as health, education, and
social safety nets, the tax-to-GDP ratio must be raised considerably by
broadening the tax base and improving significantly on taxpayer compliance.
Implement structural reforms to achieve inclusive growth. To facilitate
higher private investment and remove obstacles to private sector-led growth,
there is a need to address longstanding problems in the energy sector
(especially dealing with the circular debt on a sustainable basis), continue
reforms of the trade regime, restructure or privatize public sector enterprises,
and strengthen the business climate.
Protect the most vulnerable. Since the outset of the arrangement, the
number of beneficiaries of the targeted income support program increased by
10 percent, and stipends were raised by 50 percent. Throughout the program,
it is a top priority of the government to protect the poor from direct and indirect
impacts of fiscal consolidation and price adjustments by means of targeted
income support.