INTERNATIONAL MONETARY

FUND
About the IMF
The IMF is an international organization
of 185 member countries. It was
established to promote international
monetary cooperation, exchange stability,
and orderly exchange arrangements; to
foster economic growth and high levels of
employment; and to provide temporary
financial assistance to countries to help
ease balance of payments adjustment.
Why was it created?
The IMF was conceived in July 1944, when
representatives of 45 governments agreed
on a framework for international economic
cooperation.

The IMF's founders charged the new

institution with overseeing the international
monetary system to ensure exchange rate
stability and encouraging member
countries to eliminate exchange restrictions
that hindered trade.
What does the International
Monetary Fund do?
The IMF's primary purpose is to ensure
the stability of the international monetary
systemthe system of exchange rates
and international payments.
To maintain stability and prevent crises,
the IMF reviews national, regional, and
global economic and financial
developments.
What does the International
Monetary Fund do?
The IMF also makes financing
temporarily available to member
countries to help them address balance
of payments problems
It also provides technical assistance and
training to help countries build the
expertise and institutions they need for
economic stability and growth.
Where does the IMF get its
money?
The IMF's resources come mainly from the
quotas that countries deposit when they
join the IMF. The United States, the world's
largest economy, has the largest quota in
the IMF.
The IMF earns income from the interest
charges and fees levied on its loans. It
uses this income to meet funding costs,
pay for administrative expenses, and
maintain precautionary balances.
Macroeconomic and financial
sector policies
In its oversight of member countries, the IMF
focuses on the following:
Macroeconomic policies relating to the
government's budget
Macroeconomic performancegovernment and
consumer spending, business investment, exports
and imports, output (GDP), employment, and
inflation;
Balance of payments
Financial sector policies
Structural policies that affect macroeconomic
performance
How does the IMF help poor
countries?
Most of the IMF's loans to low-income
countries are made on concessional terms.
The IMF is not a development institution.
The IMF also participates in debt relief efforts
for poor countries that are unable to reduce
their debt to a sustainable level.
The IMF implemented the Multilateral Debt
Relief Initiative (MDRI) in 2006 by canceling
the debt owed to it by 19 countries.
The IMF and the World Bank have been
urging their members for years to eliminate
barriers to trade.

Criticism against IMF

Two criticisms from economists have been that

financial aid is always bound to so-called
conditionality's", including structural adjustment
programmed.

Conditionalitys, which are the economic

performance targets established as a precondition
for IMF loans, it is claimed, retard social stability ,
while Structural Adjustment Programs lead to an
increase in poverty in recipient countries.
Criticism against IMF
The IMF sometimes advocates "austerity programmed,"
increasing taxes even when the economy is weak, in order
to generate government revenue and balance budget
deficits, which is the opposite of Keynesian policy.

These policies were criticized by the former chief economist

and Senior Vice President at the World Bank.

He argued that by converting to a more Monetarist

approach, the fund no longer had a valid purpose, as it was
designed to provide funds for countries to carry out
Keynesian.
Criticism against IMF
In case of Argentina,

which had been considered by the IMF to be a model

country in its experienced a catastrophic economic crisis in
2001 , which some believe to have been caused by IMF-
induced budget restrictions which undercut the government's
ability to sustain national infrastructure even in crucial areas
such as health, education, security and privatization of
strategically vital national resources.
Criticism against IMF
The major argument against the IMF by leading economist is
that the weaker are getting weakest. When the IMF gives
loans it imposes conditionalitys on the borrowing countries.
However, it does not make sure where the actual funds are
going.

The borrowing countries are often not able to come out of

the crisis and they fall in to a crazy cycle of debt and interest
payment. The corrupt politicians of the developing countries
then burden the general public with high taxes to pay out
their debts.
Criticism against IMF
IMF has no effective authority over the domestic policies of
its members. It is in no position for example to force a
member to spend more on schools or hospitals and buying
less military aircrafts, or constructing huge presidential
palaces.

It intervenes for weaker countries. It can and often does urge

members to make the best use of scarce resources by
refraining from unproductive military expenditures (only the
weaker) or by spending more money on health and
education.

Pakistan and IMF

The IMF, directly and indirectly, has played a crucial role in
the macroeconomic stability of Pakistan since 1988. On the
one hand, it has provided direct bilateral support to Pakistan
in order to cope with its macroeconomic imbalances like
balance of payment deficits.

On the other hand, the IMF has indirect influence on lending

by other donor agencies.

This is evident from the fact that whenever Pakistan enjoyed

good relations with the IMF, other lending agencies also
provided money to Pakistan and vice versa.
Pakistan and IMF
Since 1988, Pakistan has not enjoyed smooth relations with
the IMF, because of the latter's dissatisfaction with the
economic performance of Pakistan.

It must be remembered that in the 1990s, the nation

suffered many losses on the economic front and the era is
thus considered a "lost decade" for the economy of Pakistan.

All macroeconomic indicators showed poor performance,

bringing Pakistan to the brink of default.
Pakistan and IMF
Moreover, the IMF's relations with Pakistan were
further strained by 1997 due to the policies of
former Prime Minister Benazir Bhutto (late)

Large-scale corruption by her People's Party and

its resistance to structural reforms irritated the IMF
and World Bank.
Pakistan and IMF
These programs have so far fallen short of resolving
Pakistan's economic problems.

Poverty has increased in Pakistan, rather than declined.

External debt has increased since the IMF and World Bank
became involved in Pakistan.

Unemployment increased in the country as a result of a

downsizing policy adopted by the government under the
guidelines of these institutions.
IMF support to military
dictators
As soon as the leader of the military coup, General Pervaiz
Musharraf, appointed Aziz the finance minister flew to New
York. After meeting IMF officials on October 29, Aziz said the
talks were very positive.

General Musharraf had already indicated his desire to satisfy

the IMF. In his policy statement on October 17 he promised
measures to rebuild investor confidence, increase domestic
savings, make state enterprises profitable and ensure
austerity.
IMF support to military
dictators
Displeased by the Benazir Bhutto government's inability to
implement its recommendations, the IMF welcomed the
Nawaz Sharif government when it came to power in March
1997.

In October that year, the IMF approved a three-year

financing package for Pakistan equivalent to $US 1,588
million in support of a medium-term adjustment and reform
program.
IMF support to military
dictators
IMF officials have been privately saying that they would need
a firm and unequivocal commitment by the Nawaz Sharif
government at the highest level" to implement its conditions,
mainly the 15 percent tax.

The IMF intervention contributed to economic collapses,

ignited socially explosive conditions and added to the
political destabilization in Pakistan. It was no surprise that
the military exploited the situation to grab power.
IMF support to military
dictators
IMF intervention to secure an "open economic
policy" in Pakistan started in 1988 at the end of
military dictator Zia Ul Haq's tenure launched an
IMF-assisted structural adjustment program in
response to chronic and unsustainable fiscal and
external account deficits.

It praised the removal of barriers to foreign trade

and investment, reform of the financial system,
relaxed exchange controls and the privatization of
dozen of state-owned enterprises.
IMF support to military
dictators
A recent UN-sponsored Human Development in
South Asia 1999 report analyzing the impact of the
IMF's measures referred to "worsening poverty
and income inequality in the wake of structural
adjustment programs. Programs have hurt the
poor in Pakistan, since the real incomes of lowest
groups have declined by nearly 52 percent since
the [IMF] adjustment."
Performance during Shaukat
Aziz Tenure
The biggest criticism for the previous government, when
it used to compare its economic performance keeping
1999 as the base year was that the economy then was
surviving heavy economic and military sanctions in the
wake of nuclear tests conducted in May, 1998. The
government of Shaukat Aziz claimed that it has come
out of the clutches of foreign lending agencies,
especially World Bank (WB) and International Monetary
Fund (IMF). They also claim that the inflation declined
and they were ready to say good bye to World Bank and
IMF.
Performance during Shaukat
Aziz Tenure
Although Pakistan received record aid,
investments and remittances, its external debt
went up from $33.6 billion in 1999 to $36.9 billion
in June 2007
However, the situation becomes completely
different when borrowing data is littered with
corruption and wasteful spending, plus players in
the major sectors of the economy do not pay tax at
all.
The government claimed that it does not carry
around a begging bowl and does not depend on
borrowings from IMF anymore. On the other hand,
it borrowed more and more from WB and (Asian
Development Bank) ADB. World Bank unveiled a
lending program of up to 6.5 billion dollars for
Pakistan under a new four-year aid strategy.
The relevance of
Argentinas experience
for Pakistan
the IMF has linked disbursal of loans in Pakistan to
privatization of a bank, submission of a fiscal
responsibility law in parliament, and elimination of
tax exemptions. IMF has also asked the Pakistan
government to impose 15 per cent General Sales
Tax in the 2003-04 budget on bricks, cement
blocks, computer hardware, software, specific
machinery etc.
Argentina is a prime example of a country that
followed the policy recommendations of the IMF to
the letter and now that the country is economically,
politically and socially a complete basket case, the
IMF has, as in other cases, abdicated all
responsibility
The relevance of
Argentinas experience
for Pakistan
The increased violence in our society is a
direct result of the incredible polarization
that has gone on as schools, hospitals, two
square meals and the prospect of
employment have moved out of the reach
of an increasing number of Pakistanis. The
service that our public hospitals and
schools provide in spite of a pitiful budget
allocation, barely 5% for health and
education combined, is remarkable (51% of
our budget is used to service loans). We
can only imagine how much better the
system could be with adequate funding
Current IMF loan facility
for Pakistan
Pakistan has decided to borrow $7.6 billion from the
International Monetary Fund (IMF) to save its sinking
economy
As a part of the agreement, the loan carries a variable
interest rate based on the market conditions. The rate may
vary between 3.51 per cent and 4.51 per cent. The loan will
be extended over a 23 month period and needs to be repaid
between the financial years 2011-12 and 2015-16.
that Pakistan would have to raise its national growth rate to 7
percent and bring down the inflation rate to 5 percent by
2012, while the target of keeping the foreign current account
deficit restricted to $10.6 billion i.e. 6.5 percent of the GDP
by the end of the current fiscal year has been given. The
target for Pakistans economic growth for the next fiscal year
has been set at 5 percent, while that of inflation at 13
percent.
Recommendations

The central bank needs to be proactive in dealing with economic

and financial issues
The fiscal and monetary policy must be in line with each other.
Government should avoid excessive borrowing from the central
bank.
To avoid conditionalties the government should not borrow from IMF
and other donor agencies.
Increase investor confidence, encourage overseas Pakistanis to
send remittances through legal channels.
Privatization process must be transparent and more organized.
Exports should be increased through value addition and quality.
Revival of major sectors such as cotton and textile
Imports should be curtailed.
Improve tax collection to increase government revenue
Above all, steps must be taken to put an end to corruption and VIP
culture.