The IMF and Pakistan

1

Muhammad Mubeen Haider

Degree: BS(CS)

Faculty: Sciences

Course Code: SSH-102

Course Title: Pak-Studies

Department of Human Linguistics And

Social Humanities

University of Agriculture, Faisalabad

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Sr. No Contents Page No

1 History & Introduction 03

2 Pakistan‐IMF Relations: 05

3 Loans Taken By Pakistan 06

4 Achievements and Failures 10

5 References 12

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THE IMF AND PAKISTAN

(A Road to Nowhere)

History of IMF

The international Monetary Fund was created in 1944, at Bretton Woods conference to

prevent the kinds of chain reaction in the economic system that caused world currencies

to collapse like in the Great Depression of the 1930s.

IMF started to make service with IBRD (International Bank of Reconstruction and

Development) in 1947. The IMF was created to support orderly international currency

exchanges and to help nations having balance of payment problems through short term

loans of cash.

The IMF is the world’s central organization for international monetary cooperation. With

188 member countries, it is an organization in which almost all of the countries in the

world work together to promote the common good. The IMF’s primary purpose is to

safeguard the stability of the international monetary system the system of exchange

rates and international payments that enables countries (and their citizens) to buy

goods and services from one another. This is essential for achieving sustainable

economic growth and rising living standards.

INTRODUCTION

IMF is an international financial organization comprised of 188 member

countries.

Purposes, as stipulated in its Articles of Agreement, are to Promote international

monetary cooperation.

Facilitate the expansion of international trade

Promote exchange stability and a multilateral system of payments

Make temporary financial resources available to members under “adequate

safeguards”

Reduce the duration and degree of international payments

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HISTORY OF PAKISTAN’S RELATIONS WITH THE IMF

A history of Pakistan’s relations with the IMF cannot be told without reference to the

complex and changing role played by the United States, especially since the mid‐1980s.

One of the first serious efforts at tax reform was initiated during this period, with the

appointment of a respected administrator, Qamar‐ul Islam at the head of a distinguished

Commission. The commission’s report, in the mid‐1980s,5 correctly identified corruption

and “cheating” as very significant problems that needed to be tackled in order to move

the tax/GDP ratio from a high of 14% towards 20%, for a sustained increase in

investment and growth. But the report was shelved as the inflows from the US peaked

at about the time it was completed.

A decline of US assistance at the end of the 1980s followed the Soviet withdrawal from

Afghanistan, with the consequent reduced strategic importance of Pakistan. There was

a tightening of US sanctions under the Pressler Amendment, aimed at dissuading

Pakistan from pursuing the development of nuclear weapons.6 However, the US

actively supported the IMF programs and World Bank Structural Adjustment Loans that

followed. In Pakistani eyes, the modalities of assistance had changed, and not the

principal sources.

Hence, IMF conditionality, was treated as largely superfluous in a classic example of the

“moral hazard” problem. Despite the restraining influence of the more conservative

members of the IMF Board, successive programs through the 1990s largely failed to

achieve their twin objectives of fiscal consolidation and establishing the autonomy of the

Central Bank. The nuclear explosion in May 1998, led to a cut‐off of bilateral assistance

and tightening of US sanctions. The Fund program in operation also abruptly came to

an end because the expected foreign inflows assumed in the program dried up with the

sanctions. At this stage, Pakistan made it clear that it would default on IMF payments if

the program were not revived, but that it would continue to pay the Fund if the program

was to be renegotiated.7 This episode could be taken as illustrative of the “defensive

lending” incentives on the side of the Fund to continue its support .

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Pakistan‐IMF Relations:

The record of IMF relations with Pakistan through the decade of the 1990s’, was

reviewed by the Independent Evaluation Office (IEO) of the IMF in 2002 which sought to

answer the question: what accounted for the country’s prolonged use of IMF resources?

Pakistan was one of six countries selected by the Fund’s Independent Evaluation Office

(IEO) as “prolonged users” and its study tried to answer the question: what accounted

for Pakistan’s prolonged use? It noted that programs in the 1989‐99 period suffered

from substantial policy slippages and soon went off‐track…..a large share of the

committed financing was not disbursed”. Even what was disbursed required “relative

generosity” in the granting of waivers, with five of the seven program reviews completed

in the 1990s’ involving the granting of “at least one and generally several waivers” and

all the waivers on quantitative performance criteria being “requested for reasons other

than minor technical deviations or exogenous shocks”. Moreover, the IEO study notes

that “in spite of the many interruptions suffered by IMF supported programs, the

intervals between two disbursements of IMF resources were generally short ‐‐ never

exceeding twelve months over 1991‐99”.

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Loans Taken by Pakistan

First loan: 1958

Loan cancelled prior to the expiration date, and the entire amount of the loan

went unused

Ayub govt: 2 more standby agreements, both with a duration of 1 year each

Z.A. Bhutto govt.: 4 more standby loans

Prior to the mid-70’s, stabilization and SAP’s did not play a major role in the

management of the economies of the third world.

1980: Pakistan entered into a long-term Extended Fund Facility (EFF) for a

period of 3 years under Gen. Zia

Amount was 3 times the amount lent post 1947

Another long term agreement was signed by the interim govt. after the death of

Zia

When Benazir’s govt. overtook office the very next day, it ratified the already

agreed program

Sharif’s govt. was also bound by the covenants of the agreement

Another agreement signed in 1993

Signed by the interim govt. of Moeen Qureshi, a former WB staff member

Agreed to policy framework paper

Laid the basis for the more comprehensive, long-term agreement made in 1994

Was the GoP initiating the program based on its own needs, or was it imposed

by the WB/IMF members?

BB comes into power for the 2nd time: handed over a pre-prepared, detailed

program to endorse

Signed the extended 3 year facility

Moeen’s govt. was responsible for framing the program and getting it approved

by the IMF; BB’s govt. just ‘stamped’ it.

The only time a democratically elected govt. itself took a loan was Nawaz Sharif’s

second govt (97-99)

A total of 4 agreements made b/w this govt. and the IMF

All 4 agreements suspended or abrogated

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Nawaz Sharif’s second govt. completed its program or fulfilled the agreement/

commitments to the IMF and WB

Musharaf: Poverty Reduction and Growth Fund (01-04)

Previous governments (88-99) had incomplete implementations but core policy

measures – devaluation, price, exchange rate, interest rate and trade

liberalization; public enterprise reform; and subsidy withdrawal were

implemented however reluctant and slow they may have been in the

implementation

The 2008 Crisis and the “IMF Programme”

Countries only turn to the IMF in times of grave crisis; thus the starting point is invariably

one of extreme volatility and disequilibrium. The decision of the present government to

ask for IMF help in 2008 is a case in point. The economy was in dire straits, rushing

headlong towards bankruptcy and debt-default. Economic growth had slowed, inflation

had reached levels unheard of in Pakistan, the domestic and external deficits had

widened appreciably. Millions of households which the previous government claimed

had been lifted out of poverty fell back. As confidence waned, there was massive capital

flight. The rupee was in virtual free-fall. Rather than take prompt corrective measures to

stem the alarming slide of the economy, the new government pinned its hope on

securing external resources from bilateral donors and friendly countries (Saudi Arabia,

China) including commitments from a new concoction called “Friends of Democratic

Pakistan (FODP). In other words, the authorities were looking around for a “free

lunch”—but there was none forthcoming. The government said they had a “Plan A”, a

“Plan B” and a “Plan C” when it should have been self-evident that the only plan that

would work was “Plan F”, the IMF because no one else would give us any money.

Indeed, all of Pakistan’s bilateral donors (as well as the World Bank and Asian

Development Bank) urged the government to enter into a Fund arrangement as a

precondition of financial support. Even our “friends” balked.

Countries will typically wait in the hope that the economic situation will somehow turn

around and some may even take corrective measures. No country wants to end up at

the IMF doorstep in Washington DC and ask to be bailed out because it means they

have accepted failure and have lost control over the economy. But in waiting so long,

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the task of halting the downward spiral and the return to a semblance of

macroeconomic stability becomes all the 4 more onerous and difficult with the pain of

adjustment falling disproportionately on the poor and vulnerable who have little or no

social protection. The Pakistani media always makes reference to the “IMF

programme”.

It is not an IMF programme. It is Pakistan’s programme and one that we are, or should

be, fully committed to. “Programme ownership” is a critical ingredient in successful

programme implementation. Without “owning” the programme, it will fail. Pakistan has

typically lacked ownership, especially at the political level. This then translates into

faltering implementation, a sleigh of hand to meet targets, and more grievously a roll-

back of reforms once the programme has either come to an end or, more typically, has

been terminated by the authorities themselves. An example of a roll-back is the removal

of exemptions and concessions as part of programme conditionality. However, once the

programme has been abandoned, these concessions and exemptions are quietly

restored and, no doubt, new ones added, fragmenting the tax base again and leading to

a loss of revenue.

The IMF, as per its mandate, stands ready to assist Pakistan, a member-country in

“good standing”, and with its resources help forestall another chaotic economic

meltdown. But it has thus far refused to provide the government with a “Letter of

Comfort” which is urgently needed to unlock quick-disbursing resources to support the

budget and balance of payments. Many observers think that this hardening of the

Fund’s attitude towards Pakistan reflects the deterioration of Pakistan’s relations with

the United States and all that is needed is a US nod-and-a-wink and lobbying of other

G-7 Executive Directors and the Letter of Comfort will be forthcoming. But, realistically

speaking, any Pakistani economist of worth, or the Fund, would be hard pressed to

declare that Pakistan’s macroeconomic situation is anywhere near “satisfactory and

sustainable”. Such a declaration under the present highly-fraught economic

circumstances would not only require a willing suspension of disbelief but would carry

no credibility at all. And the Fund knows it.

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Interests of the authorities

Pakistan has an immature political structure, with political parties struggling to replenish

coffers after lengthy periods in the wilderness—especially given long periods of

military‐led rule. The interests of the politicians, seeking funds for reelection, and

perhaps personal gain, and an increasingly rent‐seeking bureaucracy coincided. Holes

in the tax system and preferences in the tariff regime, facilitated by SROs that often

override legislation, are a useful way to “make friends and influence people.” While

paying lip service to IMF conditions to remove such loopholes, including under the

ESAF negotiated by technocratic PM Moeen Qureshi in 1993, the second Benazir

Bhutto administration actually increased the magnitude of such exemptions in its budget

of June 1994, although going through the motions of eliminating some minor provisions.

It is interesting that Musharraf’s selection of a private banker as Finance Minister,

Shaukat Aziz, who was presumably immune to “rent‐seeking” influences, attempted to

cut the Gordian knot by removing entire sectors from the GST (textiles, sports goods,

carpets and leather goods among others—virtually all the productive .

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Achievements and Failures

Fiscal Policy: implementation was weakest in this area

Tax revenues as a % of GDP remained stagnant

Steps taken in taxation

numerous income and wealth tax exemptions were eliminated

simplification and rationalization of the tax structure

Attempts to improve tax administration

Actual results?

Number of tax payers and coverage remained low

121 commodity categories exempt from the GST, so

progress in reducing concessions remained limited

Exports increased sharply (11.5% p.a.)

Resident Pakistani’s were allowed to open foreign currency

accounts in Pakistan (frozen in 1998)

Banks were authorized to increase interest rates on deposits

MCB and ABL were sold to the private sector

10 new private sector commercial banks and 8 investment

banks were sanctioned

Increased activity and capitalization in the stock market

Rate of return on T-bills increased from 6 to 13%

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Did Pakistan need to go to the IMF?

Inflation rate: 11,000%

Fiscal deficit in excess of 30% of GDP

GDP per capita was 20% less than that in 1980

Pakistan has never been in such critical conditions, though it

may have gotten there on account of following these programs!

While Pakistan’s economy needs better management, reform

and alignment, does it need to run to the IMF every 3 years?

Why does each govt. accept the stringent conditions, more

loans and more debt?

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Refrences

http://www.imf.org/external/pubs/ft/survey/so/2008/new101608a.htm

http://www.vi.is/files/The%20Icelandic%20Economic%20Turmoil_925879388.pdf

http://www.imf.org/external/pubs/ft/survey/so/2008/car102408a.htm

Ehtisham Ahmad and Nicholas Stern, 1991, Theory and Practice of Tax reforms in

Developing Countries, Cambridge University Press.

https://www.google.com.pk/search?espv=2&biw=1366&bih=667&q=imf+loan+to+pakist

an+history&revid=1164002486&sa=X&ei=F6lpVejWGYGtU8jYgBA&ved=0CGcQ1QIoA

A#q=conditions+for+loan+approval

http://www.statice.is/?PageID=444&newsid=2950&highlight=gross%20domestic%20pro

duct