Relation between IMF and Pakistan and loans taken by Pakistani Government... And History of IMF

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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