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Pakistan and the IMF


The International Monetary Fund, or IMF, promotes international financial stability and monetary cooperation. It also facilitates international trade, promotes employment and sustainable economic growth, and helps to reduce global poverty. The IMF is governed by and accountable to its 190 member countries.The IMF was established in 1944 in the aftermath of the Great Depression of the 1930s. 44 founding member countries sought to build a framework for international economic cooperation. Today, its membership embraces 190 countries, with staff drawn from 150 nations.
When you talk about difference between IMF and the world bank, The main difference between the International Monetary Fund and the World Bank lies in their respective purposes and functions. The IMF oversees the stability of the world’s monetary system, while the World Bank’s goal is to reduce poverty by offering assistance to middle-income and low-income countries
Pakistan became member of IMF in July 11, 1950as newly established country was facing fiscal problems since its creation in 1947 from British India.Due to unpredictable nature of the economy and heavily dependent on imports, IMF has given loan to Pakistan on twenty-two occasions since its membership
In 1958, for the first time, Pakistan went to IMF for bailout. For this, IMF lent out US$25,000 to Pakistan on standby arrangement basis on 8 December 1958.Pakistan again went to IMF in 1965. This time, IMF gave US$37,500 to war-torn nation on 16 March 1965.Three years later, Pakistan again went to IMF for third time for balance of payment problems for which IMF gave US$75,000 on 17 October 1968.
In 1971, Pakistan lost its Eastern half, East Pakistan, in a war against India. This war caused huge loses to Pakistan. For which, Pakistan got loan of US$84,000 in 1972, US$75,000 in 1973 and another of US$75,000 in 1974 to meet its growing needs.In 1977, another standby arrangement of US$80,000 was made on urgent basis.Three years later, an extended facility of US$349,000 was reached in 1980. Struggle of Pakistan continued, as Pakistan withdrew another US$730,000 as Pakistan was already part of US cold war against Soviet Union.
Another era was started, as democracy came back to Pakistan, Benazir Bhutto government withdrawn US$194,480 as standby arrangement and another US$382,410 in shape of structural adjustment facility commitment on 28 December 1988.In 1990, government of Nawaz Sharif decided against going to IMF instead arranged donations from friendly countries like Saudi Arabia.
In 1993, Benazir Bhutto again came to power and her government again went to IMF and reached an agreement to get standby arrangement of US$88,000 on 16 September 1993.Poor handling of economy continued by her government as she got loan of US$123,200 under the extended fund facility and another US$172,200 were borrowed on 22 February 1994. Again Pakistan got an amount of US$294,690 on 13 December 1995.[3]
In 1997, Nawaz Sharif came to power. Sharif government went to IMF on urgent basis for the first time and reached an agreement to get two amounts of US$265,370 and US$113,740 on October 20, 1997.In 2008, Yousaf Raza Gillani received a $7.6 billion loan from the IMF.
In 2018, Imran Khan became Prime Minister of Pakistan. From start, Pakistan had a large balance of payment deficit and its foreign reserves were only good enough for two months. For this, they arranged friendly loans from Saudi Arabia, United Arab Emirates and China to avoid tough IMF conditions.In 2019, when economic conditions worsened, they went to IMF for the twenty-second time for a loan of US$1 billion.IMF gave loan based on conditions such as hike in energy tariffs, removal of energy subsidy, increase in taxation, privatization of public entities and fiscal adjustments to the budget.
For decades, Pakistan has had chronic problems collecting tax and the program envisages reforms to improve public finances and cut public debt. However, failing to cope with these issues Pakistani government had to resort to taking loan. Hence under leadership of Prime Minister Imran Khan the government signed loan agreements with Saudi Arabia, United Arab Emirates, China & IMF.
To keep the balance of payments in check and to meet the financial obligations government of Pakistan unfortunately always resort to take loans hence the government has now resorted to IMF.
The primary purpose of taking loans from the IMF is that Pakistan’s Government wants to stabilize its deteriorating economy, exchange rates and balance of payments, however this relief is short-term and usually yields a new crisis in long-term as the debt matures and the government gets into a monetary crisis again due to inadequate raising of dollar in the federal reserve. IMF provides huge amount of loans for such purposes, which seems very lucrative and attractive offer at first sight for a short-term perspective.
This bailout has laid several conditions on the Pakistani government including those on taxes and subsidies, government spending, interest rate and foreign exchange rate but the most stringent condition laid by IMF for Pakistan was to account in detail the Chinese financial outlay in China Pakistan Economic Corridor and give firm assurances that Pakistan will not divert IMF loans to service its China debts. Pakistan needs $12 billion this year to bridge the gap between its foreign currency holdings and what is required to pay for loans and imports.
After IMF the biggest donor to Pakistan is China. An estimate is that around $19-20 billion out of $90 billion total debt and liabilities of Pakistan is Chinese i.e., over one fifth of the overall debt. Surpassing Japan to become the single biggest bilateral lender to Government of Pakistan. China also happens to be the biggest lender to the private sector as well. There is no direct number to reach the Chinese loan to Pakistan private sector; but virtually all the increase in the last three years has come from China. The total private sector external loan increased from $3 billion in Jun15 to $7.2 billion in Dec17. Pakistan will have to pay back $100 billion to China by 2024 of total investment of $18.5 billion, which China has invested on account of bank loans in 19 early harvest projects, under CPEC.
Although CPEC has the potential to transform the Pakistani economy, but experts fear this transformation could come at heavy price for Pakistan in light of what has happened in the past.
According to Centre for Global Development, in 2011, Tajikistan wrote off an unknown amount of loan owed to China in exchange of 1,158 square kilometres of land. And this was only 5 percent of the land what was demanded by Chinese. Then in Sri Lanka, China did a debt-to-equity swap against $8 billion loan at 6 percent provided for construction of Hambantota Port against 99 years lease for managing port. Hence for Pakistan this loan could mean losing the Gwadar port to china but only time can tell what actually will happen will Pakistan be able to repay the loan or will it have to swap the loan for land or equity with China.
CPEC brought development and business avenues with it in Pakistan in exchange of the loan from Chinese government. In the same way IMF loan is expected to enable Pakistan to repay its maturing loans, boost its dollar reserve, acquire dollars to pay its import bill and cure the soaring economy from the money received.
Due to the terms and condition of the loan Pakistan will see a new tax culture/regime, enhancement in foreign exchange reserve and increased creditability rating of the country through reduction in default rate risk of Pakistan. However to achieve all of this Pakistanis will have to pay the cost in the form of devaluation on Pakistani rupee, freezing of expenditure on non-developmental government activities decline in economic activity hence decline in GDP and allied economic indicators, a rise in markup rate and cost if inter-bank transactions, and increase in central excise duty on service and agriculture sector. One area where the IMF has put a lot of focus is tax collection. Pakistan has for years struggled to raise its tax revenue and increase it tax net.
The main aim of IMF is to increase revenue of the borrowing countries but in case of Pakistan they have not been able to do much in the past.
In the long run the IMF plan hints towards an even bigger financial crunch of the economy than it is facing today. The debt taken by Pakistan from the IMF increased in rupee terms by Rs70 billion to Rs811 billion due to currency devaluation. Hence in the long run IMF Loan has the potential to harm Pakistan and its economy in a more devastating and brutal way than the loan taken from China under CPEC. Since there are very slim chances that Pakistan will make most benefit out from the positive impact on exchange rate in the long run.
Whether the program turns to be beneficial or detrimental for the economy depends how the public responds to the measures and how thoughtfully the government implements it for now the government has no other option but to take the loan so that they can prevent the financial structure of the country from collapsing. The current economic condition of Pakistan and the future agenda of the government indicates that Pakistan has fallen in a debt trap. Pakistan’s debt and liabilities have risen steeply to Rs35.1 trillion or 91.2% of size of the economy. Yet the government is indicating to take more loan especially from IMF and Friendly countries.
The fresh rounds of talks between Pakistan and the International Monetary Fund for the release of USD 1 billion loan tranche and a good economic certificate to the nation has remained inconclusive. The talks held from October 4 to 15 failed to reach a staff level agreement because of differences over the macroeconomic framework and uncertainty over the future of Pakistan’s economy. The talks failed despite Pakistan having implemented a prior condition of increasing electricity and petroleum products prices.Pakistan and the IMF could not agree on the quantum of additional taxes and the roadmap for fiscal stability of the power sector. There were also issues about increase in gas prices and the measures needed to contain the current account deficit to a manageable level.The IMF had demanded to impose additional taxes equal to at least 1 per cent of the GDP or over Rs 525 billion but the government was willing to take measures to the tune of Rs 300 billion.
Pakistan has already accepted two conditions of the IMF. It has increased the electricity prices by Rs1.68 per unit or up to 14 per cent and also jacked up the petroleum products prices to the new historical level of Rs 137.79 per litre. The IMF wanted the cost of fuel to be passed on to the consumers and the government only did so while increasing prices by Rs10 per litre. The federal government on Saturday raised the price of petrol by Rs10.49 per litre and high-speed diesel (HSD) by Rs12.44 per litre to Rs135.
This time, IMF has made it clear that the staff-level agreement of $6 billion is subject to “timely implementation of prior actions and confirmation of international partners’ financial commitments.” That means that FBR will have to show how it wants to increase the revenue in the next budget. The State Bank will have to ensure that the rupee-dollar parity is now being set on the basis of the free-market float and increase the primary lending rates. Hence there are more chances that the plan will not only be beneficial in short run but also in the long run as well due to the IMF pressure. Since Pakistan had no other option but to take loan from IMF because foreign exchange reserves were barely enough to cover two months of exports and inflation climbing to over 8 percent. So that it can shore up fragile public finances and strengthen a slowing economy hence we should focus on how to make the most benefit from the plan that IMF has given than debate on the merits and demerits of the loan and image a better deal that could have been struck if the government negotiated. The most worrisome part of the package is what will happen when these loans will mature as in 2022 IMF 13th bailout will mature, in 2023 Saudi Arab’s loan ($9.6Bn) and UAE’s loan ($6.2Bn) will mature, in 2024 china’s loan ($100Bn) will mature.