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IMF and Pakistan Economy

The IMF suspended a $280 million loan tranche to Pakistan until democracy is restored in the country. Pakistan relies heavily on financing from international institutions like the IMF and World Bank to address its balance of payments deficit. The IMF had approved a $1.6 billion loan program for Pakistan in 1997, but disbursements were frozen due to nuclear testing and concerns over economic conditions. Pakistan now risks defaulting on its $32 billion in loans following the recent military coup against the government. The IMF is worried about Pakistan's economic performance, especially weak tax collection.

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203 views3 pages

IMF and Pakistan Economy

The IMF suspended a $280 million loan tranche to Pakistan until democracy is restored in the country. Pakistan relies heavily on financing from international institutions like the IMF and World Bank to address its balance of payments deficit. The IMF had approved a $1.6 billion loan program for Pakistan in 1997, but disbursements were frozen due to nuclear testing and concerns over economic conditions. Pakistan now risks defaulting on its $32 billion in loans following the recent military coup against the government. The IMF is worried about Pakistan's economic performance, especially weak tax collection.

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amaanhussain
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IMF and Pakistan Economy

by Muhammad Imtiaz Ali


Suspended IMF tranche under ESAI/EFF may force Pakistan to default on repayments

Pakistan depends heavily on multilateral and bilateral financing to meet its balance of payments
deficit and makes necessary structural adjustment and turn-around of the economy with the
financial assistance and advice from international lending institutions. That is why the Nawaz
government had directed all its efforts to ensure the continuation of EFF/ESAF arrangement with
the IMF. The Nawaz government was in the middle of negotiations with the IMF to get the $280
million tranche released out of a total $1.6 billion aid package when it was sacked.

The International Monetary Fund (IMF), has suspended $280 million tranche, until democracy is
restored in the country.

The IMF approved a $1.6 billion loan package for Pakistan under ESAF/EFF two years ago, but
disbursement were frozen last year as part of international sanctions to punish Pakistan for
conducting nuclear testing.

But the IMF's lending programme was revived in January this year which helped Pakistan to
reschedule $3.3 billion of official debt and 877 million in commercial debt, from a total foreign
debt of $32 billion.

It is now feared that Pakistan would default on payments of its loans following the army coups
against Nawaz Sharif's government. Payments from the latest IMF credit approved in 1997, were
delayed before the coup because of doubts about economic conditions and a dispute over the role
of independent power producers (IPPs), and their charges for electricity.

The IMF and World Bank remain worried about Pakistan's economic performance, especially tax
collection. While the country struggled to find fund to pay its debts and to prevent an economic
melt down.

The IMF generally provides temporary balance of payments support in return for meeting certain
mutually agreed conditionalities to put back the country on a sustainable path of adjustment. A
country goes to IMF while experiencing difficulties in meeting its payments obligations and
money borrowed from IMF bears interest, which is generally lower than the rate in international
financial market.

The essence of conditionality is to ensure the proper use of Fund resources for bringing about
effective economic adjustment and that the use of these resources is temporary and otherwise
consistent with the Fund's objectives.
The degree of conditionality attached to its various facilities depends on the nature of the macro-
economic and structural programmes they seek to address. The whole purpose of the exercise is
to gradually make the country self-reliant.

In recent past conditionalities attached by the IMF to its various financial facilities viz. Extended
Fund Facility (EFF), Structural Adjustment Facility (SAF) and Enhanced Structural Adjustment
facility (ESAF) have raised a big hue and cry and strong criticism in many countries of the
developing world, because of destabilizing social and political implications. Consequently, IMF
rule has emerged in developing countries as the champion and protector of existing inequitable
international economic order, wherein poor nations are being exploited by unfair global market
structures.

There are five basic components of the typical IMF conditionality attached to Structural
Adjustments Programmes.

1. Abolition or liberalisation of foreign exchange and import controls.

2. Devaluation of the currency.

3. Astringent anti-inflation programme comprising:

a) control of bank credit and elimination of concessional credit programmes for priority sectors,

b) reduction in fiscal deficit through curbs on expenditure, especially in the area of social
services and subsidies, along with increase in taxes and public utility charges,

c) control of wages and salary increase,

d) dismantling of various forms of price control.

4. Greater opening up of the economy to International Trade Investment & Commerce and

5. Privatisation of public sector enterprises.

While such policies may be successful in improving balance payment and other macroeconomic
problems of the developing countries, but they are politically very unpopular as they result in
aggravation of inequalities in society, enhance unemployment and severely hurt poor and middle
class of people, which comprises of large segment of the population living mostly below the
poverty line.

The IMF has introduced some flexibility in its conditionalities in recent years, the main thrust of
its policies is on demand management, and an analysis of the social and political impact of its
programmes has yet to be formally incorporated in the framework of its operations. Over the
years Pakistan had made many financial arrangements with the Fund (IMF), which generally got
terminated mid-way due to government's inability to fulfil the conditionalities in their true spirit.
Recently it was agreed with the IMF that by implementing certain measures budget deficit would
be reduced to 3.3 per cent of the GDP during 1999-2000. The budget announced for the year was
almost "tax free". A serious attempt to impose the agreed sales tax and documentation of the
economy met with stiff resistance. The feudal lords refused to pay agriculture tax. Despite big
claims of the government the domestic industry has no immediate prospects for any remarkable
achievement.

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