Pakistan

IMF Loans to Pakistan: History and Current Prospects

IMF Loans and Binds

By Saira Yousaf

Monday, January 5, 2009

IMF loans have been an important source to manage the financial problems of Pakistan such as balance of payment deficits, stabilization of currency, rebuilding international reserves, managing liquidity problems along with enabling the respective countries to meet their short term needs by providing various types of loans which IMF calls as its lending 'facility'. In the last few months, there was a lot of speculation and discussion on the government decision to call for IMF loan to meet its liquidity and financial problems. In spite of effective policy actions taken by State Bank of Pakistan, issues such as sharp depreciation of exchange rate, depletion of foreign exchange reserves of $5 billion till November 2008, inflation rate of more than 25%, and increase in import bill by 35.2% created immense challenges for the government and State Bank of Pakistan. Finally, the IMF loan of $7.6 billion was approved to help Pakistan come out of the liquidity and financial crisis albeit with certain IMF conditions. The IMF facility is still an important topic of discussion until the real gains from IMF loans are realized.

To determine the effects of IMF loans on Pakistani economy, it is important to analyze the history of IMF loans to Pakistan briefly. Since 1988 when Pakistan became member of IMF, almost eleven loan arrangements (including the recent IMF loan of $7.6 billion in 2008) have taken place under various IMF facilities/programs. Almost six loan arrangements were made during the regime of Benazir Bhutto including standby arrangement, Structural Adjustment Programs (SAP), Poverty reduction and Growth Facility (PRGF) and Extended SAP. Two IMF loan arrangements were made during Nawaz Sharif regime and two standby agreement and PRGF under Musharraf regime to stabilize the economy. It is important to note that in the tenure of last two decades, on average almost 44% of the total lending amount has been drawn from the original 100% agreed upon lending amount because of the failure of the government to act upon the strict measures determined by IMF. For the first time in the year 2000, this tradition was broken in Musharraf regime when Musharraf's government successfully implemented the conditions proposed by IMF and successfully drew the whole lending amount of $1.3 billion. It is also very interesting to note that only two loan arrangements were made during the military regime whereas nine IMF agreements (including the recent IMF loan) were made during the civilian regime.

The conditions posed by IMF mostly include the close monitoring, reduction of government spending, revision in tax collection policies, change in policy/discount rate etc. to make sure that funds granted to the borrower country are utilized in optimal manner. The IMF loans greatly impact the economic indicators and bring change in the regulatory framework which has both positive and negative impacts on the country. Pakistan saw a decline in GDP growth rate and other economic indicators right after infusion of IMF funds in the economy except in the second last lending arrangement in Musharraf's regime when full amount of loan was drawn from IMF. The economic indicators after IMF loans in the last two decades followed a typical cycle. Usually the trend after IMF loans show immediate decline in GDP growth rate, increased tax revenues to GDP ratio, increased CPI, increased debt on the country and then restoration of the conditions back to their previous states because of the cancellation of loans in the later years. The cancellation of IMF loan agreements in the previous regimes along with the initial IMF loan effects created quite negative impacts on the economy as a whole which shows that there were very few times when IMF loans were fully optimized.

The current IMF loan is expected to have both positive and negative impacts. The immediate benefits include quick influx of liquidity, improvement in credit rating by reducing the country's default risk, enhancement of foreign exchange reserves, stabilization of rupee (which faced 25% depreciation against U.S. dollar till November), increased investor's confidence in both money and capital markets and increased financial assistance from the friends of Pakistan. However the negative impacts associated with the increase in policy rate include increased costs for the banks, increase in unemployment (because many banks and organizations will go for restructuring and downsizing to reduce their operating costs) and increase in poverty rate.

Owing to the great financial crisis faced by the many economies, Pakistan is pursuing contractionary monetary policy which is quite different from the policies followed by the other economies. The regulator's perspective is quite valid in arguing that our conditions are different from the rest of the economies. For conformance to IMF conditions, the government is taking fiscal measures such as increase in general sales tax by 1%, increase in efforts in tax collection, removal of subsidies on domestic petroleum products, higher electricity tariffs and effective measures to solve the issue of circular debt.

In the conclusion, the cyclical trend on the macroeconomic indicators after the IMF loans and overall condition of the economy can be improved with the effective fiscal control and effective policy measures. The negative effects were not seen in the last IMF loan taken in the year 2000 (in Musharraf regime) and improvement in growth indicators were imminent to make the conclusion that the cycle and the negative impacts can be the result of improper implementation of measures prescribed by IMF. The expected doubts about Pakistan's growth can be removed if government remains committed to proper policy measures and restoration of market mechanisms to make sure that IMF loans are effectively utilized for the betterment of economy.

The flight time from Chicago, Illinois to Canada is:

The languages spoken in Karachi are

• Urdu
• Punjabi
• English
• Saraiki
• Sindhi

PIA PARIS , France

Address90 Champs Élysée 75008 Paris

Phone01 56 59 22 60

Fax01 56 59 22 99

Cargo Phone01 48 16 1793

Cargo Fax01 48 16 5249

Emailparuupk@piac.aero

ISLAMABAD, PAKISTAN - Pakistan's new president, Asif Ali Zardari, put the "war on terror" at the top of his agenda and signaled a major thawing in relations with Afghanistan Tuesday at a swearing-in ceremony where Afghan leader Hamid Karzai shared center stage. As Zardari was inaugurated, President Bush promised to send thousands more troops to Afghanistan and told Pakistan it had a "responsibility" to fight extremists "because every nation has an obligation to govern its own territory and make certain that it does not become a safe haven for terror." Zardari, 53, took his oath of office in a short but emotional ceremony in the vast presidential palace in Islamabad, with a portrait of his assassinated wife, Benazir Bhutto, on one side and a picture of her father, Zulfikar Ali Bhutto, Pakistan's first elected leader, on the other. * http://www.chron.com/disp/story.mpl/world/5992718.htmlBenazir Bhutto (Sindhi: بينظير ڀٽو, Urdu: بینظیر بھٹو, IPA: [beːnəziːɾ bɦʊʈːoː]) (June 21, 1953 - December 27, 2007) was a Pakistani politician who chaired the Pakistan Peoples Party (PPP), a centre-left political party in Pakistan. Bhutto was the first woman elected to lead a Muslim state,[5] having twice been Prime Minister of Pakistan (1988-1990; 1993-1996). She was Pakistan's first and to date only female prime minister.

* http://en.wikipedia.org/wiki/Benazir_Bhutto The Quaid-e-Azam Muhammad Ali Jinnah. He was sworn as the Pakistan's first Governor-General in 1947 at partition. Unfortunately, he died due to tuberculosis not long after.

The countries closest to Pakistan:

• India
• Afghanistan
• Nepal
• Oman
• Iran
• Uzbekistan
• China

Soneri Bank Skardu

Khayaban-e-Khumeni Main Bazar Skardu

Branch Code: 0033