- Economic review of Pakistan under IMF support By Hassnain Javed
Economic review of Pakistan under IMF support By Hassnain Javed
Pakistan has a long-standing relationship with IMF, signing 22 plans starting from its first deal on Dec 28, 1958 until the recent one on 13th May 2019. The International Monetary fund or IMF is an international organization, which is Headquartered in Washington D.C. and honed memberships from 189 countries around the globe. The purpose of IMF is to provide monetary stability and cooperation, foster international trade, create employment opportunities, reduce poverty and create sustainable economic growth around the world.
The three main functions that IMF provides for its members includes economic surveillance, lending and capacity building. Economic surveillance entails the monitoring of changing economic and financial policies of its 189 member countries; lending includes providing loans to member countries facing some degree of economic crises and capacity building refers to the help provided in building new economic policies and institutions, and training people of the member countries.
The IMF lending programs can thereby be divided into two sub categories depending on the economic condition and need of the hour of member countries. These includes the lending through GRA (General Resource Account) and Lending through PRGT (Poverty Reduction Growth Trust).
Lending through GRA (General Resource Account) is the kind of program, which is appropriate for not-so-poor economies and wealthy countries, which are temporarily facing economic crisis. On the other hand, lending through PRGT (Poverty Reduction Growth Trust) is a program, which is ideal for economies that are not so poor, and poor but at a relatively low interest rate to reduce poverty. Under the two loan plans, IMF offers 10programs through its PRGT and GRA. Pakistan has been a recipient of loans under four programs out of these ten categories. It is important to note that not all 21 of these agreements are Stand-by Agreements (SBAs) or what we call the ‘bail-outs’. In fact, Pakistan has entered into 12 Stand-by Agreements (SBAs) up until now.
The remaining nine agreements are those that fall under the category of PRGT or IMF programs that aim to counter poverty, introduce structural reforms, divert domestic economic crisis, or hedge smaller economies against the risk of a global financial crisis. A Stand-by Agreements or SBAs are short- to medium-term loan arrangements with a payback period of 3.5 and 5 years. Therefore, SBAs fall under the General Resource Account, which as described before are not only created for poor economies, unlike programs under the Poverty Reduction Growth Trust.
If we study the past trends of the IMF and Pakistan deals, it is interesting to note that the length of the payback period and principal borrowed amount has been increasing over the time. For instance, only one-year contacts were signed in the era beginning from 1958 until 1977. Furthermore, the seven agreements signed in this period were also bailouts or Stand-by Agreements only. Consequently, if we look at the era beginning from 1980 until 1995, all seven programs were between 1-2 years of payback. Lastly, in the era beginning from 1997 until 2013, the PML-N made six arrangements with the IMF, costing a whopping $6.4 billion in loans, with a three-year return plan for all except one of these plans.
Currently, the agreement signed on 13May 2019 is our 13th arrangement with the IMF to ask for a bailout, and this event marks the 22nd loan that Pakistan will be taking from the IMF.
In an interview with the media, Pakistan’s new Finance Minister, Abdul Hafeez Shaikh, said that: “We have reached an agreement with the IMF staff for $6bn for the next three years. There will be adjustments involved but we will try to make certain that the extent of pain on low-income people is minimal’. The finance minister also insured that Pakistan may receive more funding’s by the World Bank and Asian Development Bank, worth US$ 2-3 billion approximately- such a move will send positive signals to investors. He also said that the conditions imposed by IMF are not only beneficial for Pakistan’s economy but also essential for its survival.
It is expected that inflation in Pakistan will continue to touch new heights, considering the tough conditions the new IMF plan will impose on the Pakistani government. These conditions includes reducing the budget deficit by 0.6% of GDP by the end of next fiscal year, this will require the government to reduce its spending and increase revenue by US$ 6 billion in new taxes, decrease in subsidies by US$1 billion as well as nationalization of state owned businesses. The stock market is still reeling from the shock, and investor confidence have not been restored yet with the fall of 816 b.pts. Just after the IMF announcement has arrived. Moreover, with IMF’s condition to review Pakistan’s counter terrorism report and money laundering, it has stepped into the domain of intervening with our foreign policy for the very first time. The effects of this IMF plan will be felt immediately, after the government announces the budget next month.
In its own statement to the public, IMF said that: “Pakistan is facing a challenging economic environment, with lacklustre growth, elevated inflation, high indebtedness and a weak external position.”
In order to conclude, it is important to understand that economic challenges Pakistan faces is due to its history of poor economic policies, therefore IMF will work with Pakistan in creating better macroeconomic policy and structural reforms which will improve public financing and reduction in government indebtedness. However, for IMF bailout package to work out we need to focus on the domestic policies and regulations so that local investors’ confidence takes up the boost to help in uplifting the difficult economic situation.