Dec 01 - 07, 2008

The Executive Board of the International Monetary Fund (IMF) on Monday last finally approved a bailout package of $7.6billion to Pakistan. Pakistan is likely to receive between $3 to 3.5 billion initially while the rest of the amount will be disbursed in six equal installments within almost next 2 years. The package is a loan under standby arrangement which carries an interest rate of 4.5% and would be paid back in five years commending from fiscal year 2010-11.

After a seven years gap, Pakistan has finally reentered in the IMF programme to receive $7.6 billion for replenishing its fast depleting reserves, after its friends, multilaterals and other donor agencies and international financial institutions showed reluctance to offer cash as financial assistance. Almost all of them wanted Pakistan to come under IMF financial surveillance before pledging in order to ensure its return. Pakistan was left with no option but to fall back on IMF programme to avoid likely default in December, 2008.

Commenting on the development Shaukat Tarin, Advisor to Prime Minister on Finance made it clear that the amount received from the IMF would not be spent on any non-development expenditure and stock markets saying that this loan would be utilized mainly for replenishing the declining foreign reserves and its balance of payment crises.

Under the IMF's prescription for the ailing economy of Pakistan, the government has accepted the Fund's condition to increase discount rate by 2 per cent and reducing expenditures mainly on development side, which would result into slowing down the economic activities and massive unemployment would further aggravate miseries of more people living below the poverty line on short term basis till end June 2010.

The IMF viewed that the depreciation of rupee against dollar as well as higher inflationary pressure in the current fiscal would enable the tax authorities to increase revenues by Rs 110 billion from an earlier envisaged target of Rs 1,250 billion to Rs 1,360 billion for 2008-09.

According to official circles in Islamabad the most difficult conditions for the incumbent government to comply with will be to achieve zero borrowing from the Central Bank for budgetary purpose in the current financial year. They are of the view that it is almost impossible to meet this condition.

The IMF administers the international monetary system and operates as a central bank to central banks. The institution was established on December 27, 1945 when 20 countries signed the Articles of Bretton-Woods Agreement (charter). Financial operations of the Bank began on March 1947. The celebrated economist Lord Keynes and the American diplomat H.D White played a leading role in the creation of the Fund.

The purposes of the Fund are to encourage international monetary cooperation, facilitate the expansion and balanced growth of international trade and thereby contribute to the promotion and maintenance of high levels of employment and real income and to the development of productive resources of its members and help member countries in correcting balance of payments deficit, promote exchange stability and assist in the establishment of a multilateral system of payments in respect of current transactions between members and elimination of foreign exchange restrictions which hamper growth of world trade.

Central to the purposes and operations of the Fund is its mandate under the Articles of Agreement to "exercise firm surveillance over exchange rate policies of members" and to "adopt special principles for the guidance of all members with respect to their policies".

The IMF carries out this mandate by examining international monetary issues and all aspects of member countries' macro-economic and related structural policies since these policies taken together have important implications for the exchange rate system. The IMF surveillance is designed to encourage members to adopt appropriate policies and to help them in identifying issues and problems in a timely manner so the members can adopt corrective measures more quickly.

A heated discussion is going on these days in the financial circles through out the country whether or not it is good to have the IMF loan. It is quite normal for the IMF to attach some conditionalities with its loan and these often vary depending on the recipient country's specific situation. Its interest rate is often less than the market rate. The conditionalities are in fact the reform measures which the IMF considers necessary to put the economy back on the track.

These have already been negotiated in case of the said loan but so far these have not been exposed to the general public. Given our situation these could possibly be like the increase in bank discount rate, elimination of subsidies, reduction in budgetary deficit, improvements in human development indicators, liberalisation of trade, privatisation, promotion of free enterprise, good governance, elimination of corruption, etc.

Our long term development strategies of different perspective plans and budget documents stipulate similar reforms. So far there is no contradiction in perception. Moreover the country has already committed to these reforms as a member of the WTO.

Presently our economy is in the grip of recession which is likely to worsen if the global financial meltdown further accentuates. The recent fall in international oil and food prices has unleashed prospects for some respite and that may work on the supply side. But still there is a need for massive efforts to revive the domestic production, particularly in commodity sectors. The IMF support to be routed through the balance of payment, which would eventually help improve the investment level in the country.

Scaling down the public sector development programme would reduce the aggregate demand. Cement industry and construction activities are often the first victim of it and this will be having its adverse impact on employment situation. In the current situation the economy can not afford further pressure and it has to be first pulled out of the turmoil. In recession, further tightening on the demand side either through higher interest rate or through more taxes would counter the salutary impact of the IMF assistance. The government has already reduced the volume of subsidies on its own. Now its further reduction would forestall the healthy impact of a fall in international oil prices on the cost side. There should be no mad rush for privatisation to avoid any possible loss in the sale of national assets. Its possible fall out for poverty has also to be kept in view.

There is no denying the fact that the economy is confronted with numerous structural problems but all can not be tackled at a time lest the system further derails. The country is in a state of war as the president has rightly stated in his address to the UN general assembly. This is itself a great challenge. To manage a weak economy in such a situation is a terribly difficult task. Moreover the leading coalition partner in the government is by its tradition considered pro-poor. The IMF assistance should not sabotage its programme.

The IMF has committed $7.6 billion assistance to be disbursed over 23 months. The country immediately needs more than this amount to replete its forex reserves at a level required to ensure stability in rupee exchange rate, along with its massive requirements for building dams, expanding its social and physical infrastructure. Despite being not too big amount this does carry a great symbolic importance in a holistic sense. This will improve the country's ratings in the international financial market. Other multilateral and bilateral donors give tremendous weight to the IMF's assessment. Likewise would be the attitude of the newly formed forum, the Friends of Pakistan.

On the basis of the available information on the programme concluded with the IMF it will not be wrong to conclude that under the uncompromising circumstances Pakistan has got reasonably a good deal. Concessional loan of such a big amount was obviously not possible from other sources. It would definitely help the country to avoid looming default and to plug the huge gap in the external sector and increase the foreign exchange reserves to a reasonable level. It would provide the much needed time to the present team of economic managers to plan to avoid such a scenario in future.