TRANSPARENCY REQUIRED IN USAGE OF IMF FUND

AROOJ ASGHAR (Arooj.asghar@hotmail.com)
Dec 01 - 07, 2008

Pakistan entered into nine different agreements with the IMF during the period 1988-2000. The recent one was a 10th in line. Except for the second last Stand-by Arrangement (SBA), most other arrangements were not fully implemented and consequently almost half of the agreed amount remained un-drawn. Musharraf government famously labeled the 1990s as a 'lost decade' for Pakistan's economy but unfortunately now the independent analysts conclude that present day problems of Pakistan are the fallouts of the policies adopted during the Musharraf era.

Pakistan agreed to take US$1,393 million from 1972 1983 out of which 87% was drawn while remaining 13% of the total facility was not utilized and expired. Pakistan agreed to take US$3,605 million from 1988 1999 out of which 45% was only utilized whereas remaining 55% of the total facility was not unutilized and returned. However, since 2000, the SBA was fully implemented and 100% of the facility was drawn for Poverty Reduction and Growth Facility (PRGF) which was approved in 2001 though no concrete progress could be seen in poverty eradication. In 2004, Pakistan formally finished the IMF program and declared to have broken the begging bowl.

The Fund provides financial resources to its members to overcome temporary balance of payments difficulties through a variety of facilities and policies. As known to all, presently, in current fiscal year Pakistan has historic high twin deficits i.e. trade deficit and balance of payment deficit. After seven years, Pakistan has got approved a loan of $.7.6 billion from IMF in November 2008.

POLITICAL MOTIVES IN SECURING IMF ASSISTANCE:

Pakistan has had nine different governments (Bhutto, Jatoi, Nawaz Sharif, Mazari, Moeen Qureshi, Bhutto, Meraj Khalid, Nawaz Sharif, and Musharraf) during 1988-2001. Interestingly, Pakistan entered into nine different kinds of agreements with the IMF during this period. The motivations and intentions of each government may be different but the underlying factors remain the same. These factors are:

1) Need to obtain financial resources for resolving balance of payments problem;

2) Secure access of funds from other international financial institutions and bilateral donors;

3) Get a 'Seal of approval' for seeking commercial and export credit facilities;

4) Shift the blame for some of the politically unpopular decisions to external pressures and compulsions;

5) The attempt of reformist economic managers to restrain and block the pursuit of populist policies by political leaders;

6) In post 1998 period to get debt relief and rescheduling.

These factors appear to be quite reasonable. Now the question arises why core issues are not yet resolved even taking so much debt and facility from a single institution. The simple answer is careless attitude and lack of accountability of rulers. These facilities later used to bribe political affiliates resultantly nation witnessed notorious National Reconciliation Ordinance (NRO). Hopefully people in the government will carry their lustrous legacy with the exception that this time nation might not allow another NRO.

Pakistan's growth model is heavily reliant on foreign exchange inflows and the economy starts crumbling whenever there is any shortfall. Few months back, Pakistan claimed to have a strong economy where Musharraf led government has successfully turned around the economy. But after its "graceful" departure from the government, the bubble got burst and country reached back to an early 2000 economic position rather its has left the country in worst condition/shape what it received at the time of "constitutional" coup d etat in 1999. Musharaf regime built the economic model on foreign inflows but what it missed was the utilization of those funds in such a way to generate cash and promote industrialization. The economy was successfully turned into a consumer based economy and now the entire nation is facing the consequences.

DETERIORATED MACRO ECONOMIC INDICATORS:

Pakistan's economy is facing mounting pressures from ever-rising inflation, food prices, the acute power shortages, a bewildering stock market and a perceptible slowdown in the manufacturing and services sectors, a sharp increase in interest rates, widening twin deficit whereas it is badly struggling to finance a modest growth of 5 per cent. With this background, Pakistan has no option than to approach to IMF for help and support after divorcing it in December 2004. Our very own Finance Advisor is taking all the credit of negotiating best deal from IMF. He claims that he has secured debt on 4% interest rate which compared to KIBOR looks very cheap but no one asks the self-proclaimed genius that what the current LIBOR and US Treasury Bill rates are. Those rates might be near his negotiated rate. Such foolish arguments might be workable for general public who compare LIBOR with KIBOR but people in the sector know the real and normal interest rate differences.

RAMIFICATIONS OF IMF PROGRAMS:

IMF has many positive contributions to Pakistan economy like reinforcing fiscal discipline in the country during the early 2000s when we were in the four year program of Poverty Reduction and Growth Facility (PRGF) during 2000-2004. This program has laid the foundations for stringent fiscal discipline in the country and exposure requirements of the program has helped in promoting greater transparency in fiscal policy making. This program may have some pitfalls and omissions but overall the program was successful in bringing down the level of the poverty as shown by official statistics for FY-2005.

Pakistan critically needs macroeconomic stability when all of its macroeconomic indicators are on their lowest ebb, large-scale manufacturing sector is facing negative growth, acute energy shortages, inflation has crossed 24%, foreign exchange reserves are depleting at a faster pace. Just after news of IMF accord was spread through media, exchange rate stopped its downward slide and Pak rupee regained it value per dollar to over 78.

Pakistan started following a fiscal discipline prescribed by the IMF like elimination of oil, food and electricity subsidies, more revenue mobilization efforts, expenditure cuts, etc. Most people believe that harsh conditions imposed by IMF in past were responsible for overall deterioration in the socio-economic conditions of the country.

The last program of the IMF under the 'poverty reduction and growth facility' (PRGF) and ESAF started in early 2000 and by that time the country stood at the brink of default on its foreign debt. Hardly any international donor or creditor, private or public, was prepared to provide financing to Pakistan. Pakistan approached IMF and obtained the facility which subsequently helped Pakistan in obtaining debt from other institutions.

The history of prolonged uses of fund resources in Pakistan can be divided into three periods. The first period 1988-99 can be characterized as less successful in achieving the objectives set out in the programs agreed between the authorities and the IMF. Frequent changes in government reduced the time horizon of the decision makers and they avoided taking decisions with long term positive benefits but short term and immediate costs. They used IMF and other foreign resources to fix the external payment imbalances but did not stick to the complementary policy reform which would have taken care of the root problems underlying these imbalances. Poor economic governance was very much an inhibitor in the pursuit of sound economic policies, programs and investment decisions. The second period 2000-07 started on a more positive footing but left the country in worst condition.

The third period beginning in the year 2008 has started with the signing of the agreement with IMF in November. Besides other issues, IMF proposes sectoral reforms to Pakistan which is widely considered as attack on sovereignty. Due to this, the desirable results are not achieved. It is important that every one must understand the issue and participate in the discussion instead of putting labels on the issues. This stereotype thinking has badly damaged the country and will remain damaging if not stopped. It is very important to change the attitude and behavior and make constructive criticism. The only possible solution to dissolve this perception is the transparent usage of funds, establish the credibility of the government where people get relief and feel the difference of their own.