IMF LOAN - BAILOUT OR BLOWOUT

AROOJ ASGHAR (aroog.asgahr@hotmail.com)
July 20 - 26, 2009

The International Monetary Fund (IMF) started extending loan to Pakistan in the name of 'Structural Adjustment Program' (SAP) during 1988 and 2002. The disbursement of loan was connected with very harsh conditions and fiscal targets given to the government. Up to 1970 IMF would release funds to the countries that faced balance of payment difficulties. But, after oil crisis of 1973 and 1979 the IMF started attaching conditions with its loans.

Political instability rampant in the country during 1988-2002 gave rise to leakages in foreign funds that were extravagantly and lavishly wasted by functionaries of nine short-lived governments from 1988-1999. Each regime signed its own deal but none of them implemented leaving Pakistan more and more indebted with no proper utilization of loan amounts. However, the financing arrangements with IMF were discontinued after 2002 and till 2008 Pakistan preferred to do away with this financial institution on account of the high rate of interest as well as very stringent conditions tagged with the aid.

In the spell of SAP, IMF dictated Pakistan to follow a policy of economic liberalization, deregulation, privatization, withdrawal of subsidy from basic utilities like water, gas and electricity, downsizing and cutting down the expenditure, especially, on health and education.

The primary reason to seek financial assistance from IMF has been to resolving balance of payments problems, securing assistance from other bilateral donors, and getting a seal of approval for commercial and export credit facilities.

However, in November 2008 a grim patch came in the history of country when we were at the brink of a sovereign default and foreign exchange reserves were completely depleted, the government had to rush again to the donor fund and seek assistance. The country's foreign exchange reserves could only afford two months' imports. The rating agency Standard & Poor's downgraded the country's sovereign debt rating to CCC-plus, close to defaulting on its commitments of external loan repayment.

Government kept on lobbying for help from friendly countries and financial institutions and IMF loan was the last option. After getting no positive response from any of them, GoP had to sign a deal with IMF. After detailed negotiations, a stand-by arrangement worth $ 7.6 billion was sanctioned and first tranche was released in December 2008 to meet fiscal targets. This loan facility was negotiated with sixteen conditions out of which eleven were accepted by Pakistan after slight amendments.

1- According to the conditions, the Pakistan government had to gradually impose the central excise duty (CED) on services and agriculture sectors at the rate of 8-18% in place of the general sales tax (GST).

2- The Pakistani currency was to be devalued after slight changes in the discount rate and exchange rate be decreased officially by 6-7%.

3- IMF set some targets for the central bank, which were to be achieved. According to SBP officials, the central bank has met all the targets including achieving the task of maintaining the size of Net Foreign Assets (NFA) and the government borrowings. The target of government's borrowing was set at Rs 1181 billion, nevertheless the central bank has so far released Rs 1126 billion, showing Rs155 billion lesser than the target.

4- According to the agreement, the level of overall domestic banking assets had to be brought to Rs 1314 billion, which was recorded at Rs 1181 billion on June 3, 2009. The net foreign assets have also surpassed the set target of $2.782 billion and reached $4.501 billion, showing an improvement of $1.56 billion.

5- Moreover the release of 60% funds for the next three quarters of the current financial year, under the Public Sector Development Programme (PSDP), would be reviewed downward to 45%. The foreign assistance flow had already declined by 40% because donors had refused to provide funds for new projects at the federal and provincial levels under the PSDP against the ongoing projects funded by the Japan-IBRD, the World Bank, the Islamic Development Bank, and the Asian Development Bank.

6- The major conditions accepted by the Pakistan government included changes in the Islamic Development Bank loans and differentiation between loans and grants, freezing of non-development expenditure under the defence budget for the last three quarters of the current financial year, non-provision of supplementary grants to government departments, ending subsidy on gas and electricity, 20% reduction in non-development expenditure of civil departments and federal ministries, increase in markup rate of banks and on inter-bank transactions, uniformity in the inter-bank and open market dollar exchange rate, and stoppage of government financial intervention in stock markets.

CONCLUSION

Now the economy is in much better condition as IMF is again reviewing Pakistan's economic performance. Pakistan has largely overcome its balance of payments issues. The program has got off to a good start, with inflation easing and the central bank's foreign exchange reserves back above $12 billion after falling to $3.3 billion last November. Though core (non-food, non-energy) inflation remains stubborn, the headline inflation is down to just 20.3%. The trade gap is closing. The government's continuing subsidies for electricity are one of the key sticking points of its talks with the IMF. The IMF wants the government to increase power tariffs to shore up its balance sheet, but doing so would be politically sensitive, as it would add insult to the injury of frequent power cuts for many of the country's residents.

Common people, not the ruling elite, have paid a heavy price for the sense of economic stability achieved so far. There are devastating effects on the poorer section of the societies. Because of IMF conditionality, the prices of electricity, gas, food, education, medicines have gone up and poor people cannot afford to buy ordinary medicines. If Pakistan wants to develop, it has to stand on its feet and cut down the lavish expenditure being incurred on the defence and administration. Most energy subsidies have already been eliminated and the remaining will go soon. Instead of cutting its non-development expenditure, the government has reduced development spending for the social sector by a hefty Rs79.5bn. Both these steps have helped it slash the fiscal deficit, but have done harm to the people. The economic slowdown triggered by stabilization policies has left hundreds of thousands of workers jobless. It is feared that poverty, which has already shot upto 38% from 23%, will grow faster than official projections during the next couple of years.

In spite of all these hardships borne by downtrodden masses, once again Prime Minister's adviser on Finance and Revenue Shaukat Tarin has warned that the country might need to go to IMF for another loan of about $4 billion to bridge a resource gap of 4.9% in 2009-2010 in case the "Friends of Pakistan" failed to cough up the money in time.