IMF CONDITIONS & PAKISTAN
Feb 20 - 26, 2012
Pakistan's economy has been facing numerous challenges since last many years. The economy was considered stable during first half of the last decade but it proved to be a bubble, which burst at the middle of the fiscal year 2008.
As a matter of fact, the fundamentals of Pakistan's economy have gone wrong. Pakistan is one of the few countries in the world which are using imported oil for power generation and ignored indigenous coal and hydel potential; using pipelines for the supply of natural gas to the domestic consumers despite the fact that we don't have high winter seasons whereas domestic consumers use cylinders in Qatar and Iran (two largest gas producing countries) like many other countries; wanted to have an agri-based economy but became a trading country at the end of the day where we import almost everything for domestic use; the list goes on and on without any concrete solution.
Pakistan is truly a mismanaged country - everyone has put his share in it, no exception, I, you, and everyone - undoubtedly still it has a huge potential.
Pakistan is currently facing high inflation, unemployment, less savings and less investment though country has numerous investment opportunities, energy crisis, first earthquack then two countrywide floods in two successive years; war against criminals in Fata, Khyber Pakhtunkhwa and many other parts of the country.
All these and many other issues are individually and collectively affecting the economy badly, difficult to estimate the overall impact of a factor.
Pakistan lost around $67 billion alone while confronting with the irrational behaviors of a few in Fata and KPK. Future is still not certain. Oil prices have crossed the psychological barrier of $100 per barrel and is currently being traded at $120 per barrel due to possible cut in oil supplies by Iran in the coming weeks and months.
With $120 per barrel or above, it is surely difficult for Pakistan's energy sector to survive; cost of almost every product being manufactured or imported goes up with the increase in the cost of electricity generation.
In order to meet the financial needs of the country, the country has to approach various governments, donor agencies, banks, and multilaterals.
Pakistan first took the IMF assistance in 1958 and since then it has been an important source of funding the financial needs of the country; used for covering deficits in balance of payments; currency stabilization and addressing liquidity problems.
At the time of financial stress, taking IMF facility - IMF calls it lending facility - gives positive signals to other financial institutions.
Under a Standby Arrangement between the government and IMF, IMF issued facility amounting to $7 billion in 2008, which expired in 2010, which was extended till September 2011.
Pakistan didn't draw down almost $3 billion from the facility whereas 100 per cent drawdown was made in all previous programs. As a principle, every lender puts its own conditions upon issuance of loan or grant. One of the conditions being imposed by IMF was to make structural reforms in various sectors.
Almost all the programs of IMF with Pakistan were unsuccessful except IMF's program of 2000-04 in terms of implementation.
Pakistan is a developing country where there is a lack of savings and investments and it needs monetary assistance for a longer term. The country has unfortunately used a large portion of its debt drawdown on non-productive area. Later in 2005, Prime Minister Shaukat Aziz addressed in the National Assembly and declared that Pakistan had decided to end the IMF program and the country was out of the stringent economic conditions of IMF.
The IMF facilities propose changes in the regulatory framework and generally impact both positive and negative on the economic indicators. Most of the conditions imposed by IMF covered close monitoring, reduction of government spending, revision in tax collection policies, change in interest rates etc. However, IMF now also provides assistance to cover development aspects of the economy through the Paris Club.
The immediate benefits of IMF facilities are the quick influx of liquidity, improvement in credit ratings by reducing the country's default risk, enhancement of the foreign exchange reserves, stabilization of rupee to some extent, increased investor's confidence in both money and capital markets and increased financial assistance from other financial institutions and friendly countries.
Surprisingly, economic indicators in post-IMF loans followed a typical cycle; increase in the tax to GDP ratio, increase in inflation and currency circulation, increase in debt etc.
In order to meet the IMF conditions, government has taken various fiscal measures such as increase in the general sales tax by one per cent, enhanced efforts in tax collection, removal of subsidies on petroleum products, higher electricity tariffs and effective measures to solve the issue of circular debt.
Pakistan has decided not to extend the IMF program and didn't make a request for the revival of the old or negotiation of a new standby arrangement. The purpose of IMF facilities is usually to take immediate monetary assistance and take policy measures so as to correct the fundamental issues related to balance of payment.
In the last facility, IMF put the conditions that Pakistan had to impose central excise duty (CED) on services and agriculture sectors at the rate of eight to 18 percent in place of the general sales tax (GST); devalue Rupee against Dollar; reduce the size of Public Sector Development Program (PSDP); freeze non-development expenditure especially cut defense budget; completely eliminate subsidy on gas and electricity; reduce at least 20 per cent non-development expenditure of civil departments and federal ministries; increase interest rates; and open stock market and stop interventions of state corporations and institutions in stock markets.
The IMF emphasized on the policy reforms and implementation whereas none of the governments took corrective measures seriously though they signed agreements and accepted preconditions. As a result, IMF kept on increasing pressure and consequently Pakistan could only meet half or even less of the total commitments. It would be unfair to blame the government alone, IMF also contributed in it by not presenting stringent policy reforms. Apparently, donor countries use IMF as a tool and pressurize governments to get concession. In the past, IMF used to evaluate the economic conditions of the country, and identified issues and recommended solutions. Now, everything is clear.
The dark side of the IMF facility is that it takes the authority from the state to govern its own economy and policy, which a political government is always reluctant to follow. It is difficult for Pakistan to implement all the conditions of IMF yet it would be better if it implements the reforms once for all like a bitter pill because economy and lives of people get more affected if reforms are discontinued or inconsistent. It's better for the government to convert the current challenge into an opportunity by reviving and reforming economy and later abandoning the IMF.