05/20/09 1

PAKISTAN & IMF

Report submitted to:

Madam Fatima
Instructor Economics
 MBA Semester 2nd (Night)

Muhammad Shahzad Ahmad Khan

Group Leader

Mubashar Ali Shan

Ghullam Jillani

Ali Riaz
 INTERNATIONAL MONETARY FUND (IMF)

• The IMF is an international

organization which lends
money to countries which
need to borrow it. Its
headquarters are in
Washington DC, USA

• The IMF was set up at a

conference in 1944.

• Representatives of 45
countries met to discuss
how to avoid the problems
caused by the economic
depression of the 1930s.
 DISADVANTAGES OF
ADVANTAGES OF IMF
IMF
Promotes international monetary Mostly power is in the hand of rich
cooperation. countries

Helps the countries to improve IMF imposes hard conditions to

balance of payments. provide loans

It encourages economic growth. Conditions imposed results in

increase in poverty and low per
It gives financial advice to capita income
countries about how to run their
economies.
 HOW IT WORKS
• The IMF exists primarily
to assist countries in
economic difficulties.

• Provides loan to the

needy country after
verification and
imposing hard and stiff
conditions, such as:
4. Liberation of
• Barriers in free trade
• High tariffs and quotas
• Remove a portion of
subsidies
 ROLE OF IMF

• Help to stabilize exchange rates

• IMF has the same members as United

States except Cuba, Lichtenstein and Andorra

• IMF is independent of the World Bank

•Its am is to increase living standards

 FUNCTIONS OF IMF

• International Monetary
Cooperation

• To help deal with Balance of

Payments adjustment

• Economic Surveillance

• Loans To Country Are With

Financial Crisis.

• Technical Assistance And

Economic Training.
 HOW IS IMF FINANCED?

• The IMF is financed by member countries who

contribute funds on joining or from existing members

• IMF stands at $300 billion financed from its 183

member countries

• The U.S deposited the largest amount with the IMF

and it has 16% voting rate as well

• IMF has some special rights to withdraw the

approved amount of loan
WHAT DOES THE IMF ACTUALLY DO?
• In particular the IMF was to play a role in
stabilizing exchange rates and balance of
payments

• These days they are also doing:

Compiling statistics and evaluation of its member

countries economies .

overriding in Financial crisis to avoid future crisis

• In recent months this has involved

 $2.1 billion to Iceland
 $15 billion to Hungary
 $16 billion to Ukraine
 ARGUMENTS IN FAVOR OF IMF

• IMF can be seen as lender of last resort.

• IMF can also impose necessary reforms on

an economy.

• Provides an external assessment of the

economy
 IMF A SAINT OR SINNER
???

• The reality is something in between

• At times they have appeared rather inflexible

insisting on fiscal responsibility and privatization
at a time

• This does not mean that the IMF are blameless,

far from it

• They have made many mistakes and errors of

policy
WHY HAS IMF NOT REDUCED POVERTY?

• Often they are to meet government deficits and /

or lack of foreign exchange. Therefore, may not
be used for development .

• AID improved economic development most

when it is targeted in certain ways .

• Loans from IMF can have the same effect as

domestic savings in stimulating investment. The
key is how the loans are used.
• IMF impose economic conditions e.g.
privatization and deregulation.
 PAKISTAN & IMF
• The IMF, has played a crucial role in the
macroeconomic stability of Pakistan since 1988.

• The IMF credit rating of a borrowing country is taken

very seriously by other donor agencies.

• Since 1988, Pakistan has not enjoyed smooth

relations with the IMF.

• Because of the latter's dissatisfaction with the

economic performance of Pakistan.

• Pakistan signed several agreements with the IMF, but

due to a variety of factors most of them remained
incomplete, with the IMF refusing to lend the full
amounts to Pakistan.
 BENAZIR BHUTTO GOVT.

• In the 1990s, the nation suffered many losses

on the economic front and the era is thus
considered a "lost decade" for the economy of
Pakistan.

• All macroeconomic indicators showed poor

performance, bringing Pakistan to the brink of
default.

• Moreover, the IMF's relations with Pakistan

were further strained by 1997 due to the
policies of former Prime Minister Benazir
Bhutto.
 NAWAZ SHARIF GOVERNMENT
• Positive relations in that era

• IMF resumed its working by providing a standby loan

in Dec 1996

• The resumption of IMF lending brought new

conditional ties and forced large-scale budget cuts of
PRs 45 billion ($1.13 billion) between October 1996
and January 1997.

• Almost 90 percent of these cuts were in the annual

development budget, which affected economic
performance in the short run.

• In March 1997, relations with the IMF again

worsened.
 CONTINUED

• The relationship between the IMF and government

of Pakistan brightened when Sharif promised to
introduce economic reforms to the country.

• On October 20, 1997, Pakistan reached an

agreement with the IMF for a three-year, $1.6 billion
Structural Adjustment Loan (SAL) package .

• At the beginning of 1998, the IMF agreed to give

Pakistan the second disbursement (worth another
$208 million)
 CONTINUED
• The IMF asked Pakistan to tackle several long-
standing structural problems.

• In May 1999, relations between the IMF and

Pakistan again soured.

• The IMF sent a five-member commission to

Islamabad to review the economic performance
of the country. The commission reported that
the government of Pakistan had failed to meet
several IMF conditional ties in result of that:

“postponed the release of a $280 million

disbursement to Pakistan”
 THE MUSHARRAF GOVERNMENT

• After the October 12, 1999 military coup,

Pakistan's economy continued in crisis.

• The Musharraf government, from the

beginning, appealed to the IMF for
restoration of economic assistance and
showed its willingness to meet the
associated conditional ties.

• The IMF responded by noting a number of

key conditional ties it required of Pakistan
in order for the new government to
demonstrate good faith.
 CONTINUED

• The Executive Board of the IMF approved a

Stand-by-Credit of $596 million.

• Conditions are as follows:

Charge GST to agriculture

Charge GST at retailer shops

Reudce budget deficit from 6.4 to 5.2

Change petrolium prices with international market

 CONTINUED
• Pakistan addressed most of the conditions and met the IMF
targets

• As a result, IMF approved a three-year Poverty Reduction and

Growth Facility (PRGF) loan to Pakistan in December 2001

• The military government of General Musharraf implemented

unpopular reforms because:

The country was on the verge of serious financial crisis

These reforms fitted in well with the strategic

vision of President Musharraf.

• Except for the Musharraf government's Stand-by Agreement

(SBA), these were not fully implemented and consequently
almost half of the agreed amount remained undrawn.
 PAKISTAN AND THE IMF, 1995-2004
REGIME PERIOD PROGRAM TYPE AMOUNT % UNDRAWN
AND AGREED DRAWN
AMOUNT (IN US$ (IN US$
MILLION) MILLION)

Benazir Bhutto / Dec. 95-Mar. 97 SBA 562 295 48

Meraj Khalid / (Sept. 97)
Nawaz Sharif

Nawaz Sharif Oct. 97-Oct. 00 ESAF 682 265 61

(May 1999)

Oct. 97-Oct. 00 EEF 455 113 75

(May 1999)

Pervez Musharraf Nov. 00-Sept. 01 SBA 465 465 0

Dec. 01-2004 PRGF 1,410 6 disbursements Currently in

out of 12 total process
 PAKISTAN MAY TAKE IMF AID TO
AVOID BANKRUPTCY

• Pakistan may accept politically unpopular aid from

the International Monetary Fund to avoid
bankruptcy

• Pakistan needs $5 billion to avoid bankruptcy as it

has 25% of inflation rate

• It’s a bit hard to get help from IMF as it is

imposing some stiff conditions to be filled
 CONTINUED

• Pakistan's poor population of 160 million is

already suffering from rocketing food and fuel
prices and enduring daily power cuts caused by
energy shortages.

• The Pakistani rupee has lost about a third of its

value this year.

• The current economic crisis is the deepest faced

by the nuclear-armed nation since 1999

• Pakistan ended its three- year, $1.5bn loan

program with the IMF in December 2004.
 IMF & PAKISTAN;
CAN IMF DITCH THE DEFAULTERS?

• Every one knows that pakistan is

not able to repay the loan and shall
not be able to repay in the future as
well, so the point is that …..

• Should IMF provide loan to the

pakistan or not???
 IMF ORDERS PAKISTAN TO CUT
MILITARY SPENDING

• IMF asked to reduce 1/3 of army

spending(pay cut up to 10% out of 30% )

• IMF officials would be sent to collect taxes

• It also asked to reduce pensions by 50%

 PAKISTAN AND THE IMF
“A RELATION OF TRUST”

• Throughout the 1980s and `90s,

economic policies had a fatal flaw

• Pakistan took loan in 2000 when its

annual production was too short

• The growing burden of paying interest

left the infrastructure crumbling.
 THE IMF MANDATED ECONOMIC
RESTRUCTURING IS POISON FOR
PAKISTAN
• IMF-World Bank prescription trigger
hyperinflation and precipitate indebted
countries into extreme poverty.

• Pakistan has been subjected to the same

deadly IMF “economic medicine”.

• In 1999, an IMF economic package, which

included currency devaluation was
imposed on Pakistan.
 PAKISTAN ACCEPTS FOLLOWING IMF
CONDITIONS
• Changes in the Islamic Development Bank loans

• Devaluation of rupee

• Freezing defense budget

• Ending subsidy on gas and electricity,

• 20 per cent reduction in non-development expenditure of civil

Departments.

• Increase in bank markup rates up to 2%

• Interbank and open market dollar rate must be same

• Stop interference is stock markets

 FORGET IMF AND PAKISTAN
SHOULD DEFAULT

• Let’s tighten our belts and spend the money we have to

make a pro-Pakistan trade policy and creatively market
Pakistan

• We Should default as. South Korea, Thailand, and Indonesia

have done it. They have survived, So can we

• Ex-bankers and former IMF employees will never advise

Pakistan to default because to do so would be counter-
intuitive.
 CONTINUED
• Countries try to avoid default for THREE
reasons:

3. To save country’s reputation

5. To participate in international trade freely

7. To protect domestic banking and financial

institutions

In short, governments choose not to default

because it is the politically expedient thing to
do.
 MEASURES TO BE TAKEN FOR
IMPROVEMENT

• Hire competent and trained workforce

• Make sure there are nurses and doctors at each

school

• Pay every graduate twice what they would make

• Teach the kids their native languages

• It's time for Pakistan to start spending its money

on people servicing, instead of debt servicing
 PAKISTAN TURNS TO IMF
(NOVEMBER 16, 2008)

• Pakistan has agreed with the

International Monetary Fund (IMF) on
a $7.6 billion emergency loan to
stave off a balance of payments crisis

• Traditionally seen by Pakistan as its

most reliable friend, China appears to
have decided that IMF program is the
best medicine
 --CONCLUSION--
BOTH SIDES OF THE COIN

• In Pakistan, People generally are not in

favor of IMF assistance mainly due to its
harsh conditions.

• Those who are in favor ,plead that IMF

Program has always been at the acme
of economic difficulty

• The IMF supporters feel that IMF

program have brought stability to
Pakistan’s stock-market performance
and currency volatility
ANY QUESTION(S) ??