Table of Contents

Introduction......................................................................................................................................4
The History of the IMF....................................................................................................................6
The Present IMF...........................................................................................................................6
The role of the IMF in Pakistan.......................................................................................................7
Pakistan’s 60-year history with the IMF.........................................................................................9
Paying back the loans....................................................................................................................11
Recent Development: Pakistan formally asks the IMF for a bailout package...............................12
Analysis of the Pakistani CAPACITY TO REPAY THE FUND.................................................13
Risk Assessment matrix of Pakistan..........................................................................................16
Conclusion and Economic Developments of Pakistan..................................................................17
 IMF sponsoring and its impact on Pakistan

PART ONE: ___

Introduction
International Monetary Fund (IMF) was formally established in December 1945, as a result of
outcome of Bretton Woods Conference held from 1-22 July 1944 in Bretton Woods, New
Hampshire (USA), when legislative bodies from 44 states gathered for the United Nations
Monetary and Financial Conference1. It was formed along with IBRD - International Bank for
Reconstruction and Development – known as World Bank, that could not only restore the
economy in future but to establish IMF for providing a platform to member countries for
centralized consultations and collaboration on matters pertaining to international financing and
related issues. The IMF and the World Bank lend money to member developing countries whose
per capita income gross national product (GNP) exceeds 1305 US $ having serious balance of
payment issues.2 We can divide Pakistan’s history of using IMF into three distinctive phases.
First phase (1970 to 1988), Pakistan had utilized for one-year SBAs (Stand by Agreements) with
three-year Extended Fund Facility (EFF). Second phase (1988-1999), Pakistan availed both short
term and long-term arrangements with the IMF. In the third phase, 2000-2004 Pakistan availed
only one facility each of SBA and Poverty Reduction and Growth Fund (PRGF). The reasons
cited for quitting the program say that the administration has no balance of payment crises and
sufficient foreign trade reserves to meet its international obligations like payment of loan
installments etc. 3 The decision was formally conveyed to the Fund and World Bank meetings at
Washington held from 23-25 September 20114. Pakistan is one of those countries, which
suffered negative effects after taking IMF loans, and probably it is due to noncompliance to the
conditions, which were agreed to at the time of obtaining loans.

Background
In the Federal Budget 2008-09, the government embarked on a stabilization program aimed at
restoring macroeconomic and financial stability with enough protection for the poor. Four major
challenges at that time were facing by Pakistan’s economy: first, deterioration in economic
growth, second, high inflation, third, rising financial deficit and fourth unfavorable extending
gap in trade leading to quick reduction of overseas exchange reserves and plunging exchange
rate. Economic growth was projected at 2%, inflation peaked 2.5% in August 2008, fiscal and
current account deficit reached 7.6% and 8.5% in 2007- 08, and exchange rate depreciated by
22% in six months7. Now Pakistan is not inclined to approach IMF for further facility. It appears
that political considerations are of paramount importance then the country’s economic interests.
Now the situation is graver than it was prior to February 2008 general elections8. Pakistan’s
Finance Minister announced to quit the IMF’s $ 11.3 billion program from 30 September 2011,
Pakistan’s public debt increased by Rs 60 billion due to increased dollarization amid fears of rise
in inflation in the days to come9. In June 2011, the exchange rate was Rs 86 to one US dollar
which appreciated to Rs 90 within few days, later State Bank of Pakistan intervened and pumped
in dollars which bought the situation under control. Later Rupee again plunged to Rs 88.45 on 2
December 2011, thus increasing the public debt by Rs 130 billion10. It had earlier increased by
Rs 180 billion when the Rupee depreciated by PRs 2.02 against dollar from June 2011 onward
till the announcement was made.Using IMF resources by Pakistan can be alienated into three
different phases. Phase -1, (1970-1988), Pakistan had for one-year SBAs pursued by one three-
year EFF. Phase-2, (1988-1999), had both the small term and multi-year arrangements with IMF.
Phase -3, (2000-2004) Pakistan utilized one facility of SBA and PRGF each. Pakistan signed
second IMF program in 1965 by securing loan of 37 million SDRs. The third plan under SBA
was obtained in 1972 by marked loan amount of 100 million SDRs. Similarly, fourth, fifth and
sixth SBA programs were signed during former PM Z.A.Bhutto’s era. During the government of
General Zia-ul-Haq Pakistan and IMF had signed loan agreement worth 1.268 billion SDR in
1980; out of which Pakistan drew only 1.079 billion SDR till 1983 11. Point to be noted that
during the last two decades, almost 44% of the total loan has been drawn from the original 100%
agreed upon loan due to weak government which could not act upon the firm procedures
determined by the IMF. This tradition was broken for the first time in 2000 when Musharraf’
came in power and implemented the conditions suggested by IMF and successfully withdrew the
whole lending amount of $1.3 billion 12 . On 24 November 2008 Pakistan approached the IMF
for availing the 18th program with the Fund. At first, the loan amount allocated at $ 7.6 billion
but later increased to $ 11.3 billion13
The History of the IMF

The International Monetary Fund was founded in 1945 as the agency charged with overseeing
the so-called Bretton Woods system (named after the town in New Hampshire where the summit
establishing it was held), as well as promoting postwar global economic growth m ore generally.
Common economic wisdom held at the time that series o f competitive currency devaluations
were a significant contributor to the international contagion of the Great Depression (though later
Depression scholarship has raised doubt out the importance of this factor). The Bretton Woods
plan, by which the US would return to the gold standard and other participating countries would
peg their currencies to the dollar, was meant to prevent such “beggar neighbor” policies. In
addition to its oversight and international co ordination roles, the IMF also served as an
international lender of last resort: any member country facing a balance of payments crisis could
apply for a loan that would allow it to repay its sovereign debt on time (from a pool of funds
backed by capital contributed by all the member countries).

In the 1970s, rapid US inflation (brought out primarily by the Vietnam War) made the gold
standard unsustainable, as the supply of dollars rapidly outstripped the Federal Reserve’s ability
to maintain enough gold reserves to back them. The combination of the end of dollar-gold
convertibility and the rapid increase in dollar supply (causing unexpected monetary-policy
effects in the countries that p egged to the dollar) led to the abandonment of the Bretton Woods
system. The IMF continues to serve as a “global credit union” as well as an organization for
research and international economic cooperation.

The Present IMF

The IMF has a total of $1.3 trillion in resources at its disposal from its 188 member countries. As
of August 9, 2012, it has $243 billion in loans committed, of which only $57 billion have
actually been drawn. Thus, the IMF has more than $1 trillion in lending capacity still available.
Even relative to the large magnitudes of assistance that will b e nee de d to the various European
countries, this is a very substantial asset base. Especially when this figure is combined with the
resources of the ECB (see below regarding the current crisis), there is no reason to believe that
the international community will b e unable to backstop any European country needing
assistance. An important aspect of IMF lending is that it virtually always comes with specific
requirements attached, known as “conditionality.” Generally these requirements are meant to
improve the quality of the borrowing country’s macroeconomic policy and resolve the
underlying conditions of distress that led to the crisis in the first place. More recently, IMF
conditionality has also begun to expand beyond macro policy to address. International Monetary
Fund Euro Crisis Simulation Phase I: IMF structural issues (such as privatization of government
companies and competition in monopoly-dominated sectors) where it is clear that these are an
important contributing factor, especially in developing countries. While countries often find it
politically convenient to paint the IMF as imposing rigid outside conditions of its
own devising (perhaps because such help with domestic politics), a more realistic account is to
say that conditionality takes the form of a plan developed, discussed, and agreed up on by
country officials in consultation and negotiation with IMF experts (as, indeed, in the present
exercise). Some examples of specific plans undertaken to satisfy IMF conditionality provisions
are provided in the case studies below

The role of the IMF in Pakistan

IMF has an interesting relationship with an interesting country Pakistan. A country facing
problems like a rapidly growing population, sizable government deficits, a heavy dependence on
foreign aid, recurrent governmental instability, terrorism and large military expenditures.
Pakistan economy is extremely depended on foreign aid agencies such as IMF. Since the new
“democratic” government took over in 2007 the country’s economy has gotten worse and is on
the brink of becoming bankrupt. Its external debt is about $53,620,000,000 in 2010.External debt
today poses one of the biggest barriers to development for Pakistan as well as other of the worlds
less developed countries (LDC’s). Excessive external debt is often responsible for negatively
effecting economic growth which creates uncertainty and discourages the private sector from
investing in the economy for fear about the stability of the government, and it also discourages
public investment and reforms because they are aware that any benefits would be likely to be
transferred abroad in the form of debt servicing.

Despite all these problems in Pakistani economy IMF still provides loans to Pakistan. It is vital
to consider that in spite of the trouble linked with excessive debts, Pakistan have the obligation
to accomplish the contractual terms to which it committed to when they took loans from the
IMF. Though it is a real brave move by IMF to help a country in such problems and debt but the
problem is that after IMF gives out loans, many in Pakistan view that it fails in keeping in check
on what is done or where the loan is used. It is argued in Pakistan that the vast quantities of loans
that are provided to Pakistan are misused by corrupt governments and the loans are used in bad
projects that fail to turn out the required amount of profits necessary to service their loans. And
mostly in Pakistan, loans are used in non developmental projects. Therefore IMF should also
emphasize more to check whether the loan is used for development projects which would help
the economy or whether they are used in corruption or in any other wrong uses.

It is argued that the conditions of IMF loans cause more harm than good. In the Asian Crisis of
1997, many criticize the IMF’s insistence on Spending cuts and tax rises and higher interest rates
and due to that the IMF turned a minor financial crisis into a major economic recession with
unemployment rates in countries like Thailand, Indonesia and Malaysia shooting up. Another
policy that IMF follows is that “One Size Fits All”. The IMF often argues for the same economic
policies not considering that the situation is not the same everywhere and different policies
would be needed for different situations. For example, dropping of the exchange rate may help
many countries, but, it doesn’t mean that this is always the solution. Policies of privatization and
system dis involvement may work better in developed countries in the West, but, maybe more
difficult to implement in the developing world like Pakistan. The World Bank is also criticized
for such policies but the World Bank involves itself more in projects related to education and
helping the people of national disasters such as the recent floods and health sector rather than just
giving out the loan.

Even though IMF has many policies which caused problems for Pakistani economy but IMF
plays an important role in the modern day economy. It can be seen as lender of last resort. When
a Pakistan was on the edge of becoming bankrupt, the IMF provided crucial loans to stabilize the
economy and prevent a collapse of confidence. It can be argued that the IMF can also impose
necessary reforms on the economy. Reforms such as privatization control of Money supply, and
attacking corruption. But for all these policies to work for the economy the Pakistani government
too has to coordinate and implement the policies. These policies may cause short term pain, but,
are important for preventing future crisis and long term developments. It provides an external
review of the economy, which helps the government to implement popular ideas. Yet, despite the
potential benefits of having a monetary fund which can provide an effective counter to financial
crisis, the role of the IMF has proved very controversial. Another important role the IMF plays is
that it prevents international financial system from collapsing

Many critics attack the IMF for making its loans conditional. Making loans conditional on a
package prevents real economic recovery and crushes the hope of the people of the country. The
IMF takes away political autonomy from the Pakistan government. It takes away the ability to
decide their own national policy and instead they have to follow the policies of IMF such as
reduction of government spending, rising taxes etc which usually causes increase in
unemployment and increase in poverty rate and inflation. A recent example for this would be
when IMF extended Pakistan loans as the Pakistan government has to pass an economic bill,
RGST (reformed generals sales tax) in order to get the next installment of the IMF loan. The
IMF said that “The extension will provide time to the Pakistani authorities to complete the
reform of the general sales tax, implement measures to correct the course of fiscal policy and
amend the legislative framework for the financial sector” but the bill which was planned for
implementation in July, now seems unlikely to be passed. Only due to this bill the government in
Pakistan lost its majority as its collation partners left the government due to this bill and the
government is likely to fall.
PART TWO_____

Pakistan’s 60-year history with the IMF

Pakistan and the IMF are no strangers. Since 1958, they have made 21 agreements for loans.

The IMF is an international organization of 189 countries working on monetary cooperation and
international monetary stability. It helps member countries in three ways:

 Economic surveillance — monitoring the economic and financial policies of its 189
member countries.
 Lending — providing loans to member countries facing some degree of economic crises.
 Capacity building — modernizing member country economic policies and institutions,
and training their people.

The IMF lends its member countries money. These programs can be divided into:

Lending through GRA (General Resource Account) which is normal lending to not-so-poor and
wealthy countries facing economic crisis

Lending through PRGT (Poverty Reduction Growth Trust) which is lending to not-so-poor and
poor countries at a relatively low interest rate to reduce poverty

The IMF offers a total of 10 programs through its PRGT and GRA. Of these, Pakistan has taken
loans under four programs. Not all 21 of these agreements are what we call ‘bail-outs’. Pakistan
has entered into 12 Stand-by Agreements (SBAs) or what economists call bail-outs with the
IMF.
Paying back the loans

Stand-by Agreements or SBAs are short- to medium-term loans that have to be paid back
between 3.5 to 5 years. The loan may be given in up to three years, but is usually given in a 12-
to 18-month period. Stand-by Agreements come under the General Resource Account, which
means they’re not specifically designed for poor countries, unlike programs under the Poverty
Reduction Growth Trust. But what about the remaining nine agreements? These agreements are
for a number of IMF programmers’ aimed at poverty reduction, structural reform, containing a
domestic economic crisis, or protecting smaller weaker economies against the effects of a
broader international crisis.
Recent Development: Pakistan formally asks the IMF for a bailout package

Finance Minister Umar said that the country has no choice but to go to the IMF. “We will have
to take a loan to support the falling economy.” The minister said that Pakistan will have to make
tough decisions to fix the economy. For weeks analysts have warned that a new current account
crisis could undermine Pakistan’s currency and its ability to repay billions in debts or purchase
imports.

Pakistan has gone to the IMF repeatedly since the late 1980s. The last time was in 2013, when
Islamabad got a $6.6 billion loan to tackle an economic crisis. However, there are fears that the
terms of any new loan will be more stringent than those in 2013, due to tense relations with the
US, the lender’s biggest donor.
PART THREE

Analysis of the Pakistani CAPACITY TO REPAY THE FUND

In staff’s assessment, risks to Pakistan’s medium-term capacity to repay have increased

significantly since the completion of the EFF, due to mounting external and fiscal financing
needs and declining reserves.

External financing needs are expected to continue to mount in the medium term

The elevated current account deficit and rising external debt service, in part driven by CPEC-
related outflows (loan repayments and profit repatriation), are expected to lead to higher external
financing needs, which are expected to rise from US$21.5 billion (7.1 percent of GDP) in FY
2016/17 to around US$45 billion by FY 2022/23 (9.9 percent of GDP).

Fiscal risks will likely remain heightened.

Risks to public debt sustainability have increased since the completion of the EFF (Annex I).
Public and publicly-guaranteed debt is expected to remain Source elevated, marginally declining
from 70 percent of GDP in FY 2016/17 to 68 percent of GDP by FY 2022/23. Alongside, gross
fiscal financing needs will likely exceed 30 percent of GDP from 2018/19 onward, in part
reflecting increased debt service obligations.

Mobilizing affordable external financing could become more challenging in the period ahead.

The authorities’ success with contracting external borrowing (over $10 billion in FY 2016/17
and more than $6 billion so far in FY 2017/18; has been instrumental in softening the impact of
the rising external imbalances on foreign exchange reserves. While the level of external debt
(27.4 percent of GDP in FY 2016/17) has remained moderate, continued mobilization of external
financing at favorable rates could become more challenging in the period ahead, against the
background of rising international interest rates and increasing financing needs.

These trends could take a further toll on reserves and weaken Pakistan’s capacity to repay the
Fund.

At present, gross reserves amount to about twice Pakistan’s outstanding Fund repurchases (SDR
4.4 billion). Repayments to the Fund are scheduled to start at SDR 243 million (including GRA
charges and surcharges) in 2018 and peak at SDR 820 million in 2021 with a gradually declining
schedule until 2026. While these obligations do not exceed 6 percent of total external debt
service in any year, their share in gross reserves is expected to rise significantly in the medium
term, reaching close to 15 percent in 2022.
Risks to Pakistan’s economic outlook and capacity to repay are largely on the downside

Demands for higher spending in the pre-election period could raise the fiscal deficit, including at
the provincial level. A more gradual deceleration of imports (for example, due to higher oil
prices) and slower recovery of exports and remittances could further widen the external deficit.
Tightening global financial conditions and changing investor sentiment could complicate
mobilization of external financing, particularly if external and fiscal imbalances are not
proactively addressed, eroding confidence, private investment, and economic growth. A
deterioration in security conditions could also negatively affect investment. Lower growth in key
trading partners or further appreciation of the real effective exchange rate could accentuate these
trends. Furthermore, continued scaling up of CPEC investments could accelerate the buildup of
related external payment obligations. In staff’s downside scenario, based on partial
materialization of these risks, Pakistan’s capacity to repay could deteriorate at a faster pace, with
faster depletion of foreign exchange reserves and significant implications for economic growth.
Risk Assessment matrix of Pakistan
Conclusion and Economic Developments of Pakistan

As foreseen during the 2017 Article IV Consultation, the economy has continued to deliver
robust, broad-based, and balanced growth reaching 5.3 percent in 2016/17, driven by recovery in
agriculture, large-scale manufacturing expansion, and continued strong growth in construction
and services. Investment related to the China-Pakistan Economic Corridor (CPEC) has been a
major contributor to growth performance, but other factors were also at play, including structural
reforms that have improved energy supply and enhanced private sector confidence, and
supportive macroeconomic policies. Headline inflation in the context of accommodative
monetary policy remained contained at 3.9 percent at end 2016/17. The stronger growth
momentum has put pressure on the external sector. The high import content of the CPEC
investment projects and rising oil prices have had a significant impact on the balance of
payments, with concomitant decline in gross international reserves. That said, the authorities
allowed the rupee/dollar exchange rate to depreciate by 5 percent in December 2017, raised
regulatory duties on certain imports on a temporary basis, and also started tightening of monetary
policy. This policy mix, together with the ongoing rebound of exports, should help contain the
deterioration in the external balance. Pakistan has successfully taped international financial
markets last December at favorable market conditions to meet its financing needs, and its bond
spreads remain close to the average of emerging markets. The authorities expect real GDP
growth to accelerate to 6 percent in 2017/18 and 6 ½ percent in 2018/19, supported by continued
favorable conditions, namely a combination of confidence-enhancing reforms and high
investment spending under the CPEC. The authorities are confident that prudent fiscal and
monetary policies and adequate exchange rate flexibility will help strengthen external
sustainability.

Fiscal Policy

The authorities concur with the need to contain the fiscal deficit to 5 percent of GDP, which
they consider achievable under current policies. Sustained improvements in tax collection,
supported by broadening of the tax base, have already strengthened revenue performance. These
together with efforts to rationalize development spending and adequate fiscal surplus at the
provincial level will help achieve the authorities’ fiscal objectives. The fiscal deficit has been
contained to 2.2 percent of GDP in H1FY2018 as compared to 2.5 percent in the same period last
year. The authorities are of the view that the debt-to-GDP ratio could be brought down over the
near-to medium term to the limits set in the Fiscal Responsibility and Debt Limitation Act. They
concur with staff advice to make further gains in fiscal consolidation through enhanced revenue
mobilization, improvement in the fiscal federal framework, restructuring and/or privatization of
loss-making public sector enterprises (PSEs), and improved cost recovery in the gas sector. As
highlighted during the 2017 Article IV consultation, the authorities remain committed to
expanding the coverage and benefits under the Benazir Income Support Program (BISP).
Building on the progress achieved so far in improving the delivery mechanisms and minimizing
fraud, efforts are underway to establish a donor-financed endowment fund and graduation
schemes for the program’s long-term beneficiaries.

Monetary and Exchange Rate Policies

Although monetary policy has been accommodative, the authorities have been attentive to
developments in domestic demand and inflation, which prompted them to raise the policy rate by
25 bps in January 2018. They also allowed the exchange rate to depreciate to stem reserve losses,
as indicated above, and temporarily raised regulatory duties on imported intermediate, consumer,
and luxury goods while maintaining cash margin requirements on imports of consumer goods.
The authorities agree with staff on the potentially negative side effects of the latter measures, and
intend to phase them out when external pressures subside. Going forward, they will continue
with their efforts to strengthen the autonomy of the SBP, with a draft legislation to this effect
being placed before parliament. Moreover, the recently established independent monetary policy
committee is now fully empowered to take policy decisions based on its review of economic
developments and fundamentals.

Financial Sector

The banking system is sound, with capital adequacy ratios well above the regulatory minimum,
except for two small banks which are being considered for privatization or merger with larger
banks. With adequate profitability and declining NPLs, the banking system remains resilient and
has appropriately supported economic activity. The regulatory framework is being strengthened
as progress is made toward completing the phased implementation of Basel III norms by 2019.
The authorities remain committed to continue strengthening the AML/CFT regulations and
enforcement in line with international standards, as illustrated by recent intensification of
inspections and close monitoring of banks’ compliance with AML/CFT requirements, including
in overseas operations.

Structural Reforms

Implementation of structural reforms in wide-ranging areas, as detailed in the 2017 Article IV

consultation report, will continue to put emphasis on improvement in business climate,
restructuring of PSEs and opening them to private sector participation, and consolidation of the
energy sector reform. As part of the broader effort to strengthen the legal framework, the
Corporate Rehabilitation Act, which will strengthen the bankruptcy framework and facilitate the
resolution of NPLs in the banking system, was passed recently.

Capacity to Repay the Fund

The authorities are aware of the challenges posed by the growing need to mobilize external
resources to finance large scale investment projects and support growth. They agree that,
although the debt-to-GDP ratio is projected to decline from close to 70 percent of GDP in
2016/17 to 68 percent in 2022/23, it needs to be brought further down through appropriate fiscal
and monetary policies while improving the debt profile. They believe that risks to Pakistan’s
capacity to repay the Fund are low and will likely remain so in the medium-term. The external
DSA points to a sustainable medium-term path with the external debt of 27 percent of GDP in
2016/17 projected to rise and peak at 32 percent in 2022/23, a still moderate level. Since the
share of Fund credit outstanding in external debt is low (7 percent in 2017 and declining
thereafter), the debt service to the Fund, which is projected to peak at less than 6 percent of the
total in 2021, is not a source of concern. The authorities appreciate their engagement with the
Fund and attach high value to its policy advice and technical assistance. They look forward to
continuing close cooperation in support of their medium-term reform strategy.

References

international Monetary Fund. IMF conditionality. http://www.imf.org/external/np/exr/facts/

conditio.html

https://www.imf.org/ IMF –Pakistan

FIRST POST-PROGRAM MONITORING DISCUSSIONS— PRESS RELEASE; STAFF

REPORT; STATEMENT BY STAFF; AND STATEMENT BY THE EXECUTIVEDIRECTOR
FOR PAKISTAN (https://www.imf.org/en/Publications/CR/Issues/2018/03/14/Pakistan-First-
Post-Program-Monitoring-Discussions-Press-Release-Staff-Report-and-Statement-45724)