Need to review IMF program
Mukammil Shah Yousafzai
Dr Hafeez Sheikh, Finance Minister of Pakistan, has announced in November that a team from the International Monetary Fund will soon visit Pakistan to revive the $6 billion loan program with the IMF. The IMF approved a $6 billion three-year loan to Pakistan in July 2019 to help the country’s external payments as well as sustainable economic growth. Under this program, Pakistan has so far received $1.5 billion in two installments.
Since 1950, Pakistan has been a member of the IMF, because the economy is volatile and highly dependent on imports, the IMF has given loans to Pakistan 22 times since its membership, most recently in 2019. There are two types of IMF loan programs: the General Capital Account (GRA) and the Poverty Reduction Development Trust (PRGT).
The GRA is reserved for rich countries for not-so-developed countries while PRGT is for poor countries. The GRA is used for stand-by agreement (SRA) loans. The SRA was often pointed out by economists as a bail-out package. Based on these classifications, Pakistan has been bailed-out on 13 occasions since its entry, the highest under the Imran Khan administration in 2019. Pakistan joined the IMF in 1950 as ex-British India had been facing fiscal problems since its formation in 1947 as a newly formed republic.
In 1958, Pakistan went to the IMF for a loan for the first time. To this end, on December 8, 1958, the IMF lent $25,000 to Pakistan on a standby agreement basis. In 1965, Pakistan went to the IMF again. This time in 1965, the IMF gave $37,500 to a war-torn country. Three years later, on October 17, 1968, Pakistan again went to the IMF for the third time to deal with the balance of payment questions, for which the IMF gave $75,000. In 1971, in war against India, Pakistan lost its eastern part. That war led Pakistan to suffer tremendous casualties. In order to meet its rising needs, Pakistan obtained a loan of $84,000 in 1972, $75,000 in 1973, and $75,000 in 1974.
Another $80,000 standby agreement was made on an emergency basis in 1977. In 1980, an expanded facility of $349,000 was achieved three years later. As Pakistan withdrew another $730,000 because it was still part of the US Cold War against the Soviet Union, Pakistan’s struggle continued. Another age began as democracy returned to Pakistan, but the old methods of handling the economy persisted badly.
On December 28, 1988, the government of Benazir Bhutto withdrew $194,480 as a standby deal and another $382,410 in the form of a structural improvement facility pledge. In 1990, Mian Muhammad Nawaz Sharif’s government agreed not to go to the IMF and negotiated contributions from friendly countries like Saudi Arabia.
Benazir Bhutto came into power again in 1993 and her government went to the IMF once again and signed a deal on September 16, 1993 to get a standby agreement of $88,000. Her government managed to badly handle the economy by securing a loan of $123,200 under the expanded fund facility and borrowing $172,200 on February 22, 1994. Pakistan’s economy remained in poor condition throughout that time and Pakistan had to go back to the IMF for a third time in the Benazir Bhutto government. It was considered the most corrupt administration in Pakistan’s history. This time, on December 13, 1995, Pakistan received a total of $294,690.
Nawaz Sharif came into power in 1997. The government of Benazir Bhutto was sacked on corruption charges, leaving Pakistan’s economy in the worst condition. For the first time, the Sharif government went to the IMF on an immediate basis and signed a deal on October 20, 1997 to get two amounts of $265,370 and $113,740. Similarly, Prime Minister Yousaf Raza Gillani received a $7.6 billion loan from the IMF in 2008.
Imran Khan became Pakistan’s Prime Minister in 2018. There was a significant balance of payments deficit in Pakistan from the beginning, and its foreign reserves were sufficient enough only for two months. In order to escape from difficult IMF circumstances, his government took friendly loans from Saudi Arabia, the United Arab Emirates and China. In 2019, as economic conditions deteriorated, his administration went to the IMF for a loan of $1 billion for the 22nd time. The IMF issued loans dependent on conditions such as higher electricity tariffs, removal of energy subsidies, increase in taxes, privatization of public institutions and fiscal conditions. However, the program was postponed in February this year after Pakistan asked it to postpone further hikes in power sector rates until June, subject to the IMF conditions.
When the Corona epidemic affected Pakistan as well as rest of the world, it delayed further payments to the IMF under the said program. However, despite the suspension of the program, the IMF provided 1.4 billion to Pakistan to protect it from the negative effects of the Coronavirus, which is not part of the program. Now, after eight to nine months, talks are underway between Pakistan and the IMF to restart the program. There are some conditions for the resumption of this program by the IMF, the most prominent of which are the increase in electricity tariffs in Pakistan and the collection of additional taxes.
The question is, whether the Coronavirus-affected Pakistani economy, which for the first time in nearly 70 years entered a negative growth rate in the last financial year, will be able to meet the IMF’s conditions? What will be the negative impact on the country’s economy, if the conditions of the IMF are met and will some of the recent economic recovery be affected? Apparently, economists and government officials are expressing conflicting views.
Talking about why IMF loan is necessary for Pakistan, economists say that it has been a problem of Pakistan from the beginning that whenever a government is at the end of its term, it leaves a huge budget deficit in the form of an increase in the government expenditure. They say it also upsets the balance of external payments. In other words we can say that every new government that inherits this deficit has no choice but to go to the IMF.
Dr Rashid Amjad, a professor at the Lahore School of Economics, says that it is not necessary to go to the IMF, but in countries like Pakistan, when the balance of payments deteriorates and the current account deficit increases, they are left with the IMF option. He further says that if the IMF shows confidence in a country, then international financial institutions like the World Bank and the Asian Development Bank also start providing financial assistance and loans to it, adding that along with this, international investors also look at the IMF to see how much confidence it has in a country.
Talking about the resumption of the IMF program and its negative aspects on the country’s economy, Dr Pervez Tahir has said that due to the terms of the program, there was a risk of stalling economic recovery activities in Pakistan. He added that the IMF’s terms included an increase in the electricity rates. He further said that the IMF was not interested in Pakistan’s economic output whether it was increased or decreased.
To conclude, the former Finance Minister Ishaq Dar, while commenting on the resumption of the IMF program, has stated that the conditions for the IMF program should be reviewed. According to him, there should be no increase in electricity rates; however, there was no problem in the condition of increase in tax collection.
The writer is a Peshawar-based financial analyst and Program Director of De Laas Gul Welfare Program, a non-government organisation. He has done MS in Research Banking and Finance (RBF) and has been serving at many national and international organisations as an academic, researcher and financial expert. He is also the member of American Economic Association and International Academic Forum of Japan. He can be contacted at: firstname.lastname@example.org.