Role of IMF in Pakistan

First of all we should understand Pakistan’s economy and on what factors it depends. In that we can easily understand the role of IMF on our economy.

1. INTRODUCTION

A. Economy of Pakistan

The economy of Pakistan is the 27th largest economy in the world in terms of purchasing power, and the 48th largest in absolute dollar terms. Pakistan is the second largest economy in South Asia. Pakistan’s economy mainly encompasses,

• Textiles
• Chemicals
• Food processing
• Agriculture 
• And other industries.

B. Economic History

At the time of independence in 1947, Pakistan was a very poor country and its economy majorly depends on agriculture. Since independence, Pakistan’s average economic growth rate has been higher than the average growth rate of the world economy during the period. Average annual was 6.8% in the 1960s, 4.8% in the 1970s, and 6.5% in the 1980s. Average annual growth fell to 4.6% in the 1990s with significantly lower growth in the second half of that decade. Industrial-sector growth, including manufacturing, was also above average. During the 1960s, Pakistan was seen as a model of economic development around the world, and there was much praise for its economic progression.

The table which gives every five years progress of GDP, US Dollar Exchange Rate, Inflation Index, and Per Capita Income is given on the next page.

C. INTERNATIONAL monetary fund

The International Monetary Fund (IMF) is an organization of 186 countries, working to help the development of global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world. The IMF works to help development of global growth and economic stability. It provides policy advice and financing to members, in economic difficulties and also works with developing nations to help them achieve macroeconomic stability and reduce poverty.

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The IMF’s fundamental mission is to help ensure stability in the international system. It does so in three ways: keeping track of the global economy and the economies of member countries; lending to countries with balance of payments difficulties; and giving practical help to members.

The International Monetary Fund (IMF) is the international organization that oversees the global financial system by following the macroeconomic policies of its member countries, in particular those with an impact on exchange rate and the balance of payments. It is an organization formed with a stated objective of stabilizing international exchange rates and facilitating development.[1] It also offers highly leveraged loans, mainly to poorer countries. Its headquarters are in Washington, D.C., United States.

D. History

The International Monetary Fund was conceived in July 1944 during the United Nations Monetary and Financial Conference. The representatives of 45 governments met in the Mount Washington Hotel in the area of Bretton Woods, New Hampshire, United States, with the delegates to the conference agreeing on a framework for international economic cooperation.[2] The IMF was formally organized on December 27, 1945, when the first 29 countries signed its Articles of Agreement. The statutory purposes of the IMF today are the same as when they were formulated in 1943 (see #Assistance and reforms). The International Monetary Fund was established, along with the World Bank, at a conference in Bretton Woods, New Hampshire, USA, in the closing stages of World War II. The participants represented the governments soon to win the war against fascism. They were concerned about the rebuilding of Europe and of the global economic system after a devastating war.

The key debate at Bretton Woods was between the British and US delegations representing, respectively, liberal and conservative visions of global economic institutions. The British delegation, led by Maynard Keynes, imagined that the new IMF should be a cooperative fund which member states could draw upon to maintain economic activity and employment through periodic crises. This view suggested an IMF helping governments to act as the US government had during the New Deal in response to the great recession of the 1930s.

By contrast, the US delegation to Bretton Woods foresaw an IMF more like a bank, making sure that borrowing states could repay their debts on time. This more conservative view was less concerned to avoid recession and unemployment. The US view prevailed, and set the stage for how economic crises have been handled since World War II (Harris 1988).

Since the Second World War, the International Monetary Fund has provided loans to governments facing economic crises. The loans have come to be known as structural adjustment loans because they aim to help borrowing governments adjust the structure of economic activity.

The presence of the IMF as an international lending institution continues to evolve with the changing conditions of globalization. Most recently the IMF has begun to focus its policy-making stratgies to incorporate poverty reduction policies in addition to creating economic stability (New Generation – HIPC)

E. Organization and purpose

The International Monetary Fund was created in July 1944, originally with 45 members,[3] with a goal to stabilize exchange rates and assist the reconstruction of the world’s international payment system. Countries contributed to a pool which could be borrowed from, on a temporary basis, by countries with payment imbalances (Condon, 2007). The IMF was important when it was first created because it helped the world stabilize the economic system. The IMF is still important because it works to improve the economies of its member countries.[4]

The IMF describes itself as “an organization of 186 countries (as of June 29, 2009), working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty”. With the exception of Taiwan (expelled in 1980), North Korea, Cuba (left in 1964), Andorra, Monaco, Liechtenstein, Tuvalu and Nauru, all UN member states participate directly in the IMF. Member states are represented on a 24-member Executive Board (five Executive Directors are appointed by the five members with the largest quotas, nineteen Executive Directors are elected by the remaining members), and all members appoint a Governor to the IMF’s Board of Governors. [5]

F. What does the IMF do?

Most people think of the IMF as an institution that provides emergency credits to countries that have found themselves in difficulties, either as a consequence of poor economic policies or through external circumstances, such as a sudden drop in commodity prices, or a financial crisis in a neighboring country. In return the country is obliged to impose painful austerity policies, usually involving reductions of budget deficits, through spending cuts or increased revenue (taxation), a rise in interest rates to reduce inflation, and an alteration of the exchange rate (a devaluation).

This view, while not inaccurate, gives only a partial picture of the reality of the Fund’s operations, or of what it is supposed to do. Its mandate, as laid down in the first Article of Agreement in 1944 in Bretton Woods, NH, is very general: to promote international monetary cooperation, facilitate the growth of world trade, promote exchange rate stability, and to help to create a multilateral system of payments. In order to achieve these objectives, the Fund was supposed to provide short term balance of payments support to countries in need of additional international reserves.

It is now an almost universal financial institution, having grown from the 44 states represented at the 1944 Bretton Woods conference to 182 countries today. Now it includes almost every economy of the world. (There are only a few exceptions: Cuba, North Korea, and Taiwan.)

Who runs it? The IMF is owned by the governments of its member countries, represented through a Board of Governors. The Governor for each member country is usually the Minister of Finance or sometimes the Central Bank Governor (in the case of the United States, the Secretary of the Treasury). Voting is in accordance with the size of a country’s share-holding in the Fund (or “quota”), and many important decisions require special majorities (85% of the vote). There is no attempt to give an equal voice to every country, as there is in the United Nations. Periodically, quotas are recalculated to reflect changing economic size.

The United States, the largest member of the IMF, currently has 17.78% of the vote, and thus can veto any major decision of the Fund it feels is unacceptable. Under the terms of its Articles of Agreement, the IMF’s headquarters are located in the largest member country: they have always been in Washington D.C..

Meetings of the full Board of Governors are a rather cumbersome annual event; a smaller and more manageable body is the so-called “Interim Committee”, of 24 Governors, which meets twice a year and is charged with reporting to the Governors (and in practice making recommendations which stand a good chance of success) on “the management and functioning of the international monetary system and on proposals to amend the Articles of Agreement”.

Day to day decisions are made by an Executive Board. Countries are grouped into constituencies to elect 24 Executive Directors as members of the Board, with the exception that the five largest members of the IMF (the United States, Germany, Japan, France and the United Kingdom) have their own Executive Directors. The Executive Board also appoints a Managing Director. The staff of the IMF (currently 2,660) is recruited internationally, but without any quotas as to nationality (as is the practice in the United Nations).

How big is it? Fund quotas for member countries are initially determined by a calculation based on the size of the national economy (GDP, current account transactions in the balance of payments). They are periodically increased, in response to perceived needs for the IMF’s operations. The Articles of Agreement provide for a general review of the quotas every five years. There have been a total of 12 such quota reviews, in 4 of which it was decided that no increase was needed. In the other 8, there was a general increase, and some redistribution of quotas to reflect changing positions in the world economy. In the most recent round of increases, the total quota was raised by 45%, from SDR 146 bn. to 212 bn. (approx. $291 – on September 3, 1999, SDR= $1.37494), with the U.S. share being set at SDR 37,149.3. The size of the IMF, measured by the total of IMF quotas, measured as a proportion of world trade fell sharply between 1946 and the mid-1970s; since then this ratio has been stable, and even shown a slight increase.

2. Factors affecting economy

• Growth And Investment
• Agriculture
• Manufacturing
• Fiscal Development
• Money and Credit
• Inflation
• Capital Market
• Trade and Payments
• External and Domestic Debt
• Education
• Health And Nutrition
• Population, Labor Force and Employment
• Poverty
• Transport and Communication
• Energy

A. Manufacturing:

Pakistan’s manufacturing sector is growing from 2000. In 1999, large scale manufacturing is 1.5% and it is 19.9% in 2004-05. So it makes an average 8.8% by the end of 2007.

B. Finance:

Pakistan’s finance and insurance sector department also showed a great development from 2000. In 2005, it is at Rs.311, 741 million. It shows a growth of 166% since 2000.

C. Stock market:

“Business Week” the international magazine declared Pakistan’s stock market, the best performing stock market index in the world, in the first four years of 21st century. But in 2008, there is a great decline in Pakistan’s economy due to uncertain political environment and many other reasons.

D. Tourism:

Pakistan has diverse cultures, people and landscapes. Tourism in Pakistan is a growing industry. To promoting Pakistan’s unique and various cultural heritages, PM launch “Visit Pakistan” marketing campaign in 2007. In 2009, The World Economic Forum’s Travel & Tourism Competitiveness Report ranks Pakistan as one of the top 25% tourist destinations for its World Heritage sites. Some famous tourist spots are shown below,

• K2, world’s second-highest mountain, in northern
• Damn-e Koh Park in Islamabad
• DHA Marina Club in Karachi
• The Badshahi mosque in Lahore epitomizes the beauty, passion and grandeur of the Mughal era.

E. Revenue:

The income of a government from taxation, excise duties, customs, or other sources, appropriated to the payment of the public expenses. The Board of Revenue has collected nearly one trillion Rupees ($14.1 billion) in taxes in the 2007-2008.

3. Sectors of Pakistan economy

A. Agriculture:

Pakistan ranks fifth in the Muslim world and twentieth worldwide in farm output. About 25% of Pakistan’s total land area is under cultivation and is watered by one of the largest irrigation systems in the world. Agriculture accounts for about 23% of GDP and employs about 44% of the labor force.  Zarai Taraqiati Bank Limited is contributing a lot in our agriculture sector.

B. Industry:

Pakistan ranks forty-first in the world and fifty-fifth worldwide in factory output. Pakistan’s industrial sector accounts for about 24% of GDP. Cotton textile production and apparel manufacturing are Pakistan’s largest industries, accounting for about 66% of the merchandise exports and almost 40% of the employed labour force. Merchandise exports mean export of goods not services. Other major industries include cement, fertilizer, edible oil, sugar, steel, tobacco, chemicals, machinery, and food processing.

C. Automobile industry:

Pakistan is an emerging market for automobiles and automotive parts. The total contribution of Auto industry to GDP in 2007 is 2.8%. Auto sector presently, contributes 16% to the manufacturing sector which also is expected to increase 25% in the next 7 years. But in my opinion this prediction can’t be correct due to high inflation and shortage of CNG.

D. CNG industry:

Compressed Natural Gas (CNG) is a substitute for gasoline (petrol) or diesel fuel. It is considered to be an   environmentally “clean” alternative to those fuels. In 2009, Pakistan is one of the largest users of CNG (compressed natural gas) in the world. Presently, more than 2,900 CNG stations are operating in the country in 85 cities and towns. It has provided employment to many people. But now this industry has a decline and shortage of CNG is creating a big problem for CNG station owners and the employs working at these stations. Many CNG stations closed and many are going to close if we don’t fight with the shortage problem of CNG.

E. Cement industry:

Growth of cement industry is rightly considered a barometer for economic activity. In 1947, Pakistan had inherited 4 cement plants with a total capacity of 0.5 million tons.

The industry comprises of 29 firms, with the installed production capacity of 44.09 million tons. There are four foreign companies, three armed forces companies and 16 private companies listed in the stock exchanges. The cement sector is contributing above Rs 30 billion to the national exchequer in the form of taxes. Exchequer was a part of the government’s hat was responsible for the management and collection of revenues.

Cement industry is also serving the nation by providing job opportunities and presently more than 150,000 persons are employed directly or indirectly by the industry.

F. IT industry:

Pakistan’s IT industry has been rising steadily. The Government of Pakistan has been proactively developing the IT sector in Pakistan. A few of the incentives offered include tax exemption till 2016, establishment of IT Parks with low rent, foreign ownership of equity invested in IT and 100% repatriation of profit allowed to IT companies. Profit repatriation is an important factor that determines whether ‘foreign direct investment’ in another country is actually profitable for the parent firm.

G. Textiles:

Pakistan’s textile industry and clothing sector has always been a major contributor to the foreign exchange earning and still contributes about 55% to the total exports.

Textile exports in 1999 were $5.2 billion and rose to become $10.5 billion by 2007. Textile exports managed to increase at a very decent growth of 16% in 2006. There is development in other sectors and exports of other sectors increases therefore textile exports share in total export of Pakistan has declined from 67% in 1997 to 55% in 2008.The top buyers of Pakistani textile goods are:

USA, UK, Japan, Korea, Saudi Arabia, Italy, Turkey, Germany, Etc.

4. IMF assistance to Pakistan

When IMF is advancing loans to their members, they not only analyze the economic conditions of their members but the borrower will also have to frame its policies in the light of directions given by IMF authorities.

The question in my mind is that when and how much was lent to Pakistan by IMF. And what were the conditions imposed by IMF and what were the consequences of these loans.

Pakistan joined IMF on 11th July, 1950. IMF is providing financial assistance to Pakistan since 1952. According to 1977 statistics, Pakistan borrowed 1193 million dollars from IMF. Since 1980, the fund has made four main agreements with Pakistan as,

In November,1980

In December, 1988

In February, 1994

In July, 1997

A. THE YEAR 2008:

As a result of elections of 18th February 2008, General Musharaf had to surrender and Asif Ali Zardari became the president of Pakistan. At that time, the country was entrapped into economic difficulties. Not only trade deficit had gone to $20 billion, but the fiscal deficit also reached 4.7% of GDP. Foreign reserves had touched at lowest level.

The IMF’s Executive Board has approved a $7.6 billion loan for Pakistan to support its program to stabilize and rebuild the economy while expanding its social safety net to protect the poor.

“The Government’s program has two objectives: first, to restore overall economic stability and confidence through a tightening of macroeconomic policies, and second, to do so in a manner that ensures social stability and adequate support for the poor during the adjustment process,” said Juan Carlos Di Tata, the IMF mission chief to Pakistan.

Of the $7.6 billion loan, $3.1 billion will be made available by the IMF immediately to strengthen the reserve position. And the regular monitoring of the economy by the IMF will show how the macroeconomic objectives set by the Government are being met and whether they need to be adjusted in the light of changing circumstances.

The Pakistan authorities have already taken some difficult steps to achieve these objectives: energy subsidies have been cut and the interest rate has been increased to tighten monetary policy. The authorities’ program for the coming 24 months envisages a number of additional steps:

The fiscal deficit, excluding grants, will be brought to down from 7.4 percent of GDP in 2007/08 (starting July 1) to a more manageable 4.2 percent in 2008/09 and 3.3 percent in 2009/10-in line with what it was three years ago. This fiscal adjustment will be primarily achieved by phasing out energy subsidies and strengthening revenue mobilization through tax policy and administration measures.

The State Bank of Pakistan (SBP) will act on monetary policy to build its international reserves, bring down inflation to 6 percent in 2010, and eliminate central bank financing of the government. The program includes measures to improve monetary management and enhance the SBP’s bank resolution capacity, and avoid the use of public resources to support the stock market.

Expenditure on the social safety net will be increased to protect the poor through both cash transfers and targeted electricity subsidies. The fiscal program for 2008/09 envisages an increase in spending on the social safety net of 0.6 percentage points of GDP to 0.9 percent of GDP.

B. THE YEAR 2009:

The IMF’s Executive Board agreed to increase lending to Pakistan by an extra $3.2 billion to fund priority spending and help the government provide assistance to nearly three million people displaced by military operations and a difficult security situation.

The Board reviewed progress under a $7.6 billion Stand-By Arrangement for Pakistan that was agreed in November last year. During the August 7 discussion, Directors agreed to increase lending by $3.2 billion, after a request from the Pakistan government to meet the country’s increased balance of payments needs resulting from higher oil prices.

C. EFFECTS OF IMF PROGRAMES:

IMF authorities think that the problem of Pakistan increased because of non-compliance with the IMF programs. But it is not true. The IMF program has led to increase the charges of gas, electricity, petrol and telephone. The imposition of sales tax and cut in tariff rates on the advice of IMF has greatly affected the incomes of the poor and middle class earners. They have widened the gaps between the incomes. The absolute poverty has increased which has promoted unsocial activities. But this is not all because of IMF, we are responsible for it. If our fiscal deficit and trade deficit decreases then we should not go to IMF for financing. But we should be prepared to pay more in the form of taxes and reduces imports; particularly oil etc, the dependence on IMF may go down.