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. The IMFs 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. 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.

IMF and Pakistan The Past and the Present

Pakistan, in its six decades of history, has run into financial problems on quite a few occasions where IMF loans have come to assist. Examples of problems that have required assistance include, balance of payments deficit, currency stabilization, rebuilding foreign exchange reserves, liquidity issues and short term needs. It is obvious that any funding will come with conditions. The non-government forces and sources will scream about the harsh conditions that will break the poor mans back while the pro-government will point to a no choice situation and home grown reforms that will finally lead us towards selfreliance.The reality is that no viable alternative exists at present and the government is justified in approaching IMF. The History Pakistan became a member of the IMF in 1950 and the first time the Government of Pakistan opted for a loan from the IMF was in 1958. This was a Standby Agreement (SBA) amounting to USD 25 Million. However, due to political disturbance, this loan was cancelled soon after. Pakistan received its second and third SBAs in 1965 and 1968, during Field Marshal Ayub Khans era. Four more SBAs worth USD 330 Million were granted to Pakistan during General Yahya Khans regime who replaced Ayub Khan. As governments changed hands in Pakistan, in a 20 year span from 1958 to 1979, Pakistan had been granted a total amount of USD 460 Million in IMF Packages. A USD 1.27 Billion Extended Fund Facility (EFF) followed in November 1980 which was three times the combined value of the seven SBAs that Pakistan had collected previously.

During 1988-91, though IMF continued to financially assist Pakistan, its number of conditions attached to the Structural Adjustment Loan programs increased from 27 to 56. These included sales tax on 44 items of basic and daily use, withdrawal of subsidies on public services and starting of privatization. Since 1980, the fund has made four main agreements with Pakistan as, 1. In November,1980 2. In December, 1988 3. In February, 1994 4. In July, 1997 1. THE AGREEMENT OF 1980: Under this agreement, IMF provided $1.7 billion for the period of 1980-83. The biggest condition against this loan was to reduce the fiscal deficit. For this purpose they asked the Government to increase the prices of public enterprises like fertilizers, cement, electricity, clean water, educational and health services. The indirect taxes should increase and subsidies should be withdrawn. But the budget deficit in 1980-81 was 5.8% of GDP went to 9.1% in 1985-86. When Government of Pakistan again asked IMF for assistance, they showed dissatisfaction over our efforts to reduce fiscal deficit. Accordingly, IMF prepared a package of policies for Pakistan and chalked-out a time-table for the required changes. IMF set the following conditions for Pakistan: 1. Rupee be devalued by 20% in terms of dollar 2. The imports be liberalized 3. Prices should increase and subsides be withdrawn 4. The custom duty on imports be decreased and sales and exercise duty be imposed in the country 5. The industrial sector is liberalized from govt. controls through de-regulations and privatization. 2. THE AGREEMENT OF 1988: During the period of 1988-91, IMF gave the assistance of $900 million to Pakistan in order to remove the deficit in BOP by redressing structural problems. According to this agreement: 1. The current account deficit of BOP which was 4% of GNP in 1987 was to be reduced to 3.3% of GNP in 1988-89, 2.7% in 1989-90, and 2.5% of GNP in 1990-91. 2. The foreign debt burden which was 31% of GNP in 1987 would be decreased to 25% in 19990-91. 3. The overall fiscal deficit of federal and provincial govt. which was 8.5% of GDP in 1986-87 would be reduced to 4.8% of GDP in 1990-91.

4. The bank borrowings be reduced to 1% of GDP, while non-bank borrowings to 3.6% of GDP. 5. The tax structure will be changed. The tax-base will be expanded and tax collection system will be improved. 6. The system of general sales tax will be introduced. 7. The federal and provincial govt. will control their expenditures, while the price of social services will be increased. The main objective of this agreement was to reduce fiscal deficit. But the govt. failed to meet these conditions. The budget deficit which was 8.7% of GDP in 1990-91 decreased to 8% GDP in 1992-93. This means that the budget deficit could not be decrease appreciably. 3. THE AGREEMENT OF 1994: The aim of this agreement was to reduce the financial deficit to 4% of GDP in 1994-95 and to 3% of GDP in 1995-96. But this agreement was renegotiated in December, 1995. As a result, this target was set at 5% of GDP for 1994-95 and 4% for 1995-95. In this agreement IMF stressed upon early conditions. As the price of gas, electricity, water, education and health services should be increased. The govt. of Pakistan made some efforts but little success was attained. The budget deficit was 5.8% of GDP in 1994-95 and the target for 1995-96 was set at 5% of GDP. This led to create a suspension in the attainment of loan of $1.4 billion could be raised. Then the govt. of Pakistan failed to complete the conditions of IMF. Then the finance minister re-negotiated with IMF. As a result, a new agreement took place between Pakistan and IMF where the fiscal deficit was stipulated at 4% of GDP for 1996-97. Against it, the agreement was extended to September, 1997, instead of February, 1997, while the amount of loan was raised from $250 million to $850 million. Government of Pakistan neither reduces its expenditure nor raised tax revenues. The IMF failed to learn any lesson from Pakistans experience. Government of Pakistans dependence remains the same and efforts for new agreement started. 4. THE AGREEMENT OF 1997: In 1997, IMF prepared a Medium Term Policy Framework Paper for the growth and the stabilization of the economy of Pakistan. This period is of three years from 1st July, 1997 to 30 June, 2000. Pakistan demanded a lot of amount as financial aid but IMF sanctioned $500 million on January 14, 1999. IMF suggested conditionalities in order to bring structural changes in the economy. The IMF issued a long structure. Government of Pakistan applied many suggestions but still they failed to impose sales tax at retail level. The rupee was devalued in 1998. The trade was liberalized. IMF has associated its tranche ($280 million) with the issue of IPPs. It means that unless govt. of Pakistan settles the issue with IPPs, they will not get any loan from IMF. THE YEAR 2003-04:

Most projects with IMF were suspended because Pakistan could not complete their conditions. But first time in 2004, Pakistan got the entire amount which was sanctioned by IMF on PRGF which is $1.47 billion dollars. Pakistan exports grew during this period. Although IMF and other financial institutions of the world have shown satisfaction over macroeconomic stability of the country, yet WB is of the view that Pakistan has to face the problem of internal and external loans, and it will have to reduce them. 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 IMFs 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 Governments 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 2009/10in 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 SBPs 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.

THE YEAR 2009: The IMFs 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 countrys increased balance of payments needs resulting from higher oil prices. 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.