Impact of IMF on Pakistan Economy

ECONOMY OF PAKISTAN

The economy of Pakistan is 25th largest in the world (in nominal terms) and 27th largest in the world (in absolute Dollar terms). Pakistan has a semi-industrialized economy which mainly encompasses textiles, chemicals, food processing, agriculture and other industries. Growth poles of Pakistan's economy are situated along the Indus River diversified economies of Karachi and Punjab's urban centers coexist with lesser developed areas in other parts of the country .The economy has suffered in the past from decades of internal political disputes, a fast growing population, mixed levels of foreign investment, and a costly, ongoing confrontation with neighboring India. Inflation remains the biggest threat to the economy, jumping to more than 9% in 2005 before easing to 7.9% in 2006. In 2008, following the surge in global petrol prices inflation in Pakistan reached as high as 25.0.

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Impact of IMF on Pakistan Economy

SNAPSHOT OF PAKISTAN ECONOMY

Currency 1 Pakistani Rupee (PKR)

Rs. = 100 Paisas

Fiscal year July 1–June 30

Trade organizations ECO, SAFTA, ASEAN, WIPO and WTO

Statistics

GDP $174.8 billion (nominal)(2010) [1]

$464 billion (GDP-PPP) (2009)[2]

GDP growth 4.2% (2009)

GDP per capita $2400 (2010)[3]

GDP by sector agriculture: 19.6%, industry: 26.8%, services: 53.7% (2007)

Inflation (CPI) 14.17% (2009-2010)[4]

Populationbelow poverty line

40% (2010)[5]

Labour force 55.88 million (2009 est.)

Unemployment 11.2% (2009 est.)

Main industries textiles, chemicals, food processing, steel, transport equipment, automobiles, telecommunications,

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Impact of IMF on Pakistan Economy

machinery, beverages, construction, ma t erials , clothing, paper products

Ease of Doing Business Rank

83rd[6]

External

Exports $19.55 billion (2010 est.)

(67th[7][8]

Export goods textile goods (garments, bed linen, cotton cloths, and yarn), rice, leather goods, sports goods, chemicals manufactures, carpets and rugs

Main export partners

United States 22.4%, UAE 8.3%, UK 6%, China 15.4%, Germany 4.7% (2006 est.)

Imports $28.31 billion f.o.b. (2009 est.)

Import goods Petroleum, Petroleum products, Machinery, Plastics, Transportation equipment, Edible oils, Paper and paperboard, Iron and steel, Tea

Main import partners

China 14.7%, Saudi Arabia 10.1%, UAE 8.7%, Japan 6.5%, United States 5.3%, Germany 5%, Kuwait 4.9% (2006 est.)

Public finances

Public debt $58 billion (2010)

Revenues $23.21 billion (2009 est.)

Expenses $30.05 billion (2009 est.)

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

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Impact of IMF on Pakistan Economy

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. Karachi was seen as an economic role model around the world, and there was much praise for the way its economy was progressing. Economic mismanagement in general and fiscally imprudent economic policies in particular, caused a large increase in the country's public debt and led to slower growth in the 1990s. Two wars with India in Second Kashmir War 1965 and Bangladesh Liberation War 1971 and separation of Bangladesh adversely affected economic growth. In particular, the latter war brought the economy close to recession, although economic output rebounded sharply until the nationalizations of the mid-1970s. The economy recovered during the 1980s via a policy of deregulation, as well as an increased inflow of foreign aid and remittances from expatriate workers. The table which gives every five years progress of GDP, US Dollar Exchange Rate and Per Capita Income is given below:

YEARS GROSS DOMESTIC PRODUCT

US DOLLAR EXCHANGE

PER CAPITA INCOME (as % of US)

1960 20,058 Rs 4.76 3.371965 31,740 Rs 4.76 3.401970 51,355 Rs 4.76 3.261975 131,330 Rs 9.91 2.361978 283,460 Rs 9.97 2.831985 569,114 Rs 16.28 2.071990 1,029,093 Rs 21.41 1.921995 2,268,461 Rs 30.62 2.162000 3,826,111 Rs 51.64 1.542005 6,581,103 Rs 59.86 1.71

THE ECONOMY TODAY

Pakistan raised back its Foreign Reserves to a handsome $16.4 billion by October 2007. Exceptional policies kept Pakistan's trade deficit controlled at $13 billion. Pakistan’s exports increased to $18 billion. The revenue generation increased to

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Impact of IMF on Pakistan Economy

become $13 billion and attracted foreign investment of $8.4 billion. Since the beginning of 2008, Pakistan’s economy has a downfall due to war on terror. The War on Terror has created great instability and led to a decline in FDI from a height of approximately $8bn to $3.5bn for the current fiscal year. Combined with high global commodity prices, the dual impact has shocked Pakistan's economy, with gaping trade deficits, high inflation and a crash in the value of the Rupee, which has fallen from 60-1 USD to over 80-1 USD in a few months. For the first time in years, it may have to seek external funding as Balance of Payments support. The middle term however may be less turbulent, depending on the political environment. The EIU estimates that inflation should drop back to single digits in 2010, and that growth should pick up to over 5% per annum by 2011. Although less than the previous 5 year average of 7%, it would represent an overcoming of the present crisis wherein growth is a mere 3.5-4%.

Economic indicators

INDICATORS

1999 2007 2008 2009

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Impact of IMF on Pakistan Economy

GDP $ 75 b $ 160 b $ 170 b $ 185 b

GDP PPP $ 270 b $ 475.5 b $ 504.3 b $580.6 b

GDP per Capita

Income

$ 450 $ 925 $1085 $1250

Revenue

collection

Rs. 305 b Rs. 708 b Rs. 990 b Rs. 1.05 t

Foreign

reserves

$ 700 m $ 16.4 b $ 10 b $ 14 b

Exports $ 7.5 b $ 18.5 b $ 19.22 b $ 18.45 b

Textile Exports $ 5.5 b $ 11.2 b _ _

Stock exchange $ 5 b at700 points

$ 75 b at14,000 points

$ 56 b at9,000 points

_

Foreign Direct Investment

$ 1 b $ 8.4 b $ 5.19 b $ 4.6 b

Debt servicing 65% of GDP 26% of GDP _ _

Literacy rate 45% 53% _ _

Development

programs

Rs. 80 b Rs.520 b Rs. 549.7 b Rs.880 b

Poverty level 34% 24% _ _

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Impact of IMF on Pakistan Economy

FACTORS AFFECTING ECONOMY

o Growth and Investmento Manufacturingo Agricultureo Fiscal developmento Monetary credito Inflationo Capital marketo Trade and Paymentso Domestic and External debto Education, Health and Nutritiono Population, Labour force and Employmento Povertyo Transport and Communicationo Energy

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Impact of IMF on Pakistan Economy

INTERNATIONAL MONETARY FUND

The International Monetary Fund is an international organization. IMF is responsible for ensuring the stability of the International Monetary System. By observing exchange rates and balance of payments, it also looks after the global financial system. It also provides financial and technical assistance to its member countries on their request

ORIGIN

To cope with the monetary problems that arose during the World War two a conference was held on July 1, 1944 at Bretton Woods, New Hampshire, Number of suggestions was proposed, leading finally to the establishment of an International Monetary Fund. In this conference the Article of Agreement was drawn up and it was signed by 29 countries. The fund started its operations in May 1946. Its registered office is in Washington DC and present 185 countries are its members.

CAPITAL AND ORGANIZATION

The capital of the IMF consists of the aggregate of the quotas allotted to member countries. Each member pays either 20 percent of quota or 10 percent of its entire gold and dollar holdings, whichever is less, in gold. The balance of quota is paid to the IMF in the national currency of the member country. The quotas as of member countries of the IMF are normally revised once every five years. There are two bodies to run the management of the IMF. (a) The Board of Governors and (b) The Board of Directors. Every member country appoints one Governor to participate in the meetings of the Board of Governors. The Board of Governors formulates the general policy of the Fund. There are 21 members in the Board of Directors. Seven of them are permanent members, while fourteen are elected from amongst the remaining members. According to the Fund Agreement, the headquarters of the Fund are located in a country which happens to have the highest quota of capital of IMF. The head office of the Fund is at present located in Washington.

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Impact of IMF on Pakistan Economy

OBJECTIVES OF IMF

There was complete lack of monetary cooperation amongst the countries of the world after the First World War. A sort of economic war was going amongst the majority of the countries of the world. In fact the Second World War broke out primarily on account of these economic causes. During the closing years of war an international monetary conference was held at Bretton Woods in the U.S.A. in July 1944 to prepare a plan to root out the economic causes leading to the outbreak of war. The Bretton Woods Plan was divided into two parts (1) the establishment of IMF and (2) the setting up of World Bank IMF started functioning on the 1st march 1947.

Salient Features:

1. To bring about international monetary cooperation.2. To ensure stability in foreign exchange rates.3. To eliminate exchange control.4. To establish system of multinational trade and payments system.5. To promote international trade.6. To help member nations to achieve balanced economic growth.7. To eliminate of to reduce the disequilibrium in the balance of payments.8. To promote investment of capital in backward and under developed countries.

SOURCES OF FINANACING FOR IMF

The IMF is working on wide-ranging reforms to make sure it meets the needs of its member countries. One of the most important elements is governance reform, which involves adjusting quota shares to better reflect the relative weight of member countries in the world economy and enhancing the voice and participation of low income members within the institution. IMF decides on the quota for each member, richer countries have larger quota. Each member country of the IMF is assigned a quota, based broadly on its relative size in the world economy and characteristics. Quotas are denominated in Special Drawing Rights (SDRs), the IMF's unit of account. US, having largest economy, provide 44% of the total quota US has largest voting power 17.09%.

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Impact of IMF on Pakistan Economy

Quotas are reviewed every 5 years by the IMF. They are calculated by a formula. Quotas also determine how much each member can borrow from the IMF when in need of aid.

INDIVIDUAL FINANCING BY IMF

Basically 25% of the country’s quota may be used. If this still is not sufficient, then members can borrow up to 3 times the amount of its quota. In order to do so the country (in need) present plans for reform to Executive Directors. If these plans are sufficient for the Executive Directors, the IMF grants the member a loan.

FUNCTIONS OF IMF

There are three important functions of the Fund.

1. The Fund helps the member countries to eliminate or at least to minimize the short period disequilibrium in their balance of payments.2. The Fund also helps the member countries to remove the long period disequilibrium in their balance of payments.3. The Fund tenders advice to the member countries on economic and monetary matters, because it is in a position to do so in view of its special quota.

FACILITIES FOR POOR COUNTRIES

Most of the IMF's loans to low-income countries are made on concessional terms, under the Poverty Reduction and Growth Facility. They are intended to ease the pain of the adjustments these countries need to make to bring their spending into line with their income and to promote reforms that foster stronger, sustainable growth and poverty reduction. An IMF loan also encourages other lenders and donors to provide additional financing, by signaling that a country's policies are appropriate.

The IMF is not a development institution. It does not—and, under its Articles of Agreement, it cannot—provide loans to help poor countries build their physical infrastructure, diversify their export or other sectors, or develop better education

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Impact of IMF on Pakistan Economy

and health care systems. This is the job of the World Bank and the regional development banks.

Some low-income countries neither want nor need financial assistance from the IMF, but they do want to be able to borrow on affordable terms in international capital markets or from other lenders. The IMF's endorsement of their policies can make this easier. Under a mechanism introduced by the IMF in 2005—the Policy Support Instrument—countries can request that the IMF regularly and frequently review their economic programs to ensure that they are on track. The success of a country's program is assessed against the goals set forth in the country's poverty reduction strategy, and the IMF's assessment can be made public if the country wishes.

The IMF also participates in debt relief efforts for poor countries that are unable to reduce their debt to a sustainable level even after benefiting from aid, concessional loans, and the pursuit of sound policies.

ADVANTAGES OF THE FUND

1. Establishment of a Monetary Reserve Fund from which foreign exchange requirements of various are met.2. Setting up of multilateral trade and payments system.3. Improvements in short term disequilibrium in balance of payments.4. Stability in foreign exchange rates.5. Check in competitive currency devaluation.6. No interference in domestic economic affairs.7. Gains of Gold Standard.

CRITICISM OF THE FUND

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Impact of IMF on Pakistan Economy

1. Limited scope of the functioning of the Fund.2. Quota fixation is on unscientific basis.3. Discriminating treatment.4. Inability to remove exchange controls.5. No success in securing exchange stability.6. No provision for automatic revaluation of currency.7. No solution of the liquidity of problem.8. Failure to tackle the problem of petro-dollars.9. No elimination of multiple exchange rates.10. Free convertibility of currencies not attained.11. Inadequate representation to developing countries.12. Provision of inadequate resources to developing countries and erosion of sovereignty of poor nations.

PAKISTAN AND IMF

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Impact of IMF on Pakistan Economy

Pakistan joined IMF on 11th July 1950. Since the beginning, Pakistan has not enjoyed a smooth relationship with the IMF, because of its dissatisfaction with the economic performance of Pakistan. On the one hand, it has provided direct bilateral support to Pakistan in order to cope with its macroeconomic imbalances like balance of payment deficits. On the other hand, the IMF has indirect influence on lending by other donor agencies. This is evident from the fact that whenever Pakistan enjoyed good relations with the IMF, other lending agencies also provided money to Pakistan and vice versa. The IMF credit rating of a borrowing country is taken very seriously by other donor agencies. The IMF also influences policies of lending countries to a great extent.

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 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. 0IMF 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,

1. In November, 1980

2. In December, 1988

3. In February, 1994

4. In July, 1997

5. In Year 2003-04

6. In Year 2008-09

7. In Year 2010

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

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Impact of IMF on Pakistan Economy

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 the regulations and privatization.

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.

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Impact of IMF on Pakistan Economy

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.

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 Pakistan’s experience. Government of Pakistan’s dependence remains the same and efforts for new agreement started.

AGREEMENT OF 1997

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Impact of IMF on Pakistan Economy

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 1 st

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 conditionality’s 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.

AGREEMENT OF 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. 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.

AGREEMENT OF 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

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Impact of IMF on Pakistan Economy

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:

o 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.

o 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.

o 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.

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Impact of IMF on Pakistan Economy

AGREEMENT OF 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.

AGREEMENT OF YEAR 2010

August 24, 2010

o Pakistani team in Washington to discuss country's economic prospects after floods.

o Pakistan and IMF to look at need for emergency financing.o Reconstruction costs expected to run into billions of dollars.o IMF to Provide $450 Million in Flood Aid to Pakistan.

September 2, 2010

o Floods will have significant economic impact.o IMF funds to support the authorities’ emergency response.o Dialogue with IMF continues on existing $11 billion program.

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Impact of IMF on Pakistan Economy

o The International Monetary Fund is meeting with Pakistani government officials in Washington to evaluate the economic impact of devastating floods that have left millions homeless and to discuss ways in which the IMF can help in the recovery.

“The IMF announced it would provide around $450 million in new emergency financing to Pakistan to help the country cope with the economic impact of this summer’s massive floods, which have affected about one-fifth of Pakistan’s land mass and left millions homeless. This natural disaster will have an important effect on the country’s economy. It has caused serious damage to the country’s infrastructure, severely impacted its economic outlook, and resulted in a worsening of the fiscal situation,” said IMF Managing Director Dominique Strauss-Kahn. “In response to this, I will ask the IMF Board to approve $450 million in emergency assistance to be made available this month.

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Impact of IMF on Pakistan Economy

CURRENT IMF LOAN FACILITY FOR PAKISTAN

Pakistan has decided to borrow $7.6 billion from the International Monetary Fund (IMF) to save its sinking economy. Pakistan thus becomes the first Asian country to be bailed out by the IMF ever since the current global meltdown began.

As a part of the agreement, the loan carries a variable interest rate based on the market conditions. The rate may vary between 3.51 per cent and 4.51 per cent. The loan will be extended over a 23 month period and needs to be repaid between the financial years 2011-12 and 2015-16. A major section of the society in Pakistan is of the opinion that the loan has been procured at terms which will do more harm than good to the economy. They contend that this bailout loan will bring with it more wretchedness for the people in general and industry in particular.

As on date, Pakistan’s foreign exchange reserves were less than $7billion which might have landed the country in a situation wherein it cannot honor its foreign debts. The Pakistan government has pegged its economic growth at 4.3 percent for the current fiscal year. IMF, on the other hand has a more pessimistic estimate of 3.5 percent. Pakistan's finances have not only been plagued due to the current financial crisis but also due to a shaky political system, terror campaigns and soaring oil and food prices. IMF has released the strings attached to its Pakistan credit, which binds the government of Pakistan not borrowing any more during the current fiscal year from the State Bank of Pakistan, while the subsidy on electricity have been withdrawn by June 2009.

International Monetary Fund (IMF) has made public the binding clauses incorporated in the finalized agreement for $7.6 billion loan extended to Pakistan. IMF 23 months long loan program conditions spread over a document containing 24 pages said that Pakistan would have to raise its national growth rate to 7 percent and bring down the inflation rate to 5 percent by 2012, while the target of keeping the foreign current account deficit restricted to $10.6 billion i.e. 6.5 percent of the GDP by the end of the current fiscal year has been given. The target for Pakistan’s economic growth for the next fiscal year has been set at 5 percent, while that of inflation at 13 percent.

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Impact of IMF on Pakistan Economy

After minor changes in the 11-point agenda of the International Monetary Fund (IMF), the Pakistan government has agreed to gradually impose the Central Excise Duty (CED) on services and agriculture sectors at the rate of eight to 18 per cent in place of the General Sales Tax (GST). In view of the IMF demand, the Pakistani currency will also be devalued after slight changes in the discount rate and exchange rate will be decreased officially by six to seven per cent.

There has been a series of meetings between IMF and Pakistan government discussing some points from which eleven have been accepted with slight changes. The major conditions accepted by the Pakistan government included changes in the Islamic Development Bank loans and differentiation between loans and grants, devaluation of rupee, freezing of non-development expenditure under the defense budget for the last three quarters of the current financial year, non- provision of supplementary grants to government departments, ending subsidy on gas and electricity, 20 per cent reduction in non-development expenditure of civil departments and federal ministries, increase in mark-up rate of banks and on inter-bank transactions, uniformity in the inter-bank and open market dollar exchange rate and stoppage of government financial intervention in stock markets.

Under the conditions accepted by the government, the IMF will be informed at the time of the issuance of credit line by any international financial institution, including the World Bank or immediately after it the official said. The government wants the IMF to provide $3 billion and another $1.5 billion to $2 billion for adjustment of the loan installments and maintenance of the balance of payments during the current financial year. But the IMF wants to release $2 billion for repayments in the first six months after reaching the agreement for saving Pakistan from default and another $500 million for the stability of the national economy he said. For this too, the IMF wants increase in the mark-up rate on the already approved 600 million World Bank loan and grant he added. Despite all the tough conditions, objections and differences, Pakistan has no option but to seek the IMF assistance package because under the IMF pressure on the Friends of Pakistan, no friendly country has so far agreed to extend loan to Islamabad to meet its repayment obligations.

Finally in November 2009, the IMF approved a loan of $7.6 billion to help Pakistan. While in 2010, the IMF and Pakistan have agreed to impose capital value added tax (VAT) and a withholding tax on withdrawal of every Rs. 25,000/- or more from foreign currency accounts.

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Impact of IMF on Pakistan Economy

EFFECTS OF IMF PROGRAMS

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.

CONCLUSION

Nevertheless in the views of an analyst, the state of Pakistan’s economy is not just the fault of the IMF. Pakistanis, themselves have a huge role in the way things are running in Pakistan now. Even if an everyday person goes to a bank and asks for a loan, he is supposed to meet certain conditions and agree to the time period in which the loan has to be paid back. Like every other institution the IMF while giving a loan will no doubt put conditions on its money. Therefore, no country should complain about these conditions. Furthermore, we do not need anyone else to tell us that the tax to GDP ratio needs to be raised. With Pakistan having one of the lowest tax to GDP ratios in the world, it should come as a shock that we have to depend on loans and grants from other countries or institutions. The reasons for not paying taxes vary, from not trusting the government to put the money into right use to simply not wanting to pay them.

It is about time that Pakistan accepted the brunt of the blame itself, rather than placing it on the IMF. Pakistanis themselves are responsible for the state the country is in. None of the problems that our country faces today can be removed or reduced,

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Impact of IMF on Pakistan Economy

unless and until the nation rises in unity and moves forward to the path of development and prosperity.

SUGGESTION

Pakistan is a country having many natural resources in it. We should be self sufficient, we should rely on ourselves. Sincerity is the key to success so we should be sincere with our country and work hard for its development. If we have financial crisis, we should not beg for aid from IMF and World Bank or any other organization, but we can handle the problem by relying on ourselves. We should pay more taxes and we should try to remove corruption from every department of our beloved homeland. The government should make such opportunities that foreign investment is attracted towards us. By applying these things we don’t need to depend on IMF.

BIBLOGRAPHY

o http://economicpakistan.wordpress.como http://www.imf.orgo http://www.encyclopedia.como http://www.imf.org/external/pubs/ft/o http://en.wikipedia.org/wiki/Economy_of_Pakistan

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