IMF stands for Internal Monetary Funds. IMF was formed after the World War II. Its structure was made at an international conference in Bretton Woods, New Hampshire. In the beginning, IMF controlled the currency exchange rates to assist the international trade and acted as the lender of last resort, when a member country faced deficit balance and was unable to take loan from any other source. Pakistan also turned to IMF in 1988 when it faced the deficit in its Balance of payments and instability in the economy. (IMF: Cooperation and Reconstruction)
This paper gives an insight to the IMF and its relations with its members, especially Pakistan. We have listed all the loan payments taken till now from the time when Pakistan came under the membership of IMF. The temporary and fascinating effects of loan on the economy and on the same side its bad effects that it creates for longer term are discussed. At the end some suggestions in order to improve the economy are given so that Pakistan may stand on its own feet rather than begging in front of IMF.
During 1930 great depression came all over the world and countries faced more barriers in foreign trade than ever before. In order to compete with each other in export market, countries started to devalue their currencies. On the other side, they restricted their citizens from holding the foreign exchange. These conditions proved to be self-defeating. International trade in the whole world moved downward and there was a decreasing trend in employment and living standards. After this, the founders of IMF thought to make an institution that would oversee the monetary system all over the world. (IMF: Cooperation and Reconstruction)
After World War II, IMF was established in July 1944 after the meeting of 45 countries in the town of Bretton Woods. These countries agreed on a structure which was made for the international economic
corporation. This framework was designed in order to keep away those economic policies which contributed to the great depression. IMF came into official existence when 29 countries signed the "Article of Agreement" in December 1945. At 1st march 1947, its operations started properly. After a year, France became first borrower of the IMF. Neither land, United Kingdom and Mexico were the other countries that took loan in same year after France. At the end of 1950s, IMF's membership began to spread out. During 1960s many countries in Africa after becoming independent applied for membership. (IMF: Cooperation and Reconstruction)
Between 1945 and 1971, the countries which joined the IMF agreed to peg their Exchange rate with U.S Dollar and United States pegged Dollar with Gold as per the agreement of IMF. This par value agreement is also known as the Bretton Woods system and it prevailed until 1971. In 1971, the president Richard Nixon of U.S.A asked to stop the convertibility of Dollar into Gold. As the Dollar was struggling to meet the standards of Bretton wood, in this situation, Bretton Woods System was eradicated. Now the members of IMF were free to choose any arrangement of exchange. The countries were freed to peg their currency with other country's currency or may adopt any other country's currency but were not allowed to peg the dollar with Gold. (IMF: Cooperation and Reconstruction)
In October 1973, when prices suddenly grew up, flexible exchange rate made it easy to adjust the high prices of Oil and IMF also helped to those countries which were being affected by the inflation. In March 1986, IMF organized the loan program which was named as "Structural Adjustment Facility" and it prevailed until December 1987. (IMF: Cooperation and Reconstruction)
IMF is considered to be a part of United Nations and it is controlled by Western countries including particularly United States. Today, IMF promotes its objectives by law rather than conference with member countries and it also provides short-term loan to those countries that have problem regarding the balance of payment. (IMF: Cooperation and Reconstruction)
The major objectives of IMF includes helping the poor countries to strengthen their economies by giving them funds at times when they require, it promotes trade in the world and between the economies, promotes the exchange stability and tries to balance the international trade, helps to lessen the disequilibrium in the BOP of member countries, and also helps to eradicate poverty from the member countries by expanding their employment opportunities. (MianRiazAhmed)
As we know that, Pakistan is a developing country which is suffering from the shortage of saving and investment and has more need for long-term loan in order to grow up the economy and reduce poverty. Pakistan took loan from different countries which they did not use efficiently. Pakistan was unable to pay all their debts. In this situation, when it was about to become bank default, then government went to IMF and asked for loan in 1980 first time. (Pakistan and IMF :DAWN News)
Pakistan became member of IMF in 1988. Until now, Government has done almost 10 loan agreements with IMF under IMF programs/facilities. Zia-ul-Haq did one loan agreement with IMF. Three loan agreements were made in the era of Benazir Bhutto, three loan agreements were made under the era of Nawaz Sharif, two were supported by Musharraf and in 2008, 10th loan agreement has been done by Zardari (Table 1). In other words, one loan agreement was made during the era of military where as other nine loan agreements were made during the era of civilian. ($7.878b loans obtained from IMF in three years, NA told, 2009)
IMF allows a country to pay the loan back in installments; these payments could be done with in two or three years. In November 2008, when Pakistan's foreign exchange reserves declined by 5 billion, inflation rate increased to 25% and import dues also increased by 35.2% and it became a challenge for the government, this time it was difficult to take loan from IMF but finally IMF gave $7.878 Billion on Standby agreement to Pakistan. Out of which $3.9 billion was obtained in 2008 where as $3.5626 billion in 2009-10 and in 2010-11 government obtained $0.452 billion under ENDA. ($7.878b loans obtained from IMF in three years, NA told, 2009)
At the end of June 2010, Pakistan had to pay back IMF loan of $8.1 billion (Figure-1) with interest of $ 0.8 billion. In the beginning of 2010-2011, there was pressure of inflation on the economy. But the situation became more severe due to highly destructive flood. Due to this Pakistan had to bear a huge estimated loss of $ 10 billion. In this situation Pakistan had no option other than to take loan from IMF. So, during the first half of financial year 2010-11, the pressure increased on SBP to take debt to finance the fiscal deficit (government expenditures exceed from its revenues). During the financial year 2010-11 Pakistan's external debt and liabilities increased from $55.9 billion to $59.5 billion. The EDL faced the huge expansion in 2008 and 2009 from 14.1% to 13.4% respectively and there was huge contribution of IMF in it. (Overview of the Economy, 2010-11)
According to economic survey of Pakistan 2011-12, Pakistan's foreign reserves were $18.2 billion; and they depleted to $1.8 billion after the payment of loan installment to IMF as well as due to paying back of other liabilities. (Pakistan Economic Survey 2011-12, 2012)
By providing loan, IMF temporarily stables the Pakistan's economy. It reduces the default risk of the country which leads to the improvement of its credit rating. But it creates a disaster in the longer term. We have now started to rely on the IMF rather than to increase our own sources to generate revenues. Pakistan takes debt from IMF to balance fiscal deficit, trade deficit, to increase the foreign reserves to stabilize the Pak Rupee and to control the liquidity issues.
Loan from IMF is obtained by Pakistan mainly to cover the fiscal deficit and to stabilize the economy but the major portion of this loan is used by the government on places that are not revenue generating. If the loans obtained would be used for specific projects that prove to be an investment then it may be more effective for Pakistan. The loan taken from IMF increases the pressure on Pakistan and thus they start influencing Pakistan to fulfill their demands.
In 2008, Pakistan got loan from IMF when 1 dollar was against 79 rupees but now 1 Dollar is against 96.65 rupees in the open market. Foreign currency expert says that Pakistan has to pay almost $1.49 billion extra due to delay in paying back the installments of IMF loan. This devaluation of Pakistani rupee and increasing dollar value has caused Pakistan to pay a huge amount back to IMF and thus has a great pressure on the economy. The loan taken is easy to spend but is difficult to pay, the same is the case with Pakistan, the amount of loan is taken but is spent on places that do not have worth, for example, the Government spend the debt loan amount for giving pays to the workers and employees, they use that amount to give subsidies to the public and a major portion is also wasted in corruption thus, rather than investing on places that could generate revenue and could improve the economy, the amount is wasted and thus it becomes almost impossible for the Government to pay that amount back as the economic conditions worsen with time.
Due to decreasing purchasing power parity as compared to dollar, it is expected that Pakistan may face increase of 5% of IMF loan till 2015.According to Economic Survey of Pakistan; almost $793 Million has been paid back to IMF in the 3rd and 4th quarter of FY 2012. (Pakistan Economic Survey 2011-12, 2012)
IMF imposes conditions while giving loan to a country, IMF asks for close monitoring, reducing the government spending, revision in the collection of tax policies and changing in the policies and interest rates according to IMF's policies.
Pakistan could be related to a child who takes money from his elders and spends it where ever he wants but does not have any source to pay it back, if he is asked to pay it back then it would be pressurizing for him. The spending of Pakistan with context to the loan is similar to 'burning like fuel' that is, we are spending the loan amount just like the fuel once burnt and used could not be retrieved rather it leaves impact on the environment in the form of harmful gases emitted due to its burning.
IMF helps its member to develop a par value of their currency; it helps its members by giving funds under certain program that stabilizes the economy, it helps to maintain the reserves of gold in the economy, it gives monetary advises to its members so that they may improve the economy, and also helps to maintain the balance of payments. Whenever Pakistan has to take loan from IMF, it has to ensure that they are implementing the policies told by IMF otherwise the loan agreement is not accepted. Loan payments in the previous agreements were rejected by IMF only because the economy's policies were not according to the IMF. Now days, it seems that IMF is now playing the role more in the context of politics rather than just stabilizing the economy in order to maintain a balance in the international financial market.
Currently the economic condition of Pakistan is not good and it is under the EDLs which are too high that they are unable to pay them back. Therefore, Pakistan should improve the economy by making such kind of internal reforms that may help them to generate revenues. They should improve their taxation system so that rather than taking loans, they may make their own revenue and also make proper reforms that may help them to generate proper electricity so that they may be able to produce more goods and generate revenue in order to stabilize their economy.
