Pakistan joined the IMF in July 1950 and for the first time the country approached it in 1958 for a loan of Special Drawing Rights amounting to 25 million worth nearly US $24.80 million. It was requested to be sanctioned under the Stand-by Arrangement (SBA) in December 1958, meant to provide financial support to overcome macroeconomic distortions, if being faced by the member countries of mainly the developing world.
It was, however, cancelled even prior to its expiration date on the ground that the amount had remained lying completely idle for long. The whole amount, therefore, went off unutilised. The reasons being the political upheavals during the period and also because of inflow of substantial economic and military aid from the US soon after the dictatorial regime came into power in October 1958.
During the 60s, two more stand-by arrangements, each of them of one year duration, were approved in 1965 and 68, collectively amounting to 148.0 SDRs which could be utilised only to the extent of 71.0 percent and the remaining amount was lapsed due to slow utilisation.
Although the whole amount of the loan was not utilised but it was productively deployed for achieving a higher level of economic development. These IMF loans, along with other factors such as funding by the World Bank to mega projects for water resource management and hydro power generation, later on resulted in achieving an impressive growth rate during the period.
At a later stage in the 70s, four loans were sanctioned to Pakistan under the similar nature of Stand-by Arrangements worth SDRs 330 million in aggregate which were utilised to the extent of about 95 percent of the sanctioned amount. It is creditable that the then economic managers were successful in meeting the targets of their utilisation.
The loan programmes by IMF till such time were not characterised by any significant variations in terms of conditionalities attached to the loaning which provided the opportunity to the policy makers for framing the economic policies independently suiting the requirements of the economy. It facilitated, to a great extent, the successful implementation of the programmes.
In the 80s, however, a drastic change in terms and conditions i.e., conditionalities of loaning programmes took place for Pakistan as also in case for other developing countries. The conditionalities, in their broader sense, embrace both the design of IMF-supported programmes i.e., underlying macro-economic and structural policies, and the specific tools used to watch the progress of the programme.
These used to be imposed on the client countries in the form of strict set of policy reforms which included a close monitoring of the economy concerned which continued to be stricter with the passage of time and also according to its experience about the economic performance of the countries in response to the loan programme. These paved the way for the IMF involvement in policy framing of these countries.
During the period prior to the return of democratic system of government in 1988, two long-term loans under the Extended Fund Facility (EFF), amounting to a total sum of SDR 2.187 billion, were approved first in November 1980 and subsequently in December 1981, covering approximately a period of three years.
The size of these loans was more than four times the entire amount lent through seven Stand-By packages during 1958-80. It is worth noting that the IMF was once again liberal in sanctioning a large amount of loan during the military regime.
Since this period, there began an increased role of IMF as a source of lending to Pakistan and also in terms of its influence in national economic policy making. IMF loaning, therefore, became a subject of intense debate in the country which got further intensified by the failure of such packages in solving the economic health of the country.
The strict conditions imposed by the IMF attached to its loan packages such as devaluation of currency and de-linking rupee from dollar and replacing it by the managed float system, liberalisation of imports, restrain on government spending and increased role of private sector were met except implementation of complete abolition of subsidies.
However, the government could utilise only a sum of SDR worth 1.079 against the sanctioned amount loan which constituted only 49.33 percent of the total amount of approved loans despite at the cost of meeting most of the tough conditionalities such as massive devaluation and floating rate of exchange.
Its reason may be attributed to inefficient economic management and also on account of an inflow of financial aid in the country for economic and defense purposes, again during the period of military regime. Despite a heavy cost to the economy caused by devaluation and linking the value of rupee based on managed float system, the loans could be utilised only partially.
Since 1988 and prior to the ongoing Stand-By Arrangement, eleven loan arrangements, amounting to a total sum of SDR 5.21 billion equivalent to nearly US $ 5.80 billion were made under various programmes such as Standby Arrangement (SBA), Poverty Reduction and Growth Facility (PRGF) and Extended Structural Adjustment Programmes (ESAP).
Since 1988 till the end of 90s, only 62.41 percent of the total amount of loans approved by IMF was utilised. Before the Eighties the under utilisation of the loans was either on account of inefficient economic management of various governments or due to its redundancy after the inflow of economic aid during the dictatorial regime, while in the subsequent years, it was largely because of their failure to act upon the strict conditionalities attached to the loaning programmes.
During the post 2000 period, IMF entertained the government’s first request for the Stand-By credit arrangement amounting to $ 596 million equivalent to SDR 465 million in November 2000. Later on, the government was sanctioned a loan of $ 1.3 billion worth SDR 1.03 billion in December 2001 on its request under the Poverty Reduction Growth Facility, covering a period of three years.
According to State Bank, the government could successfully meet the performance criteria as laid down by the IMF for both the programmes. Almost the whole amount of $ 1.896 billion equivalent to SDR 1.495 billion was thus utilised except the last trench amounting to US $ 252.60 million on the ground that it was no longer needed.
These were followed by the approval of current 25-month Stand-By Arrangement (SBA) Programme worth SDR 7.236 billion (US $ 11.3 billion) covering a period of 25 months after being augmented on August 7, 2009 from an originally approved 23 months programme, worth SDR 5.17 (US $ 7.6 billion) approved in November, 2008 which is more than double the entire amount of loans sanctioned by IMF to the country since 1958.
The programme package comprised a number of conditionalities in the form of Structural Performance Criteria and Structural Benchmarks and it was to be implemented by December 2010 through six installments (besides the amount released with the approval of the loan) based on its satisfactory quarterly performance reviews by IMF. The reviews were to examine the achievements of the programme as per conditionalities which were framed with mutual consultation of the government and IMF.
The conditionalities were designed as loan package signified under the broad framework of its objectives, aiming at to “(i) restore financial stability through tightening of fiscal and monetary policies to bring down inflation, strengthen foreign currency reserves and develop confidence of local and foreign investors; (ii) to protect the poor to preserve social stability through a well targeted and adequately funded social safety net; and (iii) raise the budgetary revenue through comprehensive tax reforms to enable the significant increase in public investment and social spending required for achieving sustainable growth.”
The programme remained suspended after the fourth review in June 2010 and the release of fifth trench, since the government failed to achieve some of the key structural performance as well as benchmark conditionalities. The remaining two trenches amounting to US $ 3.4 billion (the last was scheduled to be released in November 2010 were, therefore, withheld.
The government, despite taking some politically difficult reform measures, could not meet some of the important conditionalities such as lowering down the fiscal deficit to the desired level since there was a continuous breach of fiscal deficit limits, implementation of reformed sales tax regime (Value Addition Tax), withdrawal of the subsidies, amendment in the banking legislation to enhance the effectiveness of the State Bank of Pakistan and overcoming the problem of circular debt in the power sector.
Lately in June, however, the IMF extended the programme till the end of September, 2011 in response to the request of the government to give chance to implement the remaining conditionalities.
On realisation that it may not be possible to implement these due to their heavy political repercussions and also on account of its inability to rectify those ills in the economy in the short run in the wake of some heavy macro economic distortions in the economy to which the conditionalities were meant to address. Non-preparedness and lack of political support including that of the business community to introduce some conditionalities such as VAT regime is also the reason of the failure of the government to successfully implement them.
Another contributing factor in the failure of the government to comply with some tough conditionalities was unprecedented floods of the last year experienced by the country, which shattered the whole economy. The government, on finding the rigid stance of IMF regarding the implementation of the key structural reform conditionalities, abandoned the effort to avail the opportunity.
The programme, therefore, ended up by 30th. September, once again without achieving some of the significant targets which are, no doubt, most essential for the health of the economy. However, since the economy faced a great economic set-back on account of unprecedented floods costing it heavily, it was expected that the IMF should have adopted some lenient approach. However, the country should take it as challenge as well as an opportunity to be dependent only on home grown solutions and to live with domestic resources mobilisation to protect its economic sovereignty.
This article was originally published at: The News
The opinions expressed in this article are the author's own and do not necessarily reflect the viewpoint or stance of SDPI.