IMF Stand-by Arrangement for Pakistan and its Inconclusive end - What Went Wrong ? (M-23)

IMF Stand-by Arrangement for Pakistan and its Inconclusive end - What Went Wrong ? (M-23)

Publication details

  • Friday | 16 Nov, 2012
  • Syed Nazre Hyder
  • Monographs
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Dr. Syed Nazre Hyder November 2012


Economy, after having witnessed an impressive rate of growth with relatively greater price stability, low incidence of foreign debt and many other favorable social and economic indicators, especially since 2003-04 up till the end of 2007, started facing serious macroeconomic imbalances. These brought about a sharp decline in the foreign currency reserves, bringing the country to the brink of default in its commitment of external payments and worsening economic situation as a whole. The failure of friendly countries of Pakistan to rescue it from economic collapse compelled the Government of Pakistan to seek financial assistance under IMF Stand-By Arrangement (SBA) so as to be able to correct serious macroeconomic distortions in the economy. The IMF entertained the request of the government and originally approved in November 2008 a 23-month programme, worth SDRs 5.17billion (500% of the country’s quota) equivalent to about US $ 7.6 billion under the Fund’s ‘Emergency Financing Mechanism’, which was later enhanced to 7.236 billion SDRs (700% of the country’s quota), worth nearly US $ 11.3 billion . To ensure the success of the loaning programme, the IMF, in consultation with the government, designed performance criteria and structural benchmark conditionalities to attach these to SBA as a component of the loan package. These conditionalities sought reduction in fiscal deficit, tightening of monetary policy, amendment in banking legislation to enhance effectiveness of the State Bank of Pakistan’s enforcement powers in the area of banking supervision, and harmonizing General Sales Tax (GST) and income tax regimes. Furthermore, the IMF called for achieving SBP’s Net Foreign Asset (NFA) targets, finalization of electricity tariff adjustments in consultation with the World Bank and Asian Development Bank with a view to eliminating tariff subsidies, removal of inter-corporal debt in energy sector and adoption of an action plan to strengthen social safety net for the marginalized population. The government, however, failed to implement some of the very significant conditions attached with the loan such as limiting fiscal deficit targets, implementation of VAT regime, finalization of amendments in legislative framework for the State Bank of Pakistan and the energy sector reforms. This became an irritant in the relationship between the Fund and the government. As a consequence, the programme remained suspended after the fourth review held in April 2010. The remaining two tranches amounting to about US $ 4.06 billion worth SDR 2.296 billion were, therefore, withheld. However, at a later stage the IMF, on the request of the government, extended the programme in December 2010 for a period of seven months till end September, 2011 in the hope that the macroeconomic managers may succeed in implementing the remaining key conditionalities. However, because of the government’s inability to implement all these largely on account of some political reasons and the rigid stance of the IMF for their strict implementation, the government abandoned its efforts for total compliance with the laid down criteria. The programme, therefore, ended up inconclusively in September 2011 with which a lot of hopes were pinned at the time of its proposition. The paper mainly aims to evaluate the extent of success and failure in achieving the structural benchmark targets and performance criteria attached to IMF’s Stand-By Arrangement which came to a premature end. It also examines whether the economy could move forward as a result of the financial assistance received to the extent of about 63.85 per cent of the total amount of loan committed despite meeting many of the most important conditionalities of the Programmeme. The analysis has been made on the basis of the available facts and an in-depth assessment of the macroeconomic trends, which forced the government to approach the IMF for financial assistance on an emergency basis to stabilize the economy showing serious downward economic trends in the country.