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IMF Stand-By Arrangement for Pakistan: what went wrong?
By: SDPI

Year: 2011

Introduction:
The study is an in-depth analysis of the macro economic trends which forced the government in November, 2008 to approach the IMF for financial assistance on an emergency basis, to overcome the grave macro economic imbalances which the country was facing. The contextual background and findings of the study are briefly outlined below:
Pakistan’s economy after having witnessed quite an impressive rate of growth with relatively greater price stability, a low incidence of foreign debt and many other favorable social and economic indicators, especially since 2003-04 up till mid-2008, started facing macroeconomic imbalances. These brought a sharp decline in the foreign currency reserve position, close to default in its commitment for external payments.
Earlier, certain factors that impacted the economy coupled with a failure of the Friends of Pakistan (FoP) and other friendly countries to rescue the country from a worse economic situation compelled the Government of Pakistan to seek financial assistance under the IMF Stand-By Arrangement (SBA) to manage the serious nature of macro economic imbalances in the economy. The IMF entertained the request of the government and originally approved in November 2008 a 23-months program, worth SDRs 5.17( 500% of the country’s quota) equivalent to about US $ 7.6 billion under Fund’s ‘Emergency Financing Mechanism’, which later on was augmented to 7.236 billion SDRs (700% of the country’s quota), worth nearly US $ 11.3 billion.
The IMF in consultation with the government designed a structural performance criteria and benchmark conditionalities, which were attached to SBA. These comprised seeking reduction in fiscal deficit, tightening of the monetary policy, an amendment in banking legislation to enhance effectiveness of the State Bank of Pakistan’s enforcement powers in the area of banking supervision, to harmonize General Sales Tax (GST) and income tax regimes. Moreover, the conditionalities also called for achieving SBP’s Net Foreign Assets (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 an adoption of an action plan to strengthen social safety net for the marginalized population.
The study examined the progress made and the failures in achieving targets as specified in the conditionalities attached to the SBA programme, the associated implications for the economy and the factors responsible for the unsuccessful ending of the programme. The contextual background and findings of the study are briefly that the initial response to the programme was found generally positive as policy implementation had been good at the time of initial introduction of the programme. It caused some revival of the economy in certain economic areas. However, at a later stage, due to the failure of the government to implement some of the key elements of the programme, it remained suspended after the fourth review held in June 2010.
The remaining two trenches amounting to US $ 3.6 were, therefore, withheld. However, lately the IMF extended the programme till the end of September, 2011 on the request of the government with the hope that it will be able to meet the remaining conditionalities attached to the program. On account of the inability of the government to meet all these, on finding a rigid stance of IMF regarding their implementation, the government abandoned the efforts. The programme, therefore, ended up inconclusive.
The analysis reveals that the government despite taking some bold decisions to implement some conditionalities could not succeed in implementing some other very significant conditionalities such as limiting fiscal deficit targets, implementation of VAT regime, non-finalization of amendments in legislative framework for the State Bank of Pakistan and the energy sector reforms. As a consequence of the inability of the government to execute the programme in an effective manner coupled with some unforeseen factors, the economy showed seriously negative trends in many areas of macro-economic management.
The growth rate of the economy was decreasing throughout the period of the programme implementation and even lower towards its ending period. While the fiscal deficit continued widening, inflation has remained unabated, and the incidence of poverty and unemployment is believed to have gone up. However, during the recent last few months two signs of optimism have been witnessed, one that the foreign currency reserves of the country have shown a rising trend and the second that current account surplus rose to a satisfactory level especially in July, 2011 after six year:, but it yet to be seen whether it may be sustained in the long run..
As regards the debt position, the study revealed that the country was again slipping into a quagmire of heavy debt The study attempts to analyse the factors responsible for the failures and inconclusive end of the programme with which a lot of hopes were being pinned at the time of its proposition.