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Has IMF’s loan a soothsayer for ailing economy of Pakistan?

Published on 16th Nov, Edition 46, 2015


Following its ninth review of the program, the International Monetary Fund (IMF) asked Pakistan to focus on accelerating steps to widen the tax net and raise funds for more infrastructure investment and social assistance after the country failed to reach its fiscal deficit and tax revenue targets under an IMF Extended Fund Facility (EFF).

However, the IMF welcomed the government’s plans to take action to attain the budget deficit and tax revenue targets for the fiscal year 2015-16. Earlier this year, the IMF praised the steps being taken by the government to broaden the tax base, including by eliminating tax exemptions and concessions. However, it said there remains significant scope to increase tax compliance rates and bolster enforcement actions.

Present government led by Prime Minister Nawaz Sharif had signed a $6.7 billion loan with the IMF in September 2013 to rebuild its reserves after more than two years of depletions and support structural changes aimed at boosting investment and growth. The government sought IMF loan less than six years after the country’s last IMF bailout. The country direly needed loan to repay the Fund nearly $5 billion that the country still owes. Under the loan deal, the IMF conducts periodic reviews in order for its executive board to approve installments of $550 million spread out over three years.

During the last ten years, Pakistan has obtained foreign loans worth $49 billion and over one-third were utilized for budgetary support instead of creating physical assets, hence raising questions of debt sustainability. On average, Pakistan received close to $5 billion in fresh loans every year and returned about $2.5 billion to its international creditors, adding the remaining amount to its debt stock. IMF has been the most persistent lender to Pakistan and is regularly providing a bailout loans to Pakistan. For 29 of the past 40 years Pakistan has received loans from the IMF, which amounts to one of the most sustained periods of international lending to any country. Over the period, the IMF’s loans have made Pakistan a more unequal country.

Moody’s satisfaction

International finance institutions and lenders have expressed their satisfaction over the way the economy is being managed by the present government. The international ratings agency Moody’s assigned a provisional rating of B3 to Pakistan while keeping the outlook stable. Moody’s observed that the government has gained significant traction on reforms under the IMF’s program, key goals of which include deficit reduction, resolving constraints in the energy sector, and the privatization of several state-owned enterprises.

In its statement, it said “Pakistan’s B3 issuer rating reflects moderate economic strength with a supply-constrained economy that has been resistant to structural change. Although the scale of the economy is relatively large, globally, Pakistan’s per-capita income level is relatively very low.”

Economy on track in five years

Technically speaking, Pakistan’s economy seems on recovery track when compared to economic indicators recorded during the past five years under the previous government. The rupee gained its value it lost in 9 months period after June 2013. The dwindling foreign exchange reserves have improved to great extent. The country’s foreign exchange reserves reached US$15.2 billion by end-September 2015, up from US$13.5 billion at end-June 2015 and covering close to four months of prospective imports.

Realistically, the economic reforms recommended by IMF could hurt the millions of Pakistanis who live in poverty on less that $2 a day. The government has launched many projects in energy sector, but the power crisis continues to worsen affecting industry and the daily life. The rupee has witnessed strong recovery against the US dollar, yet the people are still hard hit by soaring commodity prices. Truly speaking, IMF disbursements, issuance of sovereign bond and the receipt of grants including $1.5 billion donation from Saudi Arabia were instrumental to build foreign exchange reserves, strengthen local currency and brighten prospects for capital inflows.

The government borrowed Rs1.4 trillion from scheduled banks in the last fiscal year 2014-15, while the private sector credit off-take fell by 44 percent over the preceding year, according to the State Bank of Pakistan (SBP). The private sector credit off-take shrank to Rs208.7 billion in 2014-15 from Rs371 billion in the previous year, despite low oil prices and 300 basis points cut in interest rate. The government planned to borrow Rs1.35 trillion from banks through the sale of Market Treasury Bills (MTBs) and Pakistan Investment Bonds (PIBs) to finance its budget deficit during the first quarter of the current fiscal year 2015-16, according to the central bank. It actually shows that the government continues to rely on borrowing from banks to finance its spending despite the strong foreign inflows.

The government’s borrowing would have been highly inflationary in nature if it had borrowed from the central bank. It could not do so due to a condition set by the IMF under its loan package. It was in fact the significant increase in the government’s issuance of T-bills that led to a decline in government borrowing from the central bank during the last fiscal year.


Future aspect

The burden of IMF loan would further enhance the country’s debt servicing obligations, thereby squeezing the resources meant for developmental projects. The country’s rising external debt and liabilities have further burdened the economy. Every time, the country’s entry into an IMF program faced significant economic slowdown and even go through a major challenge in managing a slowing economy.

In 2008, the former government agreed to $11.3 billion loan with the IMF to avert a balance of payment crisis. It received only $7.6 billion but failed to get the remaining amount due to slippages in performance criteria, leading to suspension of the program in May 2010. The program was extended in December 2010 for nine months, but disbursements were not resumed owing to the government’s failure to take fiscal measures as demanded by the Fund.

Under IMF pressure, the former government maintained one of the world’s highest benchmark interest rates, in an economy hurt by terrorism and falling foreign investment. The high interest rate has been one of the major reasons behind the fall in the country’s industrial output. During the five-year tenure of the former government of Pakistan People’s Party (PPP), the real gross domestic product (GDP) growth averaged at 3 percent against the required rate of 7 percent, according to the Economic Survey of Pakistan for the fiscal year 2013-14.

Not loan but investment is the cure to the ailing economy. Pakistan’s weak fiscal position is mainly due to the drying up foreign investments. FDI inflows are essential to sustain the economy’s external sector. The country direly needs foreign investments to shore up its foreign exchange reserves and improve the liquidity after the end of the IMF program next year. The country could face another balance of payment crisis situation by the end of next year if FDI inflows are not improved to stabilize the external sector.

People feel the pinch

The overall impact of these International Financial Institutions-dictated moves proving harsh blow to the living and social conditions of workers and the poor. Foreign loans have weakened the economy, eroded the currency, decreased the buying power of the masses, and have promoted the interests of the elite.

Pakistan is currently unlikely to meet many of the millennium development goals, including on hunger, education, gender equality, child and maternal mortality and access to basic sanitation. High debt payments, and cuts in government spending, make it more difficult for the state to provide decent quality public services such as healthcare and education.

Inflation is going to rise due to continuing devaluation of the local currency, and subsidy cuts and taxes will increase the cost of living unbearably, under conditions where the masses are already living in dire poverty.


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