INTERVENTION OF IMF IN PAKISTAN

The funding by International Monetary Fund (IMF) to developing countries has always raised a

debate on its positive and negative impacts on the economy of the creditor country. Pakistan has

an extended history of funding from IMF starting from 1958 to 2004 in various time spans and

now the current agreement from 2008. This article discusses the intervention of IMF funding in

Pakistan. Article not only discusses the intervention and funding impact but also focus the

policies of IMF that are being imposed on Pakistan.

IMF and its Origin

It is not possible to understand the present role of IMF in the third world countries without

considering its origins. In late nineteenth and early twentieth century the major trading nations of

the world had tied their currencies to the value of gold. These currencies were stable to each

other. The great depression of 1930s saw the final abandonment of international gold standard. In

attempt to salvage something from the collapse of international trade, the major trading nations

devalued their currencies, which means they set their own price for them independent of gold, to

win back export market by lowering the international price of their products. The poor nations

and colonies were no longer able to pay for their imports with exports. Poor countries stopped

importing and began to produce import substitutes at home or they entered into a bilateral trading

agreement.

According to Payer, C. (1974), “The second world war itself gave the coup de grace not only to

Germany’s imperial pretensions but also to great Britain’s one-time pre-eminence in world trade

and finance.” As the war drew close, the American leaders, who identified the national interest

with a world economy, open to their trade and investment, tried to devise a system which was

fashioned at Breton Woods to be imposed by International Monetary Fund was called par value

system, of fixed but adjustable exchange rates. IMF has never played a deciding role in the

adjustment of exchange rates and trade practices among wealthy developed nations, but it has

made large sums available for the defense of their currencies. Cheryl payer has explained well

the true role of IMF in his book The Debt Trap,

“The gigantic speculative crises of recent years have shown that the Fund can, be at most,

a forum for negotiations; it cannot dictate policies when there are fundamental

disagreements among the titans of international finance. It is rather the weaker nations

which are subjected to the full force of IMF principles, for the rich nations (the US,

Japan, and major European countries) can agree sufficiently to present a united front in

the IMF to the poor countries which look to the fund and the rich countries, for credit”

Joyce and Gabriel, K, in their book The Limits of Power: The World and United States Foreign

Policy, (1945-1954) have done a complete study of post-war aid to Europe. For about dozen

years after the end of Second World War the US was the main source of foreign aid. As the only

significant creditor country of the era, the US found the IMF inadequate instrument for the

redistribution of its own huge resources, which was the condition for the rehabilitation of the

international trade. It therefore instituted bilateral aid programmes which served both to

redistribute dollars which enabled other countries to buy US exports and to purchase military,

political, and economic advantages around the world for US. In beginning this aid was untied

there was no restriction that aid money should be spent on US goods because US products were

most in demand so US goods were to be purchased anyway and another reason of this untied is

that even if the money is spent in a third country it would still serve to redistribute the

embarrassingly large US reserves.

Towards the end of 1950s, a number of circumstances contributed to a major shift of emphasis

and mode of operation in aid giving a chance so significant that Cheryl payer called its results

“The New Style of Aid Giving”. The architect of this new style was an American official, C.

Douglas Dillon, the Deputy Secretary of state for Economic Affairs. (Seymour J. Rubin, The

Conscience of the Rich Nation)

After this brief review of the origin and history of IMF it starts to makes sense that how the third

world countries are trapped by the FUND and the strings of foreign agendas and policies

attached to it.

IMF AND Third World Countries

Singh, R.S. (1996) in his book “IMF Policies towards Less Developed Countries LDC’s”

discusses the shifting roles of the IMF as the IMF has emerged as a small cushion to the

developed countries in exchange availability but as a source lending it has become very

important for less developed countries (now they are termed as developing countries). From the

beginning the institution has been particular to the fact that restrictive clauses in the fund

agreement be waved out for its smooth functioning. With the passage of time it has ventured to

address itself to the question of generating reserves multilaterally and in that wake enhanced

quotas of the Fund members, introduced a number of reforms in its policies and methods of

operations although those have only been half- hearted, peripheral, extremely conservative,

narrowly focused and with almost pathological reluctance to break new paths. The Fund has

engaged itself from time to time in borrowings from some countries in order to increase its

ability to extend credits but it has refrained so far from raising funds directly from the capital

market has been engaged increasingly.

Andrew B & Bradford J, 2004 suggests that international capital markets perceive IMF

intervention as a negative development. Regardless of factors driving their decisions, Jensen's

research provides strong evidence that developing countries pay a serious price when they take

advantage of IMF assistance. His research strongly reveals a negative relationship between IMF

funding and foreign direct investment in the country. According to him investors don’t perceive

this funding in a positive way that why reducing net investment level in the country and as a

result hindering economic growth.

The key feature of IMF is that it is made under conditions designed to promote effective

adjustment and ensure that the use of resources by members is temporary and consistent with the

IMF’s objective. Like it is mentioned before that IMF favored and ensured free trade to benefit

US economy in the same way IMF keeps on introducing new policies and reforms to benefit rich

developed countries for example new education reforms and hospital or health reforms in the

name of autonomy.

IMF and Pakistan

IMF funding has been one of the most debated issues from the last few years in terms of its

policies, restrictions and its impact on the economy of countries under IMF programs. A number

of studies have been done in this regard. However the results of these studies are contradicting

making this issue still debatable. Recent studies have produced mixed and sometimes puzzling

results regarding the impact of IMF programs on a nation's balance of payments, current account

balance, foreign direct investment, real GDP, per capita income and long-run economic growth.

Pakistan became a member of IMF in July 1950. Pakistan did not avail any facility from IMF

since 1958 when the country faced problems in balance of payment. This was the start of

relationship with IMF began or as some people refers it as start of living in shades of IMF. Later

in 1965 when the war began in India and Pakistan, Pakistan again had to seek help of IMF in

1965 and 1968.When (OPEC) Organization of petroleum exporting countries increased

petroleum prices in1973, the balance of payments deteriorated and Pakistan once again had to go

to IMF in 1973and1979. The 1980-1983 facility was suspended by IMF for non compliance.

Over the years, the International Monetary Fund (IMF) has emerged as a key influence on

Pakistan’s macroeconomic policies. Since the late 1980s, it has been imposing various conditions

on successive governments increasingly crippled by debt servicing. Surprisingly, one finds that

almost all discussion centers on Pakistan’s failure to meet targets set by the IMF and hardly any

on what ‘success’ might mean for Pakistan’s own development.

Typical IMF conditions comprise contractionary macroeconomic policies (fiscal and monetary),

inflation targeting regimes, financial deregulation and increased openness to international capital

flows, trade liberalization (including reduction of tariff and non-tariff barriers) and privatization

of public-sector enterprises. In short an abandonment of state-led development strategy.

Feldstein, M, (1998) argues in "Income Inequality and Poverty," National Bureau of Economic

Research, that the IMF required excessively large reductions in government deficits and

restrictions on monetary policy. These restrictions resulted in substantial increases in tax rates,

interest rates and increase in current account deficit. Feldstein also argues that Asian economies

have experienced a recession that worsened their economic problems as a result of these policy

changes. Feldstein argues that many of the mandated reforms involve unjustified interference

with national autonomy and have little or no relationship to the goal of resolving the payment

problem. He notes that it would have been better to allow more time for negotiations between

borrowers and lenders before providing IMF loans to a country experiencing payment problems.

One might begin by asking what the aim of macroeconomic policy should be in a developing

country. First and foremost, it should facilitate and never impede long-run development goals.

There is enough evidence now to suggest that it should also be counter-cyclical. In other words,

government spending should expand to fill in for a fall in private spending during a downturn

and contract during an upturn. The IMF’s argument that government spending will crowd out

private investment does not stand up to scrutiny, nor is it backed by empirical evidence. Indeed,

as research by the United Nations Conference on Trade and Development (UNCTAD) and the

United Nations Development Programme has shown, government spending, especially on

infrastructure, health, education, technology and communication, has actually had the effect

of ‘crowding-in’ private investment in a number of countries (UNCTAD 2003, Roy and Weeks

2004). This is especially true in times of crisis when private investors become even more risk

averse.

It is difficult to see how the IMF’s recommended contractionary policies aimed at controlling

inflation and reducing the deficit are consistent with Pakistan’s development goals. Indeed, a

recent study by the Centre for Economic Policy Research (CEPR) finds that in 2008-09, 31 out

of the 41 IMF agreements made with countries in response to the global recession included pro-

cyclical fiscal or monetary policy, with 15 having both. This inclination of the IMF has been

criticized by several other economists including the Nobel Laureate Joseph Stiglitz,

who criticized the IMF’s handling of the East Asian Crisis in the following terms: “All the IMF

did was make East Asia’s recessions deeper, longer, and harder”. Slashing the development

budget in Pakistan so that the deficit could be reduced, even when the Pakistani economy was

battered by the 2010 floods, was consistent with the IMF’s general policy but countered

Pakistan’s own development needs.

The IMF’s insistence that government deficits cause inflation is both theoretically and

empirically disputed in academic circles. The reality is far more complex; inflation comes from

various sources including escalating global commodity prices, currency devaluation, wage-price

spirals and low productivity, issues that would not be solved merely by cutting the deficit. This

does not mean that inflation is not a serious issue in Pakistan. On the contrary, it presents a huge

burden for the common man, but this is more because of stagnant wages due to the absence of

industrialization than due to the deficit. It is worth noting that countries such as Japan, South

Korea and Brazil grew rapidly with higher inflation than Pakistan did. This was made socially

and politically sustainable because real wages were rising too. In Pakistan, another IMF favorite

— slashing subsidy on basic commodities — only serves to enhance the pain inflicted by

inflation rather than leading to any competitiveness.

Ironically, even if we were to make deficit reduction our primary goal, over and above any

developmental goals that we may have, the IMF dictated policies are unlikely to achieve even

that. This is due to the fact that the nature of cuts the IMF advocates stifle prospects for long-

term growth by retarding development. The IMF’s policy towards Public Sector Enterprises

(PSE) is a case in point. The policy is to privatize PSEs and use the proceeds to repay debt and

prevent the PSEs from being a further drain on the exchequer. This view continues to hold

despite the fact that competing countries have created national champions out of their PSEs.

Rather than driving them into the ground, they have used them to develop valuable capabilities

and develop key sectors.

Conclusion

Existence of IMF bailouts creates a moral hazard problem that encourages countries to not solve

their fundamental problems. All nations would benefit if healthy economies "quarantined" sick

economies instead of providing economic assistance. IMF assistance programs increase risk for

healthy economies and do not provide long-term benefits for troubled economies. Most IMF

borrowers have received aid for a decade or more like Pakistan.

A pro-cyclical macroeconomic policy that is not coherently tied to development aims is likely to

make the debt situation worse by retarding economic growth. Pakistani policymakers should do

well to consider different policy options; as long as the IMF continues to prioritize creditors over

the interests of the country as a whole, growth will not only remain low, but the debt burden will

continue to be unsustainable.

References

Andrew B & Bradford J, 2004. "Entry, Expansion, and Intensity in the U.S. Export Boom, 1987-

1992," Center for Economic Studies, U.S. Census Bureau

ABDUHU, S. September 07, 2013. IMF Loan to Have Devastating Impact On Economy.

Tribune express

Bandow, D, March/April 1999. Doug Bandow on the draft, Policy Report.

Feldstein, M, 1998. "Income Inequality and Poverty," National Bureau of Economic Research,

Inc.

Joyce and Gabriel, K, 1945-1954. The Limits of Power: The World And United States Foreign

Policy

Payer, C. (1974). The Debt Trap the Third World IMF. Penguin Books: England

Rubin, S. J. (1966) The Conscience of the Rich Nation

Singh, R.S. (1996). IMF Policies towards Less Developed Countries LDC’s.

Zaidi, S Akbar. (2004). Issues in Pakistan’s Economy. Oxford University Press: London