Pakistan, in its six decades of history, has run into financial problems on quite a few occasions where IMF

loans
have come to assist. Examples of problems that have required assistance include, balance of payments deficit,
currency stabilization, rebuilding foreign exchange reserves, liquidity issues and short term needs.
The newly elected government has announced that Pakistan needs IMFs assistance to overcome
severe problems on the economic front. IMF has also reportedly agreed to a USD 5.3 Billion
package to support Pakistan. While details of the deal are yet to emerge, it is obvious that any funding will come
with conditions. The non-government forces and sources will scream about the harsh conditions that will break
the poor mans back while the pro-government will point to a no choice situation and home grown reforms that
will finally lead us towards self-reliance.
The reality is that no viable alternative exists at present and the government is justified in approaching IMF. As
this issue will be discussed and debated over months to come as details of the deal unfold, we briefly recap
Pakistans history with the IMF.
The History
Pakistan became a member of the IMF in 1950 and the first time the Government of Pakistan opted for a loan from
the IMF was in 1958. This was a Standby Agreement (SBA) amounting to USD 25 Million. However, due to
political disturbance, this loan was cancelled soon after. Pakistan received its second and third SBAs in 1965 and
1968, during Field Marshal Ayub Khans era. Four more SBAs worth USD 330 Million were granted to Pakistan
during General Yahya Khans regime who replaced Ayub Khan. As governments changed hands in Pakistan, in a 20
year span from 1958 to 1979, Pakistan had been granted a total amount of USD 460 Million in IMF Packages. A
USD 1.27 Billion Extended Fund Facility (EFF) followed in November 1980 which was three times the combined
value of the seven SBAs that Pakistan had collected previously.
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During 1988-91, though IMF continued to financially assist Pakistan, its number of conditions attached to the
Structural Adjustment Loan programs increased from 27 to 56. These included sales tax on 44 items of basic and
daily use, withdrawal of subsidies on public services and starting of privatization. Since 1984 to 2010, Pakistan has
received five Standby Agreements, three Extended Credit Facilities, two Extended Fund Facilities and one
Structural Adjustment Facility Commitment.
Standby Agreement 2008
In November 2008, Pakistan secured a 23 month SBA worth Special Drawing Rights SDR 5.1685 Billion (USD
7.61 Billion). In August, 2009, the SBA was augmented to an amount equivalent to SDR 7.2359 Billion (USD 10.66
Billion) in order to help Pakistan address its balance of payment needs. To ensure the success of the loan program,
the IMF, in consultation with the government, designed performance criteria and structural benchmarks. The
government, however, failed to implement some of the important conditions. As a consequence, following the
completion of the fourth review in May 2010, IMF suspended the program. Disbursements under the arrangement
had reached SDR 4.936 Billion until then. The remaining two tranches worth SDR 2.296 Billion (USD 4.06 Billion)
were withheld. At a later stage, the IMF extended the program in December 2010 until September 2011 to
complete the reform of the General Sales Tax, implement measures to correct the course of fiscal policy, and amend
the legislative framework for the financial sector, as per the IMF. The criteria were not met until and the program
was suspended.
At a time when the world was enduring a severe financial crisis and austerity measures were in vogue to bring
fiscal discipline, Pakistan was unfortunately living in another world. The suspension of the program had serious
implications such as:
Fiscal Discipline
The fiscal discipline deteriorated even further and it was no surprise that we ended up with an 8.8% deficit in
the last fiscal year.
Foreign investors who prefer fiscal discipline received a negative impression of the economy and a complacent
attitude of the government
Currency Depreciation
The foreign currency reserves were strained and the rupee started depreciating. The rupee depreciated from an
average of PKR 85.5 to USD 1 in FY 2010-11 to an average of PKR 89.2 to USD 1 in FY 2011-12. This has
continued the downward spiral, hitting the century mark recently.
This continuous fall in currency has been a deterrent not only for the foreign investors but more for the local
investors. As a result, most local investors preferred to hold their savings in foreign currency instead of making local
investments.
Credit Rating
Pakistans credit rating also suffered as Moodys Investors Service cut the countrys international credit rating from
B3 to Caa1 in 2012.
CMA (now S&P Capital IQ), released its Global Sovereign Credit Risk Report in 2011 which ranked Pakistan
5th in a global Cumulative Probability of Default rank in Q2 of 2011 and 3rd in Q1 of 2012.
IMF Loan 2013
At present Pakistan is facing a severe Balance of Payment crisis with heavy payments falling due in the near term.
Accordingly, the government has made a request for a loan to the IMF.
Pakistan has to avoid committing default on foreign loans, said Mr. Ishaq Dar, Finance Minister of Pakistan.
Thats the only reason we are going to IMF with a homegrown reform program.
The IMF has agreed to lend Pakistan an amount of USD 5.3 Billion (originally asked for USD 7.2 Billion)
under the Extended Fund Facility (EFF) over the next three years to boost Pakistans FX reserves and to help the
economy. An IMF loan will likely involve Pakistan in a long process of committing to reforms, broaden its narrow
tax base and slash subsidies in particular. The 3 year loan will be available with a 3 percent floating interest rate and
will be considered by the IMF board in in early September.
The request for a USD 3 Billion loan in the first year has been put forward by the Finance Minister, Mr. Ishaq
Dar, so that Pakistan can comfortably pay off the outstanding dues that will mature this year. The urgency of the
loan also demonstrates the precarious situation of FX reserves especially when the State Bank of Pakistan has almost
USD 6.25 Billion left in foreign reserves, an amount that cannot even cover six weeks of imports. It was also
proposed by Mr. Ishaq Dar that the IMF release the tranches on quarterly basis from the second year.
Is the Loan Enough?
While IMF has agreed to a loan of USD 5.3 Billion, the question remains whether the amount would be enough or
not?
The Asian Development Bank has estimated that Pakistan will need an amount in the range of USD 6 Billion to
USD 9 Billion to meet its obligations.
Loan Conditions
It is natural that IMFs EFF program will come with its conditions, but from a rational point of view, Pakistan not
have another option to turn to. The government will have to reduce subsidies, especially to the power sector, which
will result in higher bills. Then the axe would fall on the development expenditure.
The real test for the government would be to expand the tax base by bringing agriculture, services and evaders
into the tax net. Otherwise, the salaried class and the existing tax payers will continue to suffer. With little room to
maneuver the budget, real economic success will depend on the attractiveness of our business environment in the
eyes of both foreign and local investors. This is where the government needs to focus the most because it is the
private investments which will guarantee our long term economic progress. The environment will also have to be
made conducive to attract donor funding in sectors such as education, health and social development.
At present, Pakistan is in a similar situation as Turkey was in 2001 (Turkeys situation was actually even
worse). It also had to resort to the IMF to get out of the crisis. However, Turkeys prudent policies and
determination have transformed the country into a stable, dynamic and well-functioning economy. In May 2013,
Turkey completely paid off its debt to the IMF. Can Pakistan follow suit?