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Introduction to IMF Objectives of report Definition of IMF Objectives of IMF System data dissemination History of IMF Lending Surveillance Success and failures of IMF Criticisms of IMF Economy of Pakistan History of economy of Pakistan The todays economy of Pakistan IMF and economy of Pakistan IMF agreements with Pakistan IMF conditions for Pakistan Why Pakistan need IMF IMF agreements and its implementation IMF conditions effects on economy Negative assessment by the IMF Pakistan does not need IMF Solutions of not getting loans from IMF Conclusion Article no to IMF
INTRODUCTION TO IMF
After World War II, economists and politicians created the International Monetary Fund (IMF) to help keep the international financial system stable. From the beginning, the Funds specific roles were to promote balanced growth of international trade, provide funding to countries in economic problems, and protect income levels which is necessary for people to purchase essential goods and services. IMF provides funds to the member country when it faces balance of payments problems that cause severe macroeconomic Under a stand-by arrangement, an IMF member country is provided a specified amount during a given period, usually in trenches, subject to the borrowers compliance with performance criteria and other conditions embodied in the agreement. The International Monetary Fund IMF adjustment programs are of two types: a) short-term, in which the macroeconomic disequilibrium is thought to be reversible in one or two years, and b) medium-term in which the macroeconomic disequilibrium is caused a heavy external debt burden. The Standby Arrangement (SBA) is an example of the IMF short-term program. The priority course of action in SBA is expenditure reduction. IMF medium-term programs aim to correct serious external payments disequilibrium due to structural impediments to growth and debt overhang. The program involves a strategy that keeps expenditures in line with output and increases growth.
Objectives of report
The objective of making report on IMF is 1. To know about IMF 2. Conditions on giving loans to PAKISTAN. 3. Study past and current agreements of IMF with Pakistan. 4. To know why Pakistan need loans from IMF. 5. Its impact on Pakistan economy
Official Logo for the IMF Adopted: July 22, 1944 Formation Entered into force: December 27, 1945 International Economic Type Organization Washington, D.C. Headquarters United States 185 Nations (Founding); Membership 187 Nations (To Date) English, French, and Official languages Spanish Managing Director Christine Lagarde Main organ Board of Governors Website http://www.imf.org
Objectives of IMF
The objectives are as Follows:
To promote co-operation among economies of world. To strengthen the economies of member countries by making fund's resources available to them. To promote exchange stability and to facilitate the expansion and balanced growth of International trade.
To lesson the chances of disequilibrium in the international BOP of member countries. To reduce the poverty in member countries and to promote high employment by facilitating sustainable economic growth.
HEADQUARTERS:
Its headquarters is in Washington, D.C.
The IMF established a system and standard to guide members in the dissemination to the public of their economic and financial data. Currently there are two such systems: GDDS and its superset SDDS, for those member countries having or seeking access to international capital markets. The primary objective of the GDDS is to encourage IMF member countries to build a framework to improve data quality and increase statistical capacity building. This will involve the preparation of meta data describing current statistical collection practices and setting improvement plans. Upon building a framework, a country can evaluate statistical needs, set priorities in improving the timeliness, transparency, reliability and accessibility of financial and economic data.
HISTORY OF IMF:
The IMF was conceived in July 1944 originally with 45 members and came into existence in December 1945 when 29 countries signed the agreement, with a goal to stabilize exchange rates and assist the reconstruction of the worlds international payment system. Countries contributed to a pool which could be borrowed from, on a temporary basis, by countries with payment imbalances. The IMF was important when it was first
created because it helped the world stabilize the economic system. The IMF works to improve the economies of its member countries.
Lending
When a country requests a loan, the IMF will give the country the money needed to rebuild or stabilize its currency, re-establish economic growth and continue buying imports. Several of the types of loans offered include:
These are low-interest loans for low-income countries to reduce poverty and improve growth for these countries.
These are loans to low-income countries that provide lending for negative economic events that are outside the control of the government. These could include commodity price changes, natural disasters and wars that can interrupt trade.
These are used to help countries with short-term balance of payment issues.
This is used to assist countries with long-term balance of payment issues that require economic reforms.
This is provided to meet short-term financing on a large scale, like the loss of investor confidence during the Asian Financial Crisis that caused enormous outflows of money and led to massive IMF financing.
These are designed to provide assistance to countries that have had a natural disaster or are emerging from war.
Jordan
Jordan had been impacted by its wars with Israel, civil war and a major economic recession. In 1989 the country had a 30-35% unemployment rate and was struggling with its inability to pay its loans. The country agreed to a series of five-year reforms that began with the IMF. The Gulf war and the return of 230,000 Jordanians because of Iraq's invasion of Kuwait put strain on the government, as unemployment continued to increase. In the period from
1993 to 1999, the IMF extended to Jordan three extended fund facility loans. As a result the government undertook massive reforms of privatization, taxes, foreign investment and easier trade policies. By 2000 the country was admitted to the World Trade Organization (WTO), and one year later signed a free trade accord with the United States. Jordan was also able to bring down its overall debt payment and restructure it at a manageable level. Jordan is an example of how the IMF can foster strong, stable economies that are productive members of the global economy.
CRITICISMS OF IMF:
IMF only lends money when if countries agree to 1. sell their resources cheaply 2. cut public spending A criticism says this serves to increase problems of poverty in poor member countries.
Economy of Pakistan
as a model of economy development around the world, and their was much praise for its economic progress.
the respective countries to meet their short term needs by providing various types of loans which IMF calls as its lending facility. In the last few months, there was a lot of speculation and discussion on the government decision to call for IMF loan to meet its liquidity and financial problems. In spite of effective policy actions taken by State Bank of Pakistan, issues such as sharp depreciation of exchange rate, depletion of foreign exchange reserves of $5 billion till November 2008, inflation rate of more than 25%, and increase in import bill by 35.2% created immense challenges for the government and State Bank of Pakistan. Finally, the IMF loan of $7.6 billion was approved to help Pakistan come out of the liquidity and financial crisis albeit with certain IMF conditions. The IMF facility is still an important topic of discussion until the real gains from IMF loans are realized. To determine the effects of IMF loans on Pakistani economy, it is important to analyze the history of IMF loans to Pakistan briefly. Since 1988 when Pakistan became member of IMF, almost eleven loan arrangements (including the recent IMF loan of $7.6 billion in 2008) have taken place under various IMF facilities/programs. Almost six loan arrangements were made during the regime of Benazir Bhutto including standby arrangement, Structural Adjustment Programs (SAP), Poverty reduction and Growth Facility (PRGF) and Extended SAP. Two IMF loan arrangements were made during Nawaz Sharif regime and two standby agreement and PRGF under Musharraf regime to stabilize the economy. It is important to note that in the tenure of last two decades, on average almost 44% of the
total lending amount has been drawn from the original 100% agreed upon lending amount because of the failure of the government to act upon the strict measures determined by IMF. For the first time in the year 2000, this tradition was broken in Musharraf regime when Musharrafs government successfully implemented the conditions proposed by IMF and successfully drew the whole lending amount of $1.3 billion. It is also very interesting to note that only two loan arrangements were made during the military regime whereas nine IMF agreements (including the recent IMF loan) were made during the civilian regime. The conditions posed by IMF mostly include the close monitoring, reduction of government spending, revision in tax collection policies, change in policy/discount rate etc. to make sure that funds granted to the borrower country are utilized in optimal manner. The IMF loans greatly impact the economic indicators and bring change in the regulatory framework which has both positive and negative impacts on the country. Pakistan saw a decline in GDP growth rate and other economic indicators right after infusion of IMF funds in the economy except in the second last lending arrangement in Musharrafs regime when full amount of loan was drawn from IMF. The economic indicators after IMF loans in the last two decades followed a typical cycle. Usually the trend after IMF loans show immediate decline in GDP growth rate, increased tax revenues to GDP ratio, increased CPI, increased debt on the country and then restoration of the conditions back to their previous states because of the cancellation of loans in the later years. The cancellation of IMF loan agreements in the previous
regimes along with the initial IMF loan effects created quite negative impacts on the economy as a whole which shows that there were very few times when IMF loans were fully optimized. The current IMF loan is expected to have both positive and negative impacts. The immediate benefits include quick influx of liquidity, improvement in credit rating by reducing the countrys default risk, enhancement of foreign exchange reserves, stabilization of rupee (which faced 25% depreciation against U.S. dollar till November), increased investors confidence in both money and capital markets and increased financial assistance from the friends of Pakistan. However the negative impacts associated with the increase in policy rate include increased costs for the banks, increase in unemployment (because many banks and organizations will go for restructuring and downsizing to reduce their operating costs) and increase in poverty rate. Owing to the great financial crisis faced by the many economies, Pakistan is pursuing contraction monetary policy which is quite different from the policies followed by the other economies. The regulators perspective is quite valid in arguing that our conditions are different from the rest of the economies. For conformance to IMF conditions, the government is taking fiscal measures such as increase in general sales tax by 1%, increase in efforts in tax collection, removal of subsidies on domestic petroleum products, higher electricity tariffs and effective measures to solve the issue of circular debt. the cyclical trend on the macroeconomic indicators after the IMF loans and overall
condition of the economy can be improved with the effective fiscal control and effective policy measures. The negative effects were not seen in the last IMF loan taken in the year 2000 (in Musharraf regime) and improvement in growth indicators were imminent to make the conclusion that the cycle and the negative impacts can be the result of improper implementation of measures prescribed by IMF. The expected doubts about Pakistans growth can be removed if government remains committed to proper policy measures and restoration of market mechanisms to make sure that IMF loans are effectively utilized for the betterment of economy.
1. Industrial and agriculture tax has to be increased. 2. Reducing foreign exchange market intervention by the State Bank of Pakistan 3. Focus on quarterly quantitative targets for: government borrowing from the State Bank of Pakistan 4. Reduce the budget deficit. 5. Contracting or guaranteeing of non concessional loans by the public sector. 6. Phasing out electricity subsidies. 7. Phasing out fuel subsidies. 8. Interest rate has been increased to tighten monetary policy. 9. Government expenditure must be reduced. 10. Reduce 1/3 of Military spendindings. 11. Reduced 50% of pensions
12. The GST was to be implemented by retail outlets with turnovers in excess of PR s 5million 13. The budget deficit was to be reduced from 6.4 percent of GDP to 5.2 percent of GDP 14. Petroleum prices were to be adjusted in line with international market changes.
confidence through a reduction of economic and monetary policies, while simultaneously preserving social stability and enough support for the poor, stated the press release issued by the IMF. The loan trenches are subject to quarterly reviews by the IMF which has set forth certain conditions. Nevertheless, most of the conditions are already part of the governments economic agenda announced during the budget in June this year. The Fund stipulates bringing Pakistans financial deficit down from 7.4 percent of GDP to 4.5 percent and 3.3 percent in 2010/11 by phasing out energy and electricity subsidies and strengthening revenue mobilization through tax policy and administration measures. These measures, if implemented successfully, will help to meet the target to some extent, particularly the phasing out of subsidies. In the short run, reforms in tax administration and, particularly the one percent increase\in the general sales tax from 15 to 16 percent implemented in the 20011 budget will help raise tax-to-GDP ratio. In the medium-term, the government will have to take a number of measures such as eliminating exemptions in the general sales tax and the income tax, and introducing a commercial agriculture tax. To provide support to the poor, spending on the social safety net will be increased from 0.6 to 0.9 percent of GDP in 2009 with the help of IMF.
1. Increase unemployment:
IMF worsened the unemployment situation in the economy, which was 1.7% of the total labor force in 1970 and has worsened to 7.8% of the total labor force in 2011.
3. External debt:
External debt and its continued dependence on financial aid. Foreign loans and grants provide approximately 25 percent of government revenue, and debt service obligations total nearly 50 percent of government expenditure, which means that as much as half of all government expenditures are used to repay loans.
4. Increase in inflation:
The policy variables, money supply and the exchange rate and other contributors to increase rate of inflation.
8.financial reforms:
The sequencing of financial reforms has been critical in the sense that these reforms were undertaken before the reduction in the budget deficit. Financial reforms increased the competitiveness of the government in generating funds
from the public, which increase the funds rates. Increases in the interest rate on the funds bills and other government securities caused the debt servicing of the government to accelerate. As the government faced the conditionality of reducing public expenditure an increase in debt servicing put pressure on the government to reduce development expenditure, which resulted in a rapid increase of poverty incidence.
9. Prices high:
Make necessary items expansive.
PAKISTAN doesnt need the International Monetary Fund; neither its loans nor its advice, nor its supervision, nor its intrusive monitoring.
At the moment, Pakistans foreign exchange reserves, which include previously lent IMF money, are sufficient, and while some international payments need to be made in the near future, adding more loans is certainly not the best way forward for an already heavily indebted country. What Pakistans economy needs is some clear thinking about substantial structural reforms based on the consensus of political actors. For this, one doesnt need the IMF. The need for the IMF arises when a country is nearing default, is in a crisis particularly with regard to its balance of payments, when it may default on international commitments, or as more recently, may have suffered on account of a financial crisis stemming from debts and loans, as experienced by some European countries, such as Greece, Spain
and Iceland. Pakistans economy is nowhere near the crisis or default state in these countries, and, despite the false cries of crisis is in far better shape. Pakistans economy has numerous problems, but it is not going to collapse in the near or even distant future. Pakistan does not need the IMF to tell it what needs to be done. The issues and problems which affect the economy, are quite uncomplicated and commonplace. Issues related to the absence of revenue generation on account of an inequitable and inefficient taxation regime, which has been responsible for a high fiscal deficit and continuous and increasing reductions in public-sector development expenditure, is one of those central and perennial economic problems. Other issues related to the high and now chronic inflation over the last three years, are also not difficult to identify. Investment continues to be low and job creation is also lagging, affecting poverty and unemployment. Some problems which afflict Pakistans economy are not related to economic fundamentals, and are due to political choices and arrangements made by the previous military regime in the way it took decisions related to the war on terror, the consequences of which this government and the people of Pakistan continue to face. No measure of right-structuring of Pakistans
economy is going to result in a quick and certain increase in the flow of investment, whether local or foreign. The problems of militancy or extremism, which have resulted in numerous and considerable economic problems, are not in the least related to bad economic management. It is not the IMF which can help Pakistan or its government resolve such issues which have consequences for the economy. There is a long to-do list, which the Pakistan government and its finance ministry need to follow through, one by one, preferably through political consensus. One doesnt require the IMF to advise the Pakistan government that it needs to raise taxes on untaxed incomes to address numerous shortfalls which affect the economy. The finance minister is aware of this, and many other economists have also been writing on this issue. In fact, it is the IMF and numerous economists who have been giving the wrong sort of advice in supposedly helping Pakistan meet its revenue target. The IMF-supported Reformed General Sales Tax is an unfair and inequitable tax, as is the flood surcharge and other measures forced through by a presidential ordinance. Most of these measures penalise those who already pay taxes, not those who are out of the tax net. In a democracy, good technocratic advice depends on how politics plays itself out, and economic decisions will always be based on political choices and their consequences. One doesnt need the IMF to solve
2:Demonetization of Currency.
One of the measures is to demonetize currency of higher denominations. Such a measure is usually adopted when there is abundance of black money in the country. 3: CONTROL INFALTION Control inflation in county either it is cost pull inflation or demand pull inflation. 4: Reduction in Unnecessary Expenditure . The government should reduce unnecessary expenditure on non-development activities. This will also put a check on private expenditure which is dependent upon government demand for goods and services. But it is not easy to cut government expenditure. Though economy measures are always welcome but it becomes
difficult to distinguish between essential and nonessential expenditure. Therefore, this measure should be supplemented by taxation. 5:BUILD UP FOREIGN EXCHANGE Foreign exchange is very important for any country to increase capital formation. so government should take some steps to improve foreign exchange policies. 6: PROVIDE SUBSIDIES A subsidy (also known as a subvention) is a assistance paid to a business or economic sector. Most subsidies are made by the government to producers or distributors in an industry to prevent the decline of that industry (e.g., as a result of continuous unprofitable operations) or an increase in the prices of its products or simply to encourage it to hire more labor (as in the case of a wage subsidy). Subsidies should be provided to every sector for economic development. Subsidies , should be provided to different consumer goods sectors to increase production 7:PRODUCTION PRODUCITIVITY MANUFACTURING AND AGRICULTURAE Increase the production of essential consumer goods like food, clothing, kerosene oil, sugar, vegetable oils, etc. (ii) If there is need, raw materials for such products may be imported on preferential Basis to increase the production of essential commodities. Some steps should be taking by the government to develop agricultural sector.
8:Price Control .
Price control and rationing is another measure of direct control to check inflation. Price control means fixing an upper limit for the prices of essential consumer goods. They are the maximum prices fixed by law and anybody charging more than these prices is punished by law. But it is difficult to administer price control.
9: cash transfer
Cash transfers are direct transfer payments of money to eligible people. Cash transfers are usually provided by the state and federal government. Cash transfer programmers in developing countries is constrained by three factors: financial resources, institutional capacity and ideology. so government should take some steps to improve this factors. So that can cash should be properly transfer to eligible people.
12: BANKING GROWTH Bank play a very important role for ant country development because it gives loans to help increase business, trade, and industrial activity in a particular country or area, it is very important to have a good banking system in country.
13: TAXATION
To cut personal consumption expenditure, the rates of personal, corporate and commodity taxes should be raised and even new taxes should be levied, but the rates of taxes should not be so high as to discourage saving, investment and production. Rather, the tax system should provide larger incentives to those who save, invest and produce more. Further, to bring more revenue into the tax-net, the government should penalize the tax evaders by imposing heavy fines. To increase the supply of goods within the country, the government should reduce import duties and increase export duties.
Conclusion
*It is conclude that Pakistan is one of the best member and
having long relations with IMF.IMF play an important rule in the economy of Pakistan. IMF provides $7.6 billion loan to Pakistan under a certain programs and seem that it help the economy of Pakistan, but on other hand impose a harsh condition which spoil the economy of a country . IMF as an institution which provides emergency credits to those countries which needs funds and they assures the IMF that they can repay the loan., effect of poor economic policies and financial crisis in a member country. In from
return they inflict or impose painful policies, which extract the deficit budget, through spending cuts or increased revenue (taxation), a rise in interest rates to reduce inflation, and variation of the exchange rate etc. *Pakistan is the country of many natural resources in it. We should be self sufficient, we should rely on ourselves. Sincerity is the key to success so we should be sincere with our country and work hard for its development. if we have financial crises, we should not beg for aid from IMF, but we should handle the problem by over selves. We should pay more taxes and we should try to remove corruption from every department. The government should make such opportunities that foreign investment is attrac towards us. By applying these things we dont need to depend on IMF.
Article
The No to the IMF
Dr Ashfaque H Khan Pakistans current IMF programme, which has remained suspended since May 2010 owing to Pakistans failure to achieve key economic and structural reform targets, will be expiring on September 30, 2011. Pakistan has decided not to seek a new IMF programme because it believes that its external balance of payments is in a comfortable position and likely to remain so at least during the remaining period
of the current fiscal year. The decision for not seeking a new IMF programme is political in nature. The Senate election will be taking place in March 2012 and the government is not inclined to take any difficult decisions that may antagonise the provincial assembly members of the ruling party as well as parties in alliance.Also the government appears to be planning for an early general election, perhaps after the Senate election, and as such does not want to take unpleasant decisions that would antagonise general voters. The reason why the IMF programme has remained suspended since May 2010 is that the government failed to take adequate measures to broaden its tax base and address power sector and circular debt issues. Had Pakistan requested a new IMF programme, these outstanding issues would have been part of prior action. However, as it was disinclined to pursue a disciplined fiscal policy, the government did not want to risk seeking a new programme in the election years. Politics has overtaken economics. I consider it my moral obligation to apprise the people of Pakistan about the consequences of such a decision. Firstly, the global economic environment is becoming inhospitable. We are living in the midst of an unprecedented global financial and economic crisis. Never before in modern history have the policy-makers had to face as many risks as they are on the horizon today. In such difficult times ahead, Pakistan would need the support of an
institution like the IMF more than ever. Secondly, without an IMF programme, the Pakistani rupee may come under severe strain. It has already lost Rs.2.12 per dollar since June 2011 until September 17. The unscrupulous element is already active in the market and driving the exchange rate artificially low. The economic fundamental relevant to the exchange rate stability (export, import, remittances, inflation and current account) has not changed, and yet the rupee has been under pressure since the beginning of the new fiscal year. These unscrupulous elements may play havoc with the exchange rate. The implications of the exchange rate depreciation are widespread. Without borrowing a single dollar, Pakistan has already added over Rs100 billion in public debt since June 2011. Further depreciation would add even more debt. Interest payment will rise thus eroding the governments fiscal space. Depreciation of the rupee will make imported oil and fuel for electricity generation more expensive. In order to please the voters, the government is not likely to pass on the high cost of oil and electricity. As such, it will have serious budgetary implications and will further aggravate circular debt issues. Exchange rate depreciation is inflationary by definition, thereby fuelling inflation and hurting the common voters the most. Thirdly, the budget deficit has averaged over 6.3 percent of the GDP during the last four years in the midst of the IMF programmer. Without such a programmer, the political leadership will maximize their utility (enticing voters) subject to no budget constraint. The government will not
take any measures to increase tax revenue, but at the same time will freely dole out resources to entice voters, resulting in further deterioration of fiscal situation. Financing of deficit in the midst of depleted external flows will force the government to rely heavily on domestic sources, and that too on the banking system and the State Bank of Pakistan (SBP). There would be no IMF pressure to desist from borrowing from the SBP. The SBP will be forced to keep the discount rate at an elevated level. The private sector will be crowded out as the bulk of the credit would go to the government to finance fiscal deficit. Higher interest rates will discourage private investment, causing the deceleration of the economic growth and giving rise to unemployment and poverty. Fourthly, the emerging external balance of payments situation is disturbing. Pakistans exports benefited immensely on account of an unprecedented surge in cotton prices. That benefit is rapidly fading. Depressed economic activity in the industrialized countries (our major export market) is likely to weaken the demand for our exports. Domestic energy constraints and deteriorating law and order situation in the country will serve as major headwinds for exports. Pakistans capital account may deteriorate as well. Sans an IMF programme , the lending from the development financial institutions is likely to decline drastically. Money from the Kerry-Lugar is also uncertain and foreign investment has nosedived. There is a danger that Pakistan
may witness a financing gap in balance of payments, which may precipitate a serious crisis on the external side. Not seeking a new IMF programme means fiscal indiscipline will be the order of the day. The government has avoided seeking a new programme to provide relief to the voters, but the outcome of the decision is likely to hurt these very voters the most. The economic team has not done their job honestly. They should have explained the consequences of such decisions to the political leadership. They know that they cannot say no to the political leadership bent upon doling out resources to entice voters. They have also lost the shield of the IMF. In doing so, they have become partners to the economic destruction of the country. This nation of 175 million people will never forgive the economic team for the pain and miseries that they have brought on them. The writer is principal and dean at NUST Business School, Islamabad.