TERM REPORTON

INTERNATIONAL MONETARY FUND

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Submitted to: Submitted on: 17th March 2009

Acknowledgement

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About the IMF

The IMF is an international organization of 185 member countries. It was established to promote international monetary cooperation, exchange stability, and orderly exchange arrangements; to foster economic growth and high levels of employment; and to provide temporary financial assistance to countries to help ease balance of payments adjustment.

Since the IMF was established its purposes have remained unchanged but its operations—which involve surveillance, financial assistance, and technical assistance—have developed to meet the changing needs of its member countries in an evolving world economy.

Why was it created?

The IMF was conceived in July 1944, when representatives of 45 governments meeting in the town of Bretton Woods, New Hampshire, in the northeastern United States, agreed on a framework for international economic cooperation. They believed that such a framework was necessary to avoid a repetition of the disastrous economic policies that had contributed to the Great Depression of the 1930s.

During that decade, attempts by countries to shore up their failing economies—by limiting imports, devaluing their currencies to compete against each other for export markets, and curtailing their citizens' freedom to buy goods abroad and to hold foreign exchange—proved to be self-defeating. World trade declined sharply, and employment and living standards plummeted in many countries.

Seeking to restore order to international monetary relations, the IMF's founders charged the new institution with overseeing the international monetary system to ensure exchange rate stability and encouraging member countries to eliminate exchange restrictions that hindered trade. The IMF came into existence in December 1945, when its first 29 member countries signed its Articles of Agreement. Since then, the IMF has adapted itself as often as needed to keep up with the expansion of its membership—184 countries as of June 2006—and changes in the world economy.

What does the International Monetary Fund do?

The IMF is the world's central organization for international monetary cooperation. It is an organization in which almost all countries in the world work together to promote the common good.

The IMF's primary purpose is to ensure the stability of the international monetary system—the system of exchange rates and international payments that enables countries (and their citizens) to buy goods and services from each other. This is essential for sustainable economic growth and rising living standards.

To maintain stability and prevent crises in the international monetary system, the IMF reviews national, regional, and global economic and financial developments. It provides advice to its 184 member countries, encouraging them to adopt policies that foster

economic stability, reduce their vulnerability to economic and financial crises, and raise living standards, and serves as a forum where they can discuss the national, regional, and global consequences of their policies.

The IMF also makes financing temporarily available to member countries to help them address balance of payments problems—that is, when they find themselves short of foreign exchange because their payments to other countries exceed their foreign exchange earnings.

And it provides technical assistance and training to help countries build the expertise and institutions they need for economic stability and growth.Who runs the IMF?

The IMF is governed by, and is accountable to, its member countries through its Board of Governors. There is one Governor from each member country, typically the finance minister or central bank governor. The Governors usually meet once a year, in September or October, at the Annual Meetings of the IMF and the World Bank.

Key policy issues related to the international monetary system are considered twice a year by a committee of Governors called the International Monetary and Financial Committee, or the IMFC. A joint committee of the Boards of Governors of the IMF and the World Bank—the Development Committee—advises and reports to the Governors on development policy and other matters of concern to developing countries.

The day-to-day work of the IMF is carried out by the Executive Board, which receives its powers from the Board of Governors, and the IMF's internationally recruited staff. The Executive Board selects the IMF's Managing Director, who is appointed for a renewable five-year term. The Managing Director reports to the Board and serves as its chair and the chief of the IMF's staff and is assisted by a First Deputy Managing Director and two other Deputy Managing Directors.

Where does the IMF get its money?

The IMF's resources come mainly from the quotas that countries deposit when they join the IMF. Quotas broadly reflect the size of each member's economy: the larger a country's economy in terms of output, and the larger and more variable its trade, the larger its quota tends to be. For example, the United States, the world's largest economy, has the largest quota in the IMF. Quotas are reviewed periodically and can be increased when deemed necessary by the Board of Governors.

Countries deposit 25 percent of their quota subscriptions in Special Drawing Rights or major currencies, such as U.S. dollars or Japanese yen. The IMF can call on the remainder, payable in the member's own currency, to be made available for lending as needed.

Quotas, together with the equal number of basic votes each member has, determine countries' voting power. Quotas also help to determine the amount of financing countries can borrow from the IMF, and their share in SDR allocations.

Most IMF loans are financed out of members' quotas. The exceptions are loans under the Poverty Reduction and Growth Facility, which are paid out of trust funds administered by the IMF and financed by contributions from the IMF itself and a broad spectrum of its member countries.

If necessary, the IMF may borrow from a number of its financially strongest member countries to supplement the resources available from its quotas. It has done so on several occasions when borrowing countries needed large amounts of financing and a failure to help them might have put the international monetary system at risk.

Like other financial institutions, the IMF also earns income from the interest charges and fees levied on its loans. It uses this income to meet funding costs, pay for administrative expenses, and maintain precautionary balances. In the early 2000s, there was a decline in the demand for the IMF's nonconcessional loans, reflecting benign global economic and financial conditions as well as policies in many emerging market countries that had reduced their vulnerability to crises. To diversify its income sources, the IMF established an investment account in 2005. The funds in the account are invested in eligible marketable obligations denominated in SDRs or in the securities of members whose currencies are included in the SDR basket. The Fund also began to explore other options for reducing its dependence on lending for its income.

The IMF's main business

Macroeconomic and financial sector policies

In its oversight of member countries, the IMF focuses on the following: macroeconomic policies relating to the government's budget, the management of

money and credit, and the exchange rate; macroeconomic performance—government and consumer spending, business

investment, exports and imports, output (GDP), employment, and inflation; balance of payments—that is, the balance of a country's transactions with the rest

of the world; financial sector policies, including the regulation and supervision of banks and

other financial institutions; and Structural policies that affect macroeconomic performance, such as those

governing labor markets, the energy sector, and trade.

The IMF advises members on how they might improve their policies in these areas so as to achieve higher rates of employment, lower inflation, and sustainable economic growth.How does the IMF help poor countries?

Most of the IMF's loans to low-income countries are made on concessional terms, under the Poverty Reduction and Growth Facility. They are intended to ease the pain of the adjustments these countries need to make to bring their spending into line with their income and to promote reforms that foster stronger, sustainable growth and poverty reduction. An IMF loan also encourages other lenders and donors to provide additional financing, by signaling that a country's policies are appropriate.

The IMF is not a development institution. It does not—and, under its Articles of Agreement, it cannot—provide loans to help poor countries build their physical infrastructure, diversify their export or other sectors, or develop better education and health care systems. This is the job of the World Bank and the regional development banks.

Some low-income countries neither want nor need financial assistance from the IMF, but they do want to be able to borrow on affordable terms in international capital markets or from other lenders. The IMF's endorsement of their policies can make this easier. Under a mechanism introduced by the IMF in 2005—the Policy Support Instrument—countries can request that the IMF regularly and frequently review their economic programs to ensure that they are on track. The success of a country's program is assessed against the goals set forth in the country's poverty reduction strategy, and the IMF's assessment can be made public if the country wishes.

The IMF also participates in debt relief efforts for poor countries that are unable to reduce their debt to a sustainable level even after benefiting from aid, concessional loans, and the pursuit of sound policies. (A country's debt is considered sustainable if the country can easily pay the interest due using export earnings, aid, and capital inflows, without sacrificing needed imports.)

In 1996, the IMF and the World Bank unveiled the Heavily Indebted Poor Countries (HIPC) Initiative. The initiative was enhanced in 1999 to provide broader, deeper, and faster debt relief, to free up resources for investment in infrastructure and spending on social programs that contribute to poverty reduction. Part of the IMF's job is to help ensure that the resources provided by debt reduction are not wasted: debt reduction alone, without the right policies, might bring no benefit in terms of poverty reduction.

In 2005, the finance ministers and heads of government of the G-8 countries (Canada, France, Germany, Italy, Japan, Russia, the United Kingdom, and the United States) launched the Multilateral Debt Relief Initiative (MDRI), which called for the cancellation of the debts owed to the IMF, the International Development Association of the World Bank Group, and the African Development Fund by all HIPC countries that qualify for debt reduction under the HIPC Initiative. The IMF implemented the MDRI in January 2006 by canceling the debt owed to it by 19 countries. Most of the cost is being borne by the IMF itself, with additional funds coming from rich member countries to ensure that the IMF's lending capacity is not compromised.To ensure that developing countries reap full benefit from the loans and debt relief they receive, in 1999 the IMF and the World Bank introduced a process known as the Poverty

Reduction Strategy Paper (PRSP) process. To qualify for loans under the Poverty Reduction and Growth Facility and debt relief under the HIPC Initiative, countries must draw up their own strategies for reducing poverty, with input from civil society. The IMF and the World Bank provide an assessment of the strategies, but the latter are "owned" by the countries that formulate them.

Economic growth—rising average income—is necessary for the sustained reduction of poverty, and a considerable body of research has shown that international trade stimulates growth. Developing countries face many obstacles, however, to expanding their trade with other countries. Access to the industrial countries' markets is restricted by barriers such as tariffs and quotas, and developing countries themselves have barriers that prevent them from trading with each other. The IMF and the World Bank have been urging their members for years to eliminate barriers to trade.

Even if their access to other markets is increased, however, many developing countries may not be able to benefit from trade opportunities. Their export sectors may be weak because of policies that discourage investment or trade, and they may lack appropriate institutions (like customs administration) and infrastructure (for example, electricity to run plants, and roads and ports to get products to markets).

In 2005, the IMF and the World Bank introduced the concept of Aid for Trade for the least developed countries. Aid for Trade includes analysis, policy advice, and financial support. The IMF provides advice to countries on such issues as the modernization of customs administration, tariff reform, and the improvement of tax collection to compensate for the loss of tariff revenues that may follow trade liberalization. The IMF also participates in the Integrated Framework for Trade-Related Technical Assistance, a multi-agency, multi-donor program that helps the least developed countries by identifying impediments to their participation in the global economy and coordinating technical assistance from different sources.

Criticism against IMF

Two criticisms from economists have been that financial aid is always bound to so-called "Conditionality’s", including Structural Adjustment Programs. Conditionality’s, which are the economic performance targets established as a precondition for IMF loans, it is claimed, retard social stability and hence inhibit the stated goals of the IMF, while Structural Adjustment Programs lead to an increase in poverty in recipient countries. Typically the IMF and its supporters advocate a Keynesian approach. As such, adherents of supply-side economics generally find themselves in open disagreement with the IMF. The IMF frequently advocates currency devaluation, criticized by proponents of supply-side economics as inflationary. Secondly they link higher taxes under "austerity programmes" with economic contraction.Currency devaluation is recommended by the IMF to the governments of poor nations with struggling economies. Supply-side economists claim these Keynesian IMF policies are destructive to economic prosperity.

The IMF sometimes advocates "austerity programmes," increasing taxes even when the economy is weak, in order to generate government revenue and balance budget deficits, which is the opposite of Keynesian policy. These policies were criticized by Joseph E. Stiglitz, former chief economist and Senior Vice President at the World Bank, in his book Globalization and Its Discontents. He argued that by converting to a more Monetarist approach, the fund no longer had a valid purpose, as it was designed to provide funds for countries to carry out Keynesian reflations.

Argentina, which had been considered by the IMF to be a model country in its compliance to policy proposals by the Breton Woods institutions, experienced a catastrophic economic crisis in 2001 , which some believe to have been caused by IMF-induced budget restrictions — which undercut the government's ability to sustain national infrastructure even in crucial areas such as health, education, and security — and privatization of strategically vital national resources. Others attribute the crisis to Argentina's mal designed fiscal federalism, which caused sub national spending to increase rapidly. The crisis added to widespread hatred of this institution in Argentina and other South American countries, with many blaming the IMF for the region's economic problems. The current — as of early 2006 — trend towards moderate left-wing governments in the region and a growing concern with the development of a regional economic policy largely independent of big business pressures has been ascribed to this crisis.

When Argentina erupted on the international news scene in 2001 for committing the biggest default by a sovereign country on an international loan corporate media focused on fixing the blame on Argentina. In reality, Argentina’s case is a particularly good illustration of how a healthy, rich country was devastated under IMF tutelage. Conversely, Argentina today can also be an inspiring example of how ordinary citizens can organize themselves to rise above the problems created for them by local and international elites.

Argentina’s economic and political health was dealt a deathblow not because it did not follow the IMF dictates closely enough, but because it was indeed doing everything according to IMF agenda. All through the 1990s, opinion makers like the Financial Times hailed Argentina as the ‘star pupil’ of the IMF. The GDP rose by 60% over the decade, and foreign investment poured in. However, this glorious facade hid a crumbling edifice. The wealth flowing into Argentina during the 1990s was a combination of speculative finance and one-off sales: the phone company, the oil company, the post, rails, and airline. Between 1989 and 1999, national debt rose by $80bn and un-employment soared from 6.5% in 1989 to 20% in 2000. Today 57% of Argentina’s population lives below the poverty line.

Just before the default and right afterwards as well, mainstream economics machinery pounced on the country for plunging itself into international isolation, a sin beyond redemption according to the gods of globalization. The real fear underlying this hysteria was that Argentina might set a bad example for other countries caught in the debt spiral.

Other indebted countries could also default and use default on multilateral debt as a bargaining chip with creditors.

Another example of where IMF Structural Adjustment Programs aggravated the problem was in Kenya. Before the IMF got involved in the country, the Kenyan central bank oversaw all currency movements in and out of the country. The IMF mandated that the Kenyan central bank had to allow easier currency movement. However, the adjustment resulted in very little foreign investment, but allowed Kamlesh Manusuklal Damji Pattni, with the help of corrupt government officials, to siphon off billions of Kenyan shillings in what came to be known as the Goldenberg scandal, leaving the country worse off than it was before the IMF reforms were implemented.

Overall the IMF success record is perceived as limited. While it was created to help stabilize the global economy, since 1980 critics claim over 100 countries (or reputedly most of the Fund's membership) have experienced a banking collapse that they claim have reduced GDP by four percent or more, far more than at any time in Post-Depression history. The considerable delay in the IMF's response to any crisis, and the fact that it tends to only respond to them or even create them rather than prevent them, has led many economists to argue for reform. In 2006, an IMF reform agenda called the Medium Term Strategy was widely endorsed by the institution's member countries. The agenda includes changes in IMF governance to enhance the role of developing countries in the institution's decision-making process and steps to deepen the effectiveness of its core mandate, which is known as economic surveillance or helping member countries adopt macroeconomic policies that will sustain global growth and reduce poverty. On June 15, 2007, the Executive Board of the IMF adopted the 2007 Decision on Bilateral Surveillance, a landmark measure that replaced a 30-year-old decision of the Fund's member countries on how the IMF should analyze economic outcomes at the country level.

The major argument against the IMF by leading economist is that the weaker are getting weakest. When the IMF gives loans it imposes conditionality’s on the borrowing countries. However, it does not make sure where the actual funds are going. The borrowing countries are often not able to come out of the crisis and they fall in to a crazy cycle of debt and interest payment. The corrupt politicians of the developing countries then burden the general public with high taxes to pay out their debts.

The United States is the biggest shareholder in the IMF, holding nearly 18% in shares, and the IMF is generally considered a tool of the US Treasury.“There are plenty of good economists at the IMF and I do not have a problem with them, but the problem lies with policy makers at the highest level,” says free-market proponent and economist David DeRosa, who is opposed to IMF bailouts and its policy advice to emerging markets.DeRosa last week released a book titled “In Defence of Free Capital Markets” in which he criticises aggressive interventions such as those carried out by the IMF in times of currency and emerging-market meltdowns.

Widespread dissatisfaction with the way the IMF handled the 1997 Asian crisis and subsequent financial crises has prompted calls for reform of the institution and, more grandiosely, the global financial architecture.“The question is whether IMF policy has changed with respect to its mission as the lender of last resort,” says DeRosa. “In the days of managing director Michel Camdessus, the IMF transformed itself into a bailout charity, dishing out billions to Mexico, Korea, Southeast Asian nations, Brazil, Russia and a great many other countries in crisis.”Critics of bailouts charge that they undermine one of the fundamentals of a free economy by overriding market mechanisms. They say bailouts are expensive, bureaucratic and cut investors’ losses rather than allow them to bear full responsibility for their bad decisions, leaving the obligation to repay the subsequent debt to that country’s taxpayers.  They say bailouts also hinder free-market reforms.

The Cato Institute argues that while the IMF says it makes loans in exchange for policy reforms, it has not been successful in turning countries to the free market.“Instead, the fund has created loan addicts,” notes Ian Vasquez of the institute. “More than 70 nations have depended on IMF aid for 20 or more years, 24 countries have received IMF credit for 30 or more years.”

One of the institution’s most influential opponents has been the Meltzer Commission appointed by the US Congress and which last year recommended the Fund be reduced to a lender of last resort providing funds at punitive rates to solvent banks.“Lending at a penalty rate avoids the abuse of the IMF as a channel for distributing subsidies to member countries, particularly as a means of facilitating massive bailouts,” says former Meltzer Commission member Charles Calomiris, professor of finance and economics at Columbia University.“That abuse, we argued, promotes international financial instability by encouraging risk-taking in emerging-market banking systems, imprudent management of fiscal affairs and reckless lending by international lenders,” Calomiris told a recent Congressional hearing.Conditionality’s in the form of structural adjustment programs (SAPs)

Structural adjustment is a term used to describe the policy changes implemented by the International Monetary Fund (IMF) in developing countries. These policy changes are conditions (Conditionality’s) for getting new loans from the IMF, or for obtaining lower interest rates on existing loans. Conditionality’s are implemented to ensure that the money lent will be spent in accordance with the overall goals of the loan. The Structural Adjustment Programs (SAPs) are created with the goal of reducing the borrowing country's fiscal imbalances. The bank from which a borrowing country receives its loan depends upon the type of necessity. In general, loans from IMF are claimed to be designed to promote economic growth, to generate income, and to pay off the debt which the countries have accumulated.Through conditionality’s, Structural Adjustment Programs generally implement "free market" programs and policy. These programs include internal changes (notably privatization and deregulation) as well as external ones, especially the reduction of trade barriers. Countries which fail to enact these programs may be subject to severe fiscal

discipline. Critics argue that financial threats to poor countries amount to blackmail; that poor nations have no choice but to comply.

IMF has no effective authority over the domestic policies of its members. It is in no position for example to force a member to spend more on schools or hospitals and buying less military aircrafts, or constructing huge presidential palaces. It intervenes for weaker countries. It can and often does urge members to make the best use of scarce resources by refraining from unproductive military expenditures (only the weaker) or by spending more money on health and education. What authority the IMF does posses is confined to requiring the members to disperse information on its monetary and fiscal policies and to avoid as far as possible putting restrictions on exchanging domestic for foreign currency and making payments to other members.

Pakistan & the IMF

The IMF, directly and indirectly, has played a crucial role in the macroeconomic stability of Pakistan since 1988. On the one hand, it has provided direct bilateral support to Pakistan in order to cope with its macroeconomic imbalances like balance of payment deficits. On the other hand, the IMF has indirect influence on lending by other donor agencies. This is evident from the fact that whenever Pakistan enjoyed good relations with the IMF, other lending agencies also provided money to Pakistan and vice versa. The IMF credit rating of a borrowing country is taken very seriously by other donor agencies. The IMF also influences policies of lending countries to a great extent.

The IMF enjoys excessive concentration of power and has a virtual monopoly of knowledge and ideas in prescribing as to what are the right policies a country ought to follow. It has disproportionately large influence on financing provided by other players—development banks, fund managers, debt relief by Paris and London Clubs and syndicate lending by commercial banks negative assessment by the IMF or even a failure to complete on time places the reputational capital of the borrowing country at great risk, erodes its credibility in the financial markets and reduces financial flows into the country. There are instances where this created a snowball effect amplifying the disequilibrium in macroeconomic balances as the IMF and other financiers collectively withheld their assistance.

Since 1988, Pakistan has not enjoyed smooth relations with the IMF, because of the latter's dissatisfaction with the economic performance of Pakistan. Pakistan signed several agreements with the IMF, but due to a variety of factors most of them remained incomplete, with the IMF refusing to lend the full amounts to Pakistan. It must be remembered that in the 1990s, the nation suffered many losses on the economic front and the era is thus considered a "lost decade" for the economy of Pakistan. All macroeconomic indicators showed poor performance, bringing Pakistan to the brink of default. Moreover, the IMF's relations with Pakistan were further strained by 1997 due to the policies of former Prime Minister Benazir Bhutto (late). Large-scale corruption by her People's Party and its resistance to structural reforms irritated the IMF and World Bank.

These programs have so far fallen short of resolving Pakistan's economic problems. Poverty has increased in Pakistan, rather than declined. External debt has increased since the IMF and World Bank became involved in Pakistan. Unemployment increased in the country as a result of a downsizing policy adopted by the government under the guidelines of these institutions.

IMF Support to the military dictators

As soon as the leader of the military coup, General Pervaiz Musharraf, appointed Aziz, an executive of the US-based Citibank, the finance minister flew to New York. After meeting IMF officials on October 29, Aziz said the talks were “very positive." He said he had to return to Pakistan and "review what programs the IMF has proposed" before initiating further discussions. According to reports, he also met various investment bankers and executives of US companies while in New York.

It seems that the IMF officials may have informed the minister of the conditions it had insisted on with the former Nawaz Sharif government. General Musharraf had already indicated his desire to satisfy the IMF. In his policy statement on October 17 he promised measures to rebuild investor confidence, increase domestic savings, make state enterprises profitable and ensure austerity.

Squashing speculation that the IMF would impose sanctions on the military junta, an official said the institution was not "politically motivated" and "it would not have a problem with the nature of government in Pakistan". In fact, the IMF had no small role in the events that led to the ousting of Nawaz Sharif.

Displeased by the Benazir Bhutto government's inability to implement its recommendations, the IMF welcomed the Nawaz Sharif government when it came to power in March 1997. In October that year, the IMF approved a three-year financing package for Pakistan equivalent to $US 1,588 million in support of a medium-term “adjustment and reform” program. It required tightened control of government expenditure, fundamental changes to the tax administration machinery and an expansion of the net of the general sales tax (GST) and the agricultural tax.

The resulting government spending cuts affected the poverty-stricken masses, and small entrepreneurs opposed the GST and agricultural taxes. With the blessing of government, landlords escaped from the tax net. The IMF then withheld the loan.Following its nuclear tests in late May 1998, the Sharif government faced US-led sanctions. Following suit, the IMF suspended its loan facility. The sanctions magnified Pakistan's socio-economic difficulties, emptying government coffers, pushing the country to the brink of defaulting on foreign loans and worsening conditions for the poor.When US wheat growers lobbied the Clinton administration, it waived sanctions on the export of agricultural products from US to Pakistan. Only then did the IMF and World Bank agree to advance credit to the Sharif government.

Even though the Sharif regime was eager to implement the package, a political crisis and socially explosive conditions did not allow it to do so. In May this year the IMF management released a meagre sum of $US51 million to the country.When the Sharif government prepared its budget for July 1999 to June 2000, an IMF team was in Islamabad to ensure its recommendations were included in the budget paper. According to the Dawn newspaper, the visiting mission head to Pakistan told the finance minister Isaq Dar he had “no option but to go for the new VAT (GST) on the service sector". The News reported, "The finalisation of the budget took place after intense discussions with the international financial institutions, chiefly the IMF". But when the budget was presented, the regime backed away from the IMF proposals on taxes, fearing opposition, not only from the poor but small traders as well.

In the aftermath of the Kashmir conflict with India—when US administration forced Sharif to withdraw the Pakistani-backed forces from Kargil heights—opposition parties launched a campaign demanding Sharif's resignation. In a desperate bid to head off mass support for the opposition campaign, Sharif pretended that he was concerned about the plight of the people. He launched a mega-housing project with much fanfare.When Sharif's finance minister visited New York in July to plead with the IMF for a withheld loan tranche of $280 million, he was sent back empty-handed, with instructions to stop the housing project and implement the GST. The cash-strapped cabinet then decided to impose the 15 percent GST. The small traders, with the help of opposition parties, launched a strike that shut down the whole country on September 4. Sharif immediately met representatives of the small traders and promised to reduce the tax to a nominal 0.75 percent.

On September 11, Dawn reported that "IMF officials have been privately saying that they would need a firm and unequivocal commitment by the Nawaz Sharif government at the highest level" to implement its conditions, mainly the 15 percent tax.The IMF intervention contributed to economic collapses, ignited socially explosive conditions and added to the political destabilisation in Pakistan. It was no surprise that the military exploited the situation to grab power. Now the new regime is preparing to implement the IMF conditions while tightening its grip in the country by launching a so-called anti-corruption drive to distract popular attention. The All-Pakistani Organisation of Traders and Cottage Industries has warned that it will initiate a countrywide indefinite strike if the regime implements the GST.

IMF intervention to secure an "open economic policy" in Pakistan started in 1988 at the end of military dictator Zia Ul Haq's tenure. The US State Department, evaluating the program, wrote in a report in November 1997: "Market-based reform began to take hold in 1988, when the government launched an IMF-assisted structural adjustment program in response to chronic and unsustainable fiscal and external account deficits." It praised the removal of barriers to foreign trade and investment, reform of the financial system, relaxed exchange controls and the privatisation of dozen of state-owned enterprises.None of Pakistan's economic ills have been healed, however. Instead, they have been aggravated by the IMF interventions. The promised prosperity has not arrived. An IMF report, while sketching the failure of its structural adjustment program, demanded more

of the same policy: "The authorities intensified their efforts in 1993, with IMF support but by 1995 the situation deteriorated again.” The report blamed "loose monetary policy" and weather conditions. The IMF admitted that the trade deficit had widened, external reserves declined, and inflation remained "stubbornly high”.

A recent UN-sponsored Human Development in South Asia 1999 report analysing the impact of the IMF's measures referred to "worsening poverty and income inequality in the wake of structural adjustment programs. Programs have hurt the poor in Pakistan, since the real incomes of lowest groups have declined by nearly 52 percent since the [IMF] adjustment."

Performance during the Shaukat Aziz Tenure

The biggest criticism for the previous government, when it used to compare its economic performance keeping 1999 as the base year was that the economy then was surviving heavy economic and military sanctions in the wake of nuclear tests conducted in May, 1998. The government of Shuakat Aziz claimed that it has come out of the clutches of foreign lending agencies, especially World Bank (WB) and International Monetary Fund (IMF). They also claim that the inflation declined and they were ready to say good bye to World Bank and IMF.

Although Pakistan received record aid, investments and remittances, its external debt went up from $33.6 billion in 1999 to $36.9 billion in June 2007. Over the years the country received $10bn in economic and military and development aid from the US. On the other hand, there were about $6bn privatisation proceeds and a relief of $1.6 billion in loan write offs by foreign governments during the last eight years.

The rescheduling of Paris club debt provided an additional relief of $1.2 to $1.5 billion annually in terms of debt service payments. Pakistan became the fourth-largest borrower of World Bank and the fifth-largest recipient of American aid. This still shows its heavy reliance on foreign governments and multilateral institutions, despite declaration of economic sovereignty. The domestic resources have not been mobilised for developmental purposes. On the other hand, the proceeds from privatisation were not used in a completely transparent manner. Some policy-makers consider borrowing acceptable as long as they are invested for productive purposes. However, the situation becomes completely different when borrowing data is littered with corruption and wasteful spending, plus players in the major sectors of the economy do not pay tax at all. The government claimed that it does not carry around a begging bowl and does not depend on borrowings from IMF anymore. On the other hand, it borrowed more and more from WB and (Asian Development Bank) ADB. World Bank unveiled a lending programme of up to 6.5 billion dollars for Pakistan under a new four-year aid strategy. The new lending shows “a substantial increase over the previous period”, WB claimed. As the government is telling lies to the people the biggest question is: where all the money has gone? .

The relevance of Argentina’s experience for Pakistan

Pakistan owed $2.07 billion to the IMF at the end of March 2003. This represents a sharp rise from $1.55 billion in June 2000. The power that the IMF exerts on our policy formulation as a result of this immense and increasing indebtedness cannot be underestimated. Almost everyday, newspapers report the pressure that the IMF is exerting on Pakistan to make policy decisions that have become a dogma with the IMF and are recommended to country after country regardless of its particular situation. Just in the month of May, the IMF has linked disbursal of loans in Pakistan to privatisation of a bank, submission of a fiscal responsibility law in parliament, and elimination of tax exemptions. IMF has also asked the Pakistan government to impose 15 per cent General Sales Tax in the 2003-04 budget on bricks, cement blocks, computer hardware, software, specific machinery etc.

Predictably, a recent World Bank and IMF Joint Staff Assessment (JSA) report cited by the Dawn identifies four risks to the implementation of reforms in Pakistan, including political opposition to reforms, lack of continuity, insufficient institutional capacity and exogenous shocks. No mention of the failure of these policies in countries all over the world from Latin America, to South East Asia. Argentina is a prime example of a country that followed the policy recommendations of the IMF to the letter and now that the country is economically, politically and socially a complete basket case, the IMF has, as in other cases, abdicated all responsibility. We can do no better than to learn from the experience of Argentina to temper our enthusiasm for the IMF and a blind obedience to its dictates.

Argentinean (or Pakistani) citizens are not unique in having military/civilian dictatorships imposed upon them, which are then sustained by massive doses of international loans. Around the world, this recursive relationship between dictators and global capital serves the purpose of enslaving people through increased indebtedness while forcing them to open up their markets for increasing the profits of large multinationals through threats of loan recalls etc. The insecurity of dictators and their need to silence all opposition is a well-calculated advantage in this relationship to international capital. An added advantage is that once the dictators have been deposed, the people of that country remain indebted as the loans were taken in their name, regardless of the fact that beyond lining the pockets of the ruling junta these loans served little developmental purpose. As the IMF imposes devastating demands for privatisation of public resources that will increase social polarization, our government only responds with pleas for patience. At the same time we are told that the government is set to increase the budget for ‘law and order’. The increased violence in our society is a direct result of the incredible polarisation that has gone on as schools, hospitals, two square meals and the prospect of employment have moved out of the reach of an increasing number of Pakistanis. The service that our public hospitals and schools provide in spite of a pitiful budget allocation, barely 5% for health and education combined, is remarkable (51% of our budget is used to service loans). We can only imagine how much better the system could be with adequate funding. Throwing more people in jails and more policemen on the streets is likely to only increase the magnitude of the problem. As Delia Garcilazo de Ríos, whose son was killed by prison

guards, claims, "Police repression and low salary are forms of having social control. When the people ask for things in a blockade or in a march and there's a kid who breaks a window, we are violent. But I ask what's more violent, a youth dying of starvation, a kid being shot from behind, or if we break a window? A window is a material thing; you can fix it, life you can't ever get back."

Current IMF loan facility for Pakistan

Pakistan has decided to borrow $7.6 billion from the International Monetary Fund (IMF) to save its sinking economy. Pakistan thus becomes the first Asian country to be bailed out by the IMF ever since the current global meltdown began.

As a part of the agreement, the loan carries a variable interest rate based on the market conditions. The rate may vary between 3.51 per cent and 4.51 per cent. The loan will be extended over a 23 month period and needs to be repaid between the financial years 2011-12 and 2015-16.

A major section of the society in Pakistan is of the opinion that the loan has been procured at terms which will do more harm than good to the economy. They contend that this bailout loan will bring with it more wretchedness for the people in general and industry in particular.

As on date, Pakistan’s foreign exchange reserves were less than $7billion which might have landed the country in a situation wherein it cannot honour its foreign debts. Shaukat Tareen, the adviser to the Prime Minister on Finance said that the loan will boost Pakistan's currency reserves, will prevent a run on the local currency and ward off a balance of payments crisis.

Economist Dr Asad Saeed said regarding the loan, "This can be short-term solution to shore-up the depleting stocks. The long-term solution lies with development of our real sectors and to curtail the unprecedented growth of imports, which are eating up major chunk of precious forex reserves."

The Pakistan government has pegged its economic growth at 4.3 percent for the current fiscal year. IMF, on the other hand has a more pessimistic estimate of 3.5 percent. Pakistan's finances have not only been plagued due to the current financial crisis but also due to a shaky political system, terror campaigns and soaring oil and food prices.IMF has released the strings attached to its Pakistan credit, which binds the government of Pakistan not borrowing any more during the current fiscal year from the State Bank of Pakistan, while the subsidy on electricity would be withdrawn by June 2009.International Monetary Fund (IMF) has made public the binding clauses incorporated in the finalized agreement for $7.6 billion loan extended to Pakistan. IMF 23 months long loan program conditions spread over a document containing 24 pages said that Pakistan would have to raise its national growth rate to 7 percent and bring down the inflation rate to 5 percent by 2012, while the target of keeping the foreign current account deficit restricted to $10.6 billion i.e. 6.5 percent of the GDP by the end of the current fiscal year

has been given. The target for Pakistan’s economic growth for the next fiscal year has been set at 5 percent, while that of inflation at 13 percent.

After minor changes in the 11-point agenda of the International Monetary Fund (IMF), the Pakistan government has agreed to gradually impose the Central Excise Duty (CED) on services and agriculture sectors at the rate of eight to 18 per cent in place of the General Sales Tax (GST).

“In view of the IMF demand, the Pakistani currency will also be devalued after slight changes in the discount rate and exchange rate will be decreased officially by six to seven per cent,” an official in the Ministry of Finance disclosed, wishing to remain anonymous.Moreover, the official said the release of 60 per cent funds for the next three quarters of the current financial year, under the Public Sector Development Programme (PSDP), would be reviewed downward to 45 per cent.

According to the official, the foreign assistance flow had already declined by 40 per cent because donors had refused to provide funds for new projects at the federal and provincial levels under the PSDP against the ongoing projects funded by the Japan-IBRD, the World Bank, the Islamic Development Bank and the Asian Development Bank.

The IMF proposal received by the federal government in the last week of October contained 16 conditions having 180 points that were discussed in four meetings between Pakistani and IMF officials in Dubai the official disclosed. Eleven of the 16 conditions have been accepted with slight changes. The major conditions accepted by the Pakistan government included changes in the Islamic Development Bank loans and differentiation between loans and grants, devaluation of rupee, freezing of non-development expenditure under the defense budget for the last three quarters of the current financial year, non-provision of supplementary grants to government departments, ending subsidy on gas and electricity, 20 per cent reduction in non-development expenditure of civil departments and federal ministries, increase in mark-up rate of banks and on inter-bank transactions, uniformity in the inter-bank and open market dollar exchange rate and stoppage of government financial intervention in stock markets.

Under the conditions accepted by the government, the IMF will be informed at the time of the issuance of credit line by any international financial institution, including the World Bank or immediately after it the official said.

The matters on which the government and its financial managers have differed with the IMF include release of $1.5 billion to$2 billion for the current financial year under the annual assistance package he said.

The government wants the IMF to provide $3 billion and another $1.5 billion to $2 billion for adjustment of the loan instalments and maintenance of the balance of payments during the current financial year.

But the IMF wants to release $2 billion for repayments in the first six months after reaching the agreement for saving Pakistan from default and another $500 million for the stability of the national economy he said. For this too, the IMF wants increase in the mark-up rate on the already approved 600 million World Bank loan and grant he added.Despite all the tough conditions, objections and differences, Pakistan has no option but to seek the IMF assistance package because under the IMF pressure on the Friends of Pakistan, no friendly country has so far agreed to extend loan to Islamabad to meet its repayment obligations.

Finance Secretary Dr Waqar Masood Khan claimed that the loan would have no direct impact on the poor. He said the home-grown package carried safety nets for the wellbeing of the people.

He said the government had decided to reduce the budget deficit to 4.3 per cent and current account deficit to 4.5 per cent. He said reducing the deficits was part of this year’s budget.

Dr Khan ruled out imposition of agriculture tax or increase in toll tax. “We have only to plug the loopholes in the taxation system.” He said the target for general sales tax collection would be increased in view of over 24 per cent inflation.

He said other conditions agreed with the IMF included reducing non-development and other expenditures, free float of exchange rate, zero borrowing from the SBP and increasing interest rate to tame core inflation.He said the country’s credit rating would improve in the next few weeks because of the IMF loan which would boost investors’ confidence.

Recommendations

The central bank needs to be proactive in dealing with economic and financial issues

The fiscal and monetary policy must be in line with each other. Government should avoid excessive borrowing from the central bank. To avoid conditionalities the government should not borrow from IMF and other

donor agencies.

Increase investor confidence, encourage overseas Pakistanis to send remittances through legal channels.

Privatization process must be transparent and more organized. Exports should be increased through value addition and quality. Revival of major sectors such as cotton and textile Imports should be curtailed. Improve tax collection to increase government revenue

Above all, steps must be taken to put an end to corruption and VIP culture.

Bibliography

Introduction to IMFwww.wikipedia.org

Pakistan and Argentinaby Humeira Iqtidar; June 08, 2003

ZNet | Corporate Globalizationwww.dawn.com www.geo.tvhttp://www.jang.com.pk/

The IMF on the RunThe International Monetary Fund Tries to Outrun Its Criticsby Robert WeissmanMultinational Monitor magazine, April 2000

Criticism against IMF by Gumisai Mutume

Pakistan’s military regime prepares IMF Program By Vilani Peris25 November 1999- World Socialist Website www.wsws.org

Pakistan turns to IMF for financial aidThe money times