Imf Final Project

05/20/09

1

PAKISTAN & IMF

Report submitted to: Madam Fatima Instructor Economics

MBA Semester 2nd (Night) Muhammad Shahzad Ahmad Khan Group Leader

Mubashar Ali Shan

Ghullam Jillani

Ali Riaz

INTERNATIONAL MONETARY FUND (IMF) •

The IMF is an international organization which lends money to countries which need to borrow it. Its headquarters are in Washington DC, USA

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The IMF was set up at a conference in 1944.

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Representatives of 45 countries met to discuss how to avoid the problems caused by the economic depression of the 1930s.

ADVANTAGES OF IMF

DISADVANTAGES OF IMF

Promotes international monetary cooperation.

Mostly power is in the hand of rich countries

Helps the countries to improve balance of payments.

IMF imposes hard conditions to provide loans

It encourages economic growth.

Conditions imposed results in increase in poverty and low per capita income

It gives financial advice to countries about how to run their economies.

HOW IT WORKS • The IMF exists primarily to assist countries in economic difficulties. • Provides loan to the needy country after verification and imposing hard and stiff conditions, such as: 4. Liberation of • Barriers in free trade • High tariffs and quotas • Remove a portion of subsidies

ROLE OF IMF

• Help to stabilize exchange rates • IMF has the same members as United States except Cuba, Lichtenstein and Andorra • IMF is independent of the World Bank •Its am is to increase living standards

FUNCTIONS OF IMF •

International Monetary Cooperation

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To help deal with Balance of Payments adjustment

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Economic Surveillance

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Loans To Country Are With Financial Crisis.

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Technical Assistance And Economic Training.

HOW IS IMF FINANCED?

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The IMF is financed by member countries who contribute funds on joining or from existing members

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IMF stands at $300 billion financed from its 183 member countries

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The U.S deposited the largest amount with the IMF and it has 16% voting rate as well

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IMF has some special rights to withdraw the approved amount of loan

WHAT DOES THE IMF ACTUALLY DO? • In particular the IMF was to play a role in stabilizing exchange rates and balance of payments • These days they are also doing: Compiling statistics and evaluation of its member countries economies . overriding in Financial crisis to avoid future crisis •   

In recent months this has involved $2.1 billion to Iceland $15 billion to Hungary $16 billion to Ukraine

ARGUMENTS IN FAVOR OF IMF • IMF can be seen as lender of last resort. • IMF can also impose necessary reforms on an economy. • Provides an external assessment of the economy

IMF A SAINT OR SINNER ??? • The reality is something in between • At times they have appeared rather inflexible insisting on fiscal responsibility and privatization at a time • This does not mean that the IMF are blameless, far from it • They have made many mistakes and errors of policy

WHY HAS IMF NOT REDUCED POVERTY? • Often they are to meet government deficits and / or lack of foreign exchange. Therefore, may not be used for development . • AID improved economic development most when it is targeted in certain ways . • Loans from IMF can have the same effect as domestic savings in stimulating investment. The key is how the loans are used. • IMF impose economic conditions e.g. privatization and deregulation.

PAKISTAN & IMF •

The IMF, has played a crucial role in macroeconomic stability of Pakistan since 1988.

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The IMF credit rating of a borrowing country is taken very seriously by other donor agencies.

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Since 1988, Pakistan has not enjoyed smooth relations with the IMF.

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Because of the latter's dissatisfaction with the economic performance of Pakistan.

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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.

the

BENAZIR BHUTTO GOVT. • 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.

NAWAZ SHARIF GOVERNMENT •

Positive relations in that era

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IMF resumed its working by providing a standby loan in Dec 1996

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The resumption of IMF lending brought new conditional ties and forced large-scale budget cuts of PRs 45 billion ($1.13 billion) between October 1996 and January 1997.

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Almost 90 percent of these cuts were in the annual development budget, which affected economic performance in the short run.

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In March 1997, relations with the IMF again worsened.

CONTINUED • The relationship between the IMF and government of Pakistan brightened when Sharif promised to introduce economic reforms to the country. • On October 20, 1997, Pakistan reached an agreement with the IMF for a three-year, $1.6 billion Structural Adjustment Loan (SAL) package . • At the beginning of 1998, the IMF agreed to give Pakistan the second disbursement (worth another $208 million)

CONTINUED • The IMF asked Pakistan to tackle several longstanding structural problems. • In May 1999, relations between the IMF and Pakistan again soured. • The IMF sent a five-member commission to Islamabad to review the economic performance of the country. The commission reported that the government of Pakistan had failed to meet several IMF conditional ties in result of that: “postponed the release of a $280 million disbursement to Pakistan”

THE MUSHARRAF GOVERNMENT • After the October 12, 1999 military coup, Pakistan's economy continued in crisis. • The Musharraf government, from the beginning, appealed to the IMF for restoration of economic assistance and showed its willingness to meet the associated conditional ties. • The IMF responded by noting a number of key conditional ties it required of Pakistan in order for the new government to demonstrate good faith.

CONTINUED • The Executive Board of the IMF approved a Stand-by-Credit of $596 million. • Conditions are as follows: Charge GST to agriculture Charge GST at retailer shops Reudce budget deficit from 6.4 to 5.2 Change petrolium prices with international market

CONTINUED •

Pakistan addressed most of the conditions and met the IMF targets

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As a result, IMF approved a three-year Poverty Reduction and Growth Facility (PRGF) loan to Pakistan in December 2001

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The military government of General Musharraf implemented unpopular reforms because:

The country was on the verge of serious financial crisis These reforms fitted in well with the strategic vision of President Musharraf. •

Except for the Musharraf government's Stand-by Agreement (SBA), these were not fully implemented and consequently almost half of the agreed amount remained undrawn.

PAKISTAN AND THE IMF, 1995-2004 REGIME

PERIOD

PROGRAM TYPE AND AGREED AMOUNT (IN US$ MILLION)

Benazir Bhutto / Meraj Khalid / Nawaz Sharif

Dec. 95-Mar. (Sept. 97)

97

SBA

Nawaz Sharif

Oct. 97-Oct. (May 1999)

00

ESAF

Oct. 97-Oct. (May 1999)

00

Pervez Musharraf

562

AMOUNT DRAWN (IN US$ MILLION)

% UNDRAWN

295

48

682

265

61

EEF

455

113

75

Nov. 00-Sept. 01

SBA

465

465

0

Dec. 01-2004

PRGF

1,410

6 disbursements out of 12 total

Currently process

in

PAKISTAN MAY TAKE IMF AID TO AVOID BANKRUPTCY

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Pakistan may accept politically unpopular aid from the International Monetary Fund to avoid bankruptcy

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Pakistan needs $5 billion to avoid bankruptcy as it has 25% of inflation rate

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It’s a bit hard to get help from IMF as it is imposing some stiff conditions to be filled

CONTINUED

• Pakistan's poor population of 160 million is already suffering from rocketing food and fuel prices and enduring daily power cuts caused by energy shortages. • The Pakistani rupee has lost about a third of its value this year. • The current economic crisis is the deepest faced by the nuclear-armed nation since 1999 • Pakistan ended its three- year, $1.5bn loan program with the IMF in December 2004.

IMF & PAKISTAN; CAN IMF DITCH THE DEFAULTERS?

• Every one knows that pakistan is not able to repay the loan and shall not be able to repay in the future as well, so the point is that ….. • Should IMF provide loan to the pakistan or not???

IMF ORDERS PAKISTAN TO CUT MILITARY SPENDING

• IMF asked to reduce 1/3 of army spending(pay cut up to 10% out of 30% ) • IMF officials would be sent to collect taxes • It also asked to reduce pensions by 50%

PAKISTAN AND THE IMF “A RELATION OF TRUST”

• Throughout the 1980s and `90s, economic policies had a fatal flaw • Pakistan took loan in 2000 when its annual production was too short • The growing burden of paying interest left the infrastructure crumbling.

THE IMF MANDATED ECONOMIC RESTRUCTURING IS POISON FOR PAKISTAN • IMF-World Bank prescription trigger hyperinflation and precipitate indebted countries into extreme poverty. • Pakistan has been subjected to the same deadly IMF “economic medicine”. • In 1999, an IMF economic package, which included currency devaluation was imposed on Pakistan.

PAKISTAN ACCEPTS FOLLOWING IMF CONDITIONS •

Changes in the Islamic Development Bank loans

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Devaluation of rupee

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Freezing defense budget

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Ending subsidy on gas and electricity,

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20 per cent reduction in non-development expenditure of civil Departments.

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Increase in bank markup rates up to 2%

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Interbank and open market dollar rate must be same

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Stop interference is stock markets

FORGET IMF AND PAKISTAN SHOULD DEFAULT

• Let’s tighten our belts and spend the money we have to make a pro-Pakistan trade policy and creatively market Pakistan • We Should default as. South Korea, Thailand, and Indonesia have done it. They have survived, So can we • Ex-bankers and former IMF employees will never advise Pakistan to default because to do so would be counterintuitive.

CONTINUED • Countries try to avoid default for THREE reasons: 3. To save country’s reputation 5. To participate in international trade freely 7. To protect domestic banking and financial institutions

In short, governments choose not to default because it is the politically expedient thing to do.

MEASURES TO BE TAKEN FOR IMPROVEMENT

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Hire competent and trained workforce

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Make sure there are nurses and doctors at each school

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Pay every graduate twice what they would make

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Teach the kids their native languages

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It's time for Pakistan to start spending its money on people servicing, instead of debt servicing

PAKISTAN TURNS TO IMF (NOVEMBER 16, 2008) • Pakistan has agreed with the International Monetary Fund (IMF) on a $7.6 billion emergency loan to stave off a balance of payments crisis • Traditionally seen by Pakistan as its most reliable friend, China appears to have decided that IMF program is the best medicine

--CONCLUSION-BOTH SIDES OF THE COIN

• In Pakistan, People generally are not in favor of IMF assistance mainly due to its harsh conditions. • Those who are in favor ,plead that IMF Program has always been at the acme of economic difficulty • The IMF supporters feel that IMF program have brought stability to Pakistan’s stock-market performance and currency volatility

ANY QUESTION(S) ??