Why Pakistan says adieu to IMF program?
Syed Abdul Khaliq
Publishing Date: September 22nd 2011
- Existing $11.3 billion Stand By Agreement (SBA) is 8th program with IMF, going to be ended on a bitter note
- Having kept the IMF at arm’s length for over a year now is anything but good news
The government of Pakistan has taken the latest decision on 17 September 2011 to say ‘adieu’ to the International Monetary Fund (IMF) program at least for the time being, after the existing $11.3 billion Stand By Arrangement (SBA) is to be ended on 30 September 2011.This is the 8th SBA program with the IMF to conclude on an unsuccessful note, since 1950 when Pakistan joined the Fund. Out of these eight programs six were contracted with democratic governments.
Soon after coming into power the current PPP government had secured $11.3 billion IMF program in November 2008 and got disbursements of about $7.6 billion, but since May 2010 the program was suspended when IMF refused to release the remaining $3.7 billion due to non-compliance of the strict criteria, set under the Stand By Agreement. However, the agreement was extended for nine months until 30th September 2011, but disbursements were not resumed owing continuous stand-off between IMF and government of Pakistan. The situation leads Pakistan to ultimately say good bye to the program. The Minister of Finance, Abdul Hafeez Sheikh, in a statement, made it clear on 17 September 2011.
The discontinuation of the program with the IMF has been some time in the making as Pakistan is cut off from IMF and World Bank funding since May 2010.But having kept the IMF at arm’s length for over a year now is anything but good news. However, the widespread belief is that the government wanted to get rid of the IMF imposed conditions, not because of any radical shift in its economic policy, but in the run up to the next general elections, scheduled to be held early 2013.
Out of the 11 main conditions imposed by the IMF, three major include; holding down the fiscal deficit, imposition of value added tax and slashing subsidies in power sector. Any government ready to succumb to these conditions have little chance to maintain popularity. So, free of those constraints, the government can now pursue pro-people steps like holding down electricity tariffs and suppressing the fuel prices.
The decision to abandon the existing IMF program is a welcome step, however, given the fact it seems for the time being and politically motivated decision. That means no conscious effort to disengage with IMF and provide durable relief to the people. Pertinent to mention is that the previous government had also given up the IMF program prematurely to just to win elections. It seems the current government is also toeing the same line ahead of elections. This is clear evidence that though governments agree to IMF conditions during their tenures, however, in run up to elections they can’t afford the heavy cost of the IMF “friendship”.
The discontinuation with IMF program will have obvious implications on the prospects of obtaining funding from other multilateral institutions such as the World Bank and Asian Development Bank. Pakistan would have to repay $1.2 billion to the IMF as principal and interest payments in two installments but the country’s foreign currency reserves might decline in the range of $500 million to a maximum $2 billion compared to the existing level of over $17.5 billion.
However, the government in the long run have no option but to continue power sector reforms, macroeconomic adjustment and stabilization program to maintain credibility to return to the IMF program with ease in case of any difficulty with external account. If that does happen, what will come next is almost inevitable: Pakistan will be forced back into the arms of the IMF. And the next time the IMF is likely to be more stringent.
So debt scenario of Pakistan is getting bad to worse. The public debt has soared by a whopping Rs.120 billion just between July 1, 2011 to-date in the wake of depreciation of Pak currency. The country’s public debt has risen to 11 trillion, which includes foreign debt of Rs.4500 billion ($ 60 billion) and domestic debt of Rs. 6500 billion. The country is paying $ 3 billion at average every year under debt servicing to foreign creditors. However, for FY-2010 the debt servicing target is much higher of $ 5. 46billion and ratio will further shoot up in 2014, when rescheduled loans will be back in action, amassing the external debt burden to $ 75 billion.
On the other hand, the international credit ranking of Pakistan is also fast decreasing mainly because of multiple implications of the country’s involvement in US-led war on terrorism. A recent study by the IMF found that twenty-eight of the poorest nations are now at high risk of debt crisis. Pakistan is ranked number 5 in “cumulative probability of default” (CPD) report. In the situation Pakistan’s economic ailments are getting complex and neo-liberal economic remedies are not going to work.
While still suffering from the economic pain inflicted by the last year’s super floods, Pakistan once again hit by the fresh wave of floods this year as well. The major reason of these floods is the overflowing of water from Left Bank Outfall Drainage (LBOD)- a World Bank funded faulty project. Over 8 million people are affected this time in the Province of Sindh. Lakhs are shelter less, foodless and without medicines. It is not less than shame and violation of Fundamental Human Rights that IMF and other creditors continue to push government for debt servicing, while millions crying for basic needs.
IMF programs with Pakistan – loaded with political motivations
Pakistan joined IMF in 1950.The first time government of Pakistan went for a loan from IMF was in 1958. It was a Stand By Agreement worth US $ 25 million. However, the loan was cancelled soon after. It was a period of political upheavals in Pakistan and our first dictator, Field Marshal Ayub Khan was about to take over. However, in 1960s, during Ayub regime, IMF happily gave two packages; standby agreement in 1965, 1968, to ease the dear dictator. When second dictator Gen Yahya placed in, IMF continued showering its financial blessing over him and made four more SBA agreements in 70s doling away US $ 330 million.
However, with the first popularly elected democratic government of ZA Bhutto coming to power, IMF behavior towards democratic government became cooler and it almost deleted Pakistan from the favorite list on account of Bhutto’s socialist agenda. That was why Bhutto had to tell the Fund to “go to hell, we do not want your money”.
However, in 1979, with the toppling of ZA Bhutto’s democratically elected government at the hands of third and most cruel dictator Gen. Zia ul Haq, the nature and extent of IMF involvement drastically changed and it extended lavish package for the dear dictator. Statistics show that in 20 years (1958-1979) Pakistan had collective IMF packages of worth US $ 460 million. However, in Nov 1980, it extended a huge amount of US $ 1.27 Billion to Gen Zia regime through long-term Extended Fund Facility (EFF). The amount was three times the entire amount lent through 7 SBAs packages in 20 years.
It is interesting to note that after the passage of decade of eighties (Zia period) there was major change in the character of IMF packages for the late 80s and 90s, when Pakistan had successive stints of democratic governments of PPP and PML. Now, once again more complex and tough conditions were being attached to loans offered to Pakistan. The number of conditions attached to structural adjustment loan, for Benazir Government (1988-91), was increased from average 27 in 1985 to 56 in 1989. The conditions attached to 1988 IMF package were the most severe in the history of IMF-Pakistan interaction.
The IMF’s strict and anti-people financial prescriptions continued throughout the 90s. But with the sudden entry of yet another dictator, Gen Musharraf in 1999, coupled with 9/11 incident in 2001, IMF ceased its harsh attitude once again and as usual softened its behavior towards Pakistan’s new dictator. The moment Musharraf regime agreed to be part of US-led war on terrorism, IMF indicated easing out its position on the concessional Poverty Reduction and Growth Facility (PRGF). It is pertinent to mention that prospects of PRGF package for Pakistan were quite dismal till a week before 9/11.
However, IMF swiftly changed its position after 9/11 and quickly agreed to support Gen. Musharraf by extending financial support under much needed PRGF. Thus it is evident from the above mentioned fact that sudden and positive change in IMF attitude towards Pakistan was the result of political understanding between Gen. Musharraf and US administration, and not in line with the ethics of multilateral lending.