2019 saw Pakistan’s 13th bailout in the last 30 years. As each government comes and goes, the one thing that does not change is Pakistan’s dependence on the IMF. Loans are taken only to avert BOP crises by short term injection of funds and increasing reserves. Little attention is paid to the long term effects of mounting such external debt.
Political leaders time and again go for an IMF loan without any foresight and future planning so that they could stabilize the then economic status but blame the repercussions on the next government.
In this article, we will explore:
• Pakistan’s history with IMF
• What circumstances probed each government to take the loan?
• What were its effects?
To understand IMF loans, there are some key terms that must be discussed first.
Special Drawing Rights (SDRs): According to IMF’s own website the “SDR is an international reserve asset, created by the IMF in 1969 to supplement its member countries’ official reserves.” In simple words, it is a kind currency for the IMF which can be exchanged for the freely usable currencies of member countries. SDRs are allocated to member countries in proportion to their IMF quotas. Its value is based on a basket of key international currencies: US Dollar, Chinese Renminbi, Euro, Japanese Yen and British pound sterling.
Currently, that is in June 2019, 1 SDR = 215.79 PKR and 1 SDR = 1.38 USD.
Now we come to the type of programs and loans that IMF offers, that Pakistan has availed.
- Standby Arrangement (SBA): A staple IMF program to provide aid to emerging and advanced market countries with a current or impending BOP crisis. Availed 12 times.
- Extended Fund Facility (EFF): Medium-term program with longer duration and repayment period (compared to SBA) in order to assist countries that need structural reforms to address a BOP crisis. Availed 6 times.
- Extended Credit Facility (ECF): Program for countries with a prolonged BOP problem. It is a flexible and tailored program and IMF’s main tool for providing medium-term support to low-income countries. Availed 3 times.
- Structural Adjustment Facility Commitment (SAF): Concessional financing for the world’s poorest countries. Now replaced by the Poverty Reduction and Growth Facility. Availed once.
Before we start a few important stats to look out for when discussing IMF include:
• As of now Pakistan has gone to the IMF 22 times.
• Amongst these only 13 programs were bailouts, and 5 were prematurely terminated.
• Pakistan joined the IMF in 1950 and its first loan was the SBA in 1958.
• In 2019 Pakistan would receive $6 billion through an EFF program over a period of 3 years.
• PPP has borrowed the most from IMF when they were in government.
The following table shows the amount and type of loans taken by Pakistan from the IMF and the exact money drawn (since not all of it was taken).
Ayub Khan (1958 – 1969)
During this period 3 SBAs were signed of which only the first one was not entirely disbursed meaning the amount of the first SBA was not drawn. Each of these facilities was a short term loan expiring only within 1 year. All of these loans are termed bailouts.
Zulfikar Ali Bhutto (1973 – 1977)
In 1972 another SBA was signed under Bhutto, and then 3 more. The special characteristics of this phase were (a) there was little emphasis on structural reforms (except in EFF), and (b) repeated approach to Fund resources, in between periods of break.
3 of these programs were successful with the complete amount drawn.
General Zia (1977 – 1985)
He signed a 3-year EFF agreement which was the first long term facility and had to be taken due to the currency appreciating. The amount was three times the entire amount lent through 7 SBAs packages in 20 years. In 1981 another loan under the EFF was received.
The objectives of the IMF were similar to that in ZA Bhutto’s regime. However it is interesting to note that whenever a dictator took a loan, the IMF would immediately soften its behavior but during democratic governments the number of conditions would not only increase but would be very harsh. This may partly be due to the dictators’ (Musharraf and Zia) willingness to be a part of the US-led war on terrorism.
Benazir Bhutto (1988 – 1990)
In the 90s foreign aid had stopped so Benazir went to the IMF and funds under the SBA and SAF program were received by Pakistan.
It must be noted that the SBA was signed on by Dr Mehboob-ul-Haq the former finance minister, just a few weeks before the elections. IMF added conditions like free trade, privatization, devalue exchange rate, increase taxes, increase electricity prices, reduce discretionary expenses like PSDP, enhance export incentives and reduce list of restricted imported items. Individual development was affected as now indirect taxation had increased, subsidies on gas, electricity and fertilizers were withdrawn.
Wheat, cotton, sugar cane, rice and petroleum products became expensive. Credit allocation lowered and the cost of borrowing was high.
This contributed further to the economic and political instability due to the shift from military rule and rival PML-N’s efforts to label PPP as Sindhi nationalist party. Corruption scandals, including allegations against her husband Asif Ali Zardari and her father-in-law Hakim Ali Zardari caused her Cabinet to sink as well.
Nawaz Sharif (1990 – 1993)
Unlike the previous governments, the IMF emphasized on a variety of structural reforms along with demand management policies PML-N’s tenure.
Nawaz Sharif initiated an ambitious program of economic reform during his first term and privatized a range of state-owned businesses. With tensions simmering in Kashmir and feeling the need to secure itself against aggressive Indian policies, Nawaz Sharif’s government defied US calls to suspend the nuclear program.
With economic aid halted by the US, Nawaz also faced increasing pressure at home. This is primarily why the SBA program was signed as the IMF was the only source of funding.
Benazir Bhutto (1993 – 1997)
Despite the huge failure in her first term, Benazir was quick to sign on 3 more loans from the IMF. These were the EFF, ECF and SBA respectively.
It the same time, Pakistan owed huge amounts to the International Monetary Fund as part of servicing its enormous $28.6 billion in foreign debts. Benazir had raised taxes, which raised the level of discontent in the country. But even so, her government did not collect enough revenue. In an effort to appease the IMF, Bhutto gave up the finance portfolio she had held since retaking the government.
Nawaz Sharif (1997 – 1999)
Nawaz Sharif came into power in 1997 and the program during his time started to show some progress. An ECF and EFF agreement was signed under PML-N tenure. The comprehensive program of macroeconomic adjustment and structural reforms in early 1997 yielded some positive results: economic growth accelerated and inflation was brought down to single-digit levels against a backdrop of tight macroeconomic policies.
In 1998 when Nawaz Sharif tested nuclear weapons he faced a lot of backlash which led to the US imposing sanctions on Pakistan. This affected exports and foreign aid had stopped.
General Pervez Musharraf (1999 – 2002)
4 programs were entered into after 2000, of which 3 were successful.
It must be noted that the nuclear tests conducted by Nawaz Sharif in 1998 and Musharraf’s military coup in 1999 had led to falling out of US favor. Thus Musharraf’s only option was the IMF. During Musharraf’s tenure 2 agreements were signed: SBA and ECF. The first program (ECF) program though successful, had a lot of issues. The drought that hit Pakistan had severely damaged the economy so waivers were granted on areas like revenue collection and tax reforms.
The completion of the first program led to Musharraf entering the SBA (now known as Poverty Reduction and Growth Facility). The funds however were not used for poverty and social related expenditures. Instead it was clear that IMF’s objective was mass privatization. This is clear from UBL, HBL and big enterprises in oil and gas sector becoming private. Removing government shares in oilfields in SSGC was also observed. A more open economy in terms of trade and exchange rates is what the IMF wanted, and it is what they achieved.
A lot of people believe the completion of these two programs are primarily due to the positive external developments. Taking the example of 9/11, US had given huge grants to Pakistan to aid in the war against terrorism. This influx of dollars increased Forex reserves which had a good impact on the economy. Many write offs and debt rescheduling were also given.
Musharraf had even refused the last installment saying that Pakistan would no longer need the IMF.
Yousuf Raza Gillani (2008 – 2012)
Soon however the PPP approached the Fund for around $11.35 billion under an SBA. The financial Depression of 2008, depleting reserves, high international oil prices and high inflation had led to this.
The main economic objectives of this program were to:
• Reduce fiscal deficit (from 7.4% of GDP to 4.2% in 2009, and 3.3% in 2010)
• Tighten the monetary policy (increase interest rate, and reduce government borrowing to reduce inflation to 6%)
• Increase expenditure on social safety net (o.6% of GDP to 0.9%)
However, unlike the previous 2, this was not successful as the government could not being down budget deficits and revenue collection lowered. Nevertheless, the likely default situation was averted but investor confidence had lowered significantly.
Nawaz Sharif (2013 – 2017)
PML-N took a $6.6 billion loan under the 36- month EFF program which aimed at bringing down the inflation and lowering fiscal deficit. Solving the energy crisis at the time was also a top priority which is why the IMF funds were used to clear circular debt, adjusting tariff to improve resource allocation and energy conservation.
Several policies aimed at natural gas supplies were also passed. The increased dependence in the thermal oil power generation had given rise to circular debt because bill payments were not being made. The debt was settled – Rs.342 billion cash payment using IMF funds and a non cash payment of Rs.138 billion.
PML-N issued a Power Policy that aimed to reduce cost of power generation, bring down transmission losses from 25% to 16% and improve collection of bills to 95%. These policies obviously required regular maintenance and funds which were provided by the IMF. Gas related initiatives like the IP gas pipeline project was also planned. Energy subsidies will be lowered that currently go the wealthy class and thus putting less burden on government expenses.
Pakistan at the time even though did not have a very bad BOP deficit (only 1% of GDP), its FDI was very low and the depleting reserves is what brought the currency on the verge of collapse.
Despite these policies, the government like its predecessors kept missing their deficit and reserve targets. It was only after the fall of commodity prices and oil that PML-N was able to meet a few benchmarks.
Imran Khan (2018 – )
The current PTI government has signed a $6 Billion bailout agreement under the EFF program. Despite PTI’s claims about never approaching IMF again, they gave in to the pressure of their financial crunch and went to them again.
Pakistan’s current account deficit — a measure of the imbalance between imports and exports — is an existential crisis. The country is deep in debt to China, and its slowing economy is expected to contract even further this year.
The objectives IMF wants the government to achieve include:
• Increasing tax revenue by raising rate and expanding tax net. Go after tax evaders and improve tax administration.
• The upcoming budget will aim for a primary deficit of 0.6 percent of G.D.P.
• Revise power reforms like phasing out its subsidies.
• Reduce discretionary expenses.
• IMF wants Pakistan to free float the currency. This is raising a lot of concerns as the Pakistani Rupee has already dropped by 17% in the past year. Country’s import prices will further inflate.
One only hopes that the money will be used efficiently keeping in mind the near and far future.