Should Pakistan opt for the IMF programme

Pakistan has no strain on its balance of payments and also has sufficient foreign exchange reserves. Therefore, it is not interested to ask for a new International Monetary Fund (IMF) loan programme neither would it request for an extension with the existing loan package ending on September 30.
However, it will remain in close contact with the IMF, said officials. This was the eighth programme with the IMF which ended on an unsuccessful note.
In July and August 2011-12 the current account deficit narrowed down to $189 million, as against a deficit of $1.016 billion in the same period last year, due to an increase in exports which rose to $25 billion, and workers’ remittances that are enough to meet the country’s foreign exchange requirements with a current account deficit of about 1 to 2 per cent. The foreign exchange reserves were $17.79 billion on September 10 and were at a record level of $18.31 billion on July 10, 2011. In November 2008 the IMF approved $7.6 billion for a 23 month Stand-By Arrangement for Pakistan to support the country’s economic stabilisation programme. The amount approved by IMF was 500 per cent of the country’s quota and was under fast track Emergency Financing Mechanism procedures.

IMF payables

In August 2009, when the Friends of Democratic Pakistan group of aid donors refused to provide a promised loan, Pakistan requested to enhance the size of the 2008 IMF loan to $11.3 billion from $7.6 billion that was accepted.
The country’s total debt and liabilities reached the unprecedented level of Rs11.01 trillion or $129 billion in 2010, which was 69 per cent of the total size of the economy, SBP said. Under the Fiscal Responsibility and Debt Limitation Act, the government must keep the debt level below 60 per cent of GDP. The country’s domestic debt amounted to Rs5.3 trillion and external debt was over Rs5 trillion.
Pakistan will pay over $1 billion in interest on IMF loans. It has to repay $2.9 billion in 2013; $4.3 billion in 2014; $2.6 billion in 2015; and finally remove the debt with payment of the last tranche of $430 million in 2016, according to finance ministry.
The IMF loan repayments will start from early next year. Pakistan has to pay $1.2 billion in two installments. Besides, 60.3 million with SDR 27.9 million interest to be paid to IMF in 2011, as the first installment of the loan received under Stand-By Arrangement (SBA) programme. According to the repayment schedule, Pakistan has to repay SDR 1.418 billion with an interest of SDR 100.24 million, total SDR 1.518 billion in 2012, IMF website indicated. In 2013 payments would be SDR 2.451 billion, SDR 2.399 billion as loan and SDR 52 million as interest. During 2014, Pakistan will pay SDR 1.396 billion, SDR 1.379 billion in loan and SDR 17 million as interest. Further, SDR 306.4 million has to be paid to the Fund, SDR 303.04 million as loan and SDR 3.43 in interest in 2015. The total outstanding loans of Pakistan to the Fund under SBA are SDR 4.936 billion with 477.5 per cent quota while under the emergency assistance the country has received 28.7 per cent of its quota that is SDR 296 million. Similarly, the outstanding purchases and loans under Extended Credit Facility (ECF) utilised amount is SDR 327.3 million that is 31.6 per cent of the quota.
According to the details, the amount approved for Pakistan was SDR 7.235 billion while the drawn amount is SDR 4.936 billion. Pakistan entered into an ECF arrangement programme on December 6, 2001 which expired on Dec 5, 2004. The total amount drawn under the programme was SDR 861 million while the total amount approved for Pakistan under ECF was SDR 1.03 billion. In November 29, 2000 Pakistan entered a SBA programme and utilised the full amount, SDR 465 million.
Implementation of Multilateral Debt Relief Initiative (MDRI) and Post Catastrophe Debt Relief (PCDR) are not applicable to Pakistan as its current per capita income is $ 1207, the MDRI was adopted by the IMF in late 2005. IMF initially turned down Pakistan’s request saying the economic managers lied on tax reforms that proved true by the figures of 2010-11. The IMF considers the policy makers are cheaters and liars, said Pakistan’s former representative in the IMF board, Dr Ehtisham Ahmad. IMF board also said Pakistan’s economic team also lied on the promise of levying the value added tax (VAT). Out of the total $11.3 billion IMF loan, the amount disbursed was $7.6 billion, but failed to get the remaining $3.7 billion due to not showing good performance that led to suspension of the programme since May 2010. The programme was extended for nine months until September 30, but disbursement was not started because of not implementing agreed measures.

Fiscal deficit

The IMF has been insisting that Pakistan should expedite fiscal reforms that include limiting fiscal deficit to 4.7 per cent of GDP, which was later revised to 5.3 per cent of the GDP. However, the government could not meet even the revised deficit limit which exceeded 5.9 per cent at the end of the financial year on June 30, 2011.

VAT, power tariff & circular debt

The other IMF demand was introducing Value Added Tax (VAT) and retiring power sector circular debt that reached Rs200 billion. The IMF wants that the power tariff should be raised to 24 per cent during 2010 in three phases, i.e. 6 per cent in October-December quarter, 12 per cent in January-March and 6 per cent in April-June. The government was planning to increase electricity tariff by 10 to 12 per cent, but it would be difficult to bridge the gap of Rs250 billion of the power sector.
The government was unable to implement these three major commitments. However, despite not seeking the IMF fund, the officials said the government would implement the fiscal reforms for macroeconomic stability. The FM said the government would continue to implement power sector reforms and take steps to introduce reforms demanded by IMF so it has reasonable credibility to return to the Fund with ease in case of any difficulty with external account.
Dr Ehtisham said the 2008 programme was approved on a strategy that Pakistan would mobilize the domestic resources by generating additional tax revenues equivalent to 1 per cent of the total national income for consecutive three years. The IMF wanted that Pakistan should enhance tax to GDP ratio to 14 per cent from the present 9 per cent up to the year 2013 and reduce the budget deficit to 3.0 percent of the total size of the economy.

History of US assistance to pakistan

US-Pakistan relations go back to 6 decades and have been a love-hate relationship between the two countries. The United States Agency for International Development (USAID) has provided about $7 billion to assist Pakistani government in achieving its development goals since the start of its operations in 1951.
Pakistan received nearly , a quarter of which was military assistance. The United States then suspended assistance during the Indo-Pakistan wars and following Pakistan’s construction of a uranium enrichment facility in 1979. Pakistan remerged as an ally in the 1980s during the Soviet Union’s occupation of Afghanistan and was again the recipient of aid. But following the withdrawal of Soviet troops in the late 1980s, assistance to Pakistan reduced substantially.
During the 1950s, the US focused on helping the newly independent Pakistan to overcome the economic problems emerging due to its partition from India. This assistance helped to lay down the foundation of agricultural and industrial growth. It provided funds, materials for infrastructure and technical support to ease skill shortage and food.
In the 1960s, US aid was about half of all foreign aid to Pakistan, covering one third of Pakistan’s budget and financing half of its import bill. From this point onward it also supported agriculture and industrial sectors. Besides, it invested heavily in water, power, transportation and communications.
During the 1970s, the US helped Pakistan to increase its fertiliser production and provided funds to import fertilisers and improve its water and irrigation systems. USAID worked with Pakistani agricultural scientists and engineers to develop water and irrigation systems on farms. The USAID with other international donors financed two largest dams of the world, Tarbela and Mangla. The dams continue to make significant contributions to the energy and agricultural sectors till today. In the same period, the US also supported nutrition research, malaria control, population planning and health care for rural areas.
During 1981-87 USA aid to Pakistan was a landmark in the US Pakistan relations. Cooperation increased between the two countries and they negotiated a $1.62 billion programme in 1981 from which Pakistani institutions started many projects in all four provinces, for the annual and five year development plans. From 1988-93, the US provided an additional $2.28 billion for development projects, $480 million was used to import agricultural items the rest was in grants. USAID also invested in expanding private investment in Pakistan, guarantees for housing loans to strengthen the housing market, mobilizing shelter resources and the Institutional Excellence Project.

US sanctions

From 1991-01, US Government imposed nuclear non-proliferation sanctions, therefore, under a humanitarian assistance regulation USAID worked with, and through, non-governmental organizations (NGOs) on narcotics control, basic education and community based learning, literacy and skills development; reproductive health maternal and child health care; income earning activities; strengthening of local NGOs and community organizations and policy advocacy at the national, provincial and local levels. After an 8 year suspension, USAID reopened its Mission in Pakistan in July 2002. Presently, USAID has direct funding relationships with some 40 partner organizations covering all elements of the USAID portfolio in Pakistan.
The USAID has played an important role in helping Pakistan in humanitarian disasters with relief, recovery and reconstruction assistance. First in response to the devastating October 2005 earthquake. It helped the people to “build back better” with new earthquake resistant schools and health facilities. Assistance was also used to increase economic opportunities. Then in 2009 following the conflict in the Federally Administered Tribal Areas and Khyber Pakhtunkhwa, USAID provided humanitarian assistance to the internally displaced people who left their homes by the millions to escape the violence and later committed funds to reconstruction projects that restored infrastructure damaged in the conflict areas. The USAID played a critical role after heavy monsoon flooding Pakistan in July 2010, by providing about $550 million for relief and recovery efforts. The USAID’s assistance focused on providing shelter, food, water, health services and essential supplies to affected communities, including displaced families. Presently, USAID is focusing to Pakistan in five priority sectors: energy, economic growth, stabilization, education, and health.

Kerry Lugar bill

In spite of US aid, only of the Pakistani population is literate. Only one third of Pakistani women can read and write. The of total US aid, since 2001, directed toward education. This amounts to an average of less than $2 per Pakistani child per year.
About was given under the head of economic and development assistance, including food aid. However, about 77 million Pakistanis, half of the population, is unable to get adequate nutritional intake. With the support of the , also known as the “Kerry-Lugar-Berman Bill”, the USAID said that it aimed to strengthen the Government of Pakistan’s capacity to effectively provide services to its citizens and to address the country’s urgent development needs, and to deepen a strategic partnership with the Pakistani people and their government, by supporting Pakistanis to create a stable and prosperous country. It said the US assistance will have a greater and more sustainable impact over the long term.
Again after 9/11, Pakistan became a US ally and almost all of the aid provided was for military operations amounted . The majority of which has been from “coalition support funds” reimbursed for Pakistani assistance in the war on terror.
However, Pakistan has suffered greatly due to its involvement in the war on terror the number of deaths from terrorist violence in Pakistan in 2003 was 189 that rose to in 2005 and further increased to in 2007. Moreover, about 30,000 civilians and 5,000 military and police people have died in terror attacks since 9/11. Increasing political and economic instability and the growing violence demonstrated that the Pakistani people need more than military assistance to improve stability in their country, said aid providers. Besides repayments, Pakistan is not receiving any funds from multilaterals or friends of democracy; it will be difficult to run economy without an IMF programme. Therefore, Pakistan has no option but to seek the ninth programme of the Fund. In this regard a team visited Washington, headed by the finance minister, from 23 to 25 September 2011 to attend annual meetings of the IMF and World Bank to discuss funding.