IMF load and its consequences to Pakistan

History of IMF•It was formed in July, 1944. Its headquarters are in Washington, USA.
•IMF is an organization of 185 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.
How was IMF FORMED?
•Western Capitalism
•Formation of institutions to implement American Capitalist World Order.
•Veto power of America in IMF
•America’s qouta is 17.6 % and according to the rules, for any decision 85% majority is needed. So, America alone can block any decision. Hence America, practically, has the veto power in IMF.
International monetary system
•Gold Standard
•Currencies pegged to the value of gold; convertibility guaranteed
•By 1880 most countries were on the gold standard
•Abandoned in 1914; attempt to resume after WWI failed with Great Depression
Bretton Wood (1944-1973)
a)44 countries met to design a new system in 1944
b)Established International Monetary Fund (IMF) and World Bank
c)IMF maintained order in monetary system
d)World Bank promoted general economic development
f)Fixed exchange rates pegged to the US Dollar
g)US Dollar pegged to gold at $35 per ounce


Collapse of Bretton Woods•Devaluation pressures on US dollar after 20 years
•Lyndon Johnson’s policies
•Vietnam War financing
•Welfare program financing
•Nixon ended gold convertibility of US dollar in 1971
•US dollar was devalued and dealers started speculating against it for further devaluation
•Bretton Woods fixed exchange rates abandoned in January 1972
Criticism
Two criticisms from economists have been that financial aid is always bound to so-called

•Conditionalities, including Structural Adjustment Programs(SAPs)
•These Conditionalities are the economic performance targets established as a precondition for IMF loans

Structural Adjustment Programs:•SAPs are the policy changes implemented by the International Monetary Fund (IMF) in developing countries.
•These are the conditions for getting new loans from the IMF or World Bank, or for obtaining lower interest rates on existing loans.
•Structural Adjustment Programs generally implement "free market" programs and policy.
IMF’s Original Function and activities
•Provide a pool of money from which members could borrow to adjust their balance-of-payments position and maintain their exchange rate
•If exchange rates of major currencies rise and fall erratically, it becomes difficult to price goods for international business and trade is hampered
•Since many countries trading with many other countries, so IMF makes sense to make sure the currency exchange rates are stable
Activities•IMF’s Current Function
•The IMF began to lend to medium sized economies and emerging economies
•When these recipient countries experience financial crisis, the IMF lends money – BUT the IMF requires that the recipient follow certain economic policies so that they will be able to use the money wisely and their economy will recover



To serve these purposes the IMF;Monitors economic and financial developments and policies, in member countries and at the global level, and gives policy advice to its members

BUT Conflict and controversy develops when the IMF makes recommendations that are difficult for the recipients to follow.





IMF loan to Pakistan
IMF’s Past Lending to Pakistan


•Conditions for the loan were that Pakistan spend more on infrastructure (roads, schools, hospitals) and less on military spending
•Pakistan leaders said we have military tension with India on our east and we have conflict in Afghanistan to our west – military spending is critical
•The IMF was criticized for giving money to national governments, who end up using it for purposes other than the original agreement


IMF’s current loan to Pakistan•The International Monetary Fund has recently approved a $7.6 billion loan for Pakistan to prevent the country from defaulting on its debt and to help stabilize its economy.
•Pakistan would get immediate access to about $3.1 billion, and the rest would be phased in quarterly reviews.
Conditions and Effects of the Loan:•IMF demands that the P.M. House and the President House should cut short their expenses
•The IMF conditions include a demand that the government increase tax rates, which are among the worlds lowest. In particular, the fund wants an increase in agriculture taxes

Conclusion
•The IMF loan will be repayable in five years. Since the servicing liability on the existing debt burden of $ 50 billion is already about $ 3 billion a year, the IMF loan will raise the annual liability to $ 5 billion a year.
•This will require a number of measures, including elimination of exemptions in the general sales tax, income tax, commercial agriculture.