PAKISTAN has a long history of dealing with the IMF and asking for financial assistance, it was in 1958 when Pakistan went to the IMF and asked for a bailout package for the first time. IMF agreed to a package of USD 25000.00 which will amount to USD 253,576 in today’s money this agreement was signed on the 8th December 1958. During the last 76 years Pakistan has sought assistance from the IMF 23 times.It is important to first understand what the IMF is at its core. After the devastating impact of World War II, the IMF was established as a lender since many monetary institutions had become dysfunctional. World leaders gathered in the United States of America in a conference held in New Hampshire between July 1st – July 22nd, 1944. Two institutions were created as a result of this conference, The World Bank and The IMF to ensure global monetary and financial stability.
It is interesting to note that most IMF funding is usually availed during periods of intense political strife. The period of 1960-1988 was an interesting time for the country. Despite having only recently been granted independence, an impressive average GDP growth rate of 6.8% over the 1960s was maintained. That being said many external issues would throw a wrench in productive undertakings and political complications would cause many undue issues. Nowhere is this more apparent than the separation of East and West Pakistan in 1971, reflected by the fall in GDP growth rate down to 0.5%. Shortly after, Bhutto’s nationalization scheme would also be implemented, which slowed down economic growth due to complications in effective implementation resulting in staff mismanagement, increased investment costs and decline in service quality in state owned enterprises, while also reducing the private sector’s incentive to invest.
Couple this with the blowback from productivity losses and balance of payment issues arising due to East Pakistan’s separation and the global recession in 1973, it comes as no surprise that IMF funding was sought for 3 consecutive years between 1972-1974 inevitably contributing to a sharp spike in inflation rate for the following years, reaching a record high at 26.2% in 1974.
The 1980s saw the advent of the Soviet-Afghan war. With Pakistan and Afghanistan as major players in the region to oppose the Soviet march, many foreign powers, including America, provided funding to Pakistan and by extension, Afghanistan, to act as a proxy on the front lines and repel the invasion to deny Russia a strategic geographical gain. This unprecedented exogenous inflow of revenue was capitalized on greatly. Couple this with steps taken towards a new deregulation policy, increased remittance inflow and other factors, helps explain how inflationary pressures remained low throughout the 1980s despite two IMF loans taken in 1980 and 1981. Pakistan utilized the incoming revenue to bolster its defense budget and improve its economic strength, reflected in how government spending was on an increasing trajectory and GDP reached an average of 6.5% over the decade. In the years following the end of the Soviet-Afghan war, government control of Pakistan would rotate between the Pakistan People’s Party and Pakistan Muslim League (N). A time of economic decline was observed as the flow of foreign funding came to a halt and security risks in the country increased exponentially owing to the rise of Kalashnikov culture and mass immigration towards Pakistan.
While the two governments took steps towards further privatization and liberalization in the country, unstable political climate as well as opposition by public sector entities and worker unions led to significant delays in the implementation. Moreover, public debt and unemployment, along with fiscal and external debt were on the rise, leading to seeking more IMF loans in hopes of implementing policies to improve stability, though the endeavor would be largely unsuccessful. Things would come to a head in 1998, when the first public nuclear tests led to then PM Nawaz Sharif declaring a state of emergency which put a halt to the remainder of the privatization program, while also shutting down stock exchange. The tests would also lead to numerous trade sanctions / embargos on Pakistan. With foreign exchange reserves only worth $400 million still in access, access to foreign markets restricted due to decreased credit rating, it helps to paint a picture of why average GDP growth over the decade hovered around barely 4% and poverty rose exponentially.
Following up on the issues of the previous government, two IMF loans were taken on 2000 and 2001 as a stimulus to begin course correction. The main goal was to resolve the mounting debt crisis in the country and improve poverty and unemployment ratios. While there was substantial improvement on these economic indicators and GDP grew at a respectable average rate of 6.3%, the improvements were not sustainable as by the end of Pervez Musharraf’s tenure, Fiscal and current account deficits widened, leading the country once again to borrow excessively, which led to a spike in inflationary pressure and money supply, stifled foreign capital inflow and weakening exchange rate as foreign reserves began depleting again. With how the economy was weakening towards the end, the next government under Asif Ali Zardari had to seek out an IMF loan again on 2008, as soon as they came to office.
The years between 2008 and 2013 were troubling times for Pakistan with unsustainable economic policies pushed at the forefront, amid increasing cases of rampant corruption in all institutions. There were severe coordination issues between the fiscal and monetary authorities as well, leading to a persistently high case of inflation, unemployment, energy shortages etc. when comparing GDP growth and inflation to the previous tenure, bothworsened from 5.1% and 5.7% to 2.8% and 12.7% respectively.
Benazir Bhutto was sworn in as Prime Minister on 2nd December 1988 and she signed two agreements with the IMF and since then it has become a norm for every subsequent new Govt.to sign a new IMF package. After the swearing in of the new coalition Govt. headed by Shahbaz Sharif an IMF mission has just concluded talks with the nation’s economic managers on its short term USD 3 Billon Package. The review has been successfully completed and after a staff level agreement that will facilitate the disbursement of USD 1.2 Billion tranche very shortly that will be a vital cash injection in the country’s economy. The new finance minister has now hinted at starting discussions with the IMF for a bigger and longer bailout package.
—The writer is Professor of History, based in Islamabad.
Email: tariq.aqil@headstart.edu.pk
