Evaluate the Impact of IMF Loans on the Economy of Pakistan

CSS Solved International Relations Past PapersEvaluate the Impact of IMF Loans on the Economy of Pakistan.

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Question Breakdown

The examiner has asked you to evaluate the impacts of IMF loans on the economy of Pakistan. Here the word evaluate is a keyword that means you have to shed light on causes, impacts, and recommendations. First, tell the examiner something about the IMF. Second, you need to give an overview of the extent of IMF loans to Pakistan. Then you delve into the causes of seeking economic assistance from the IMF. Besides, the talk on the topic is to evaluate the impacts of the IMF loans on the economy of Pakistan. Next to it, highlight some remedial measures to escape the IMF debt trap. Lastly, introspection requires theoretical implementation.

1- Introduction2- International Monetary Fund Bretton Woods project3- An overview of the extent of the IMF loans for Pakistan a conundrum piecemeal4- What are the causes of seeking economic succor from the IMF?

• ✓ Political turmoil to the lust for power leading to fiscal slippages
• ✓ Catastrophic flash floods 2022 and the climate crisis
• ✓ Draconian spikes of covid-19, Russia-Ukraine war, and skyrocketing prices of cartels

5- A glimpse of the impacts of the IMF loans on the economy of Pakistan

• ✓ Depreciation of the Pakistani rupee against the US dollar through a market-based exchange rate
• ✓ Inverse relationship between interest rates and foreign direct investments FDI
• ✓ Incremental taxation measures by cutting developmental expenditures

6- Viable and rigorous measures for strengthening the economy of Pakistan7- Introspection What s next?8- Epilogue

Answer to the Question

Pakistan, undoubtedly, has been the victim of political, constitutional, and economic engineering. For instance, foreign intervention in sovereign affairs, self-obsessed and egocentric leaders, and hypersonic institutional interference are quoted. Pakistan s economy is jeopardized due to cataclysm flash floods, draconian impacts of the Covid-19 pandemic, Ukraine-Russia war implications, hyperinflation, and the harsh neo-liberal model of the IMF. Consequently, the devaluation of currency owing to a market-based exchange policy, incremental tax measures due to tight fiscal policy, and an increase in interest rates under tightening monetary policy are some of the impacts of the IMF loans on the economic saga of Pakistan. A meticulous plan of action is the need of the hour in the account. A critical introspection is to delve into the long-term independence from the debt trap of the IMF.

It is an earmarking financial organization under the shadow of the United Nations and an International Financing Institution established in1944 at the Bretton Woods Conferenceby the ideas ofHarry Dexter White and John Maynard Keynes. It has 190 members, and its head-quarter is in Washington, D.C.

The functions of the IMF include

• To succor fixed exchange rate for harmonization between countries
• To consortium a short-term capital so that assistance to a balance of payments provided
• To prevent the spread of international economic crises through global surveillance
• To help the pieces of the international economy after the Great Depression and World War II
• To provide capital investments for economic growth and projects such as infrastructure

Pakistan joined the IMF on11^thJuly 1950, at the hub of the financial crisis. However, the report from the IMF reveals33.2 million SDRs succored in Pakistan to date 47 per cent by the PPP, 35 per cent by the PML-N, and 18 per cent by the military dictators. A glimpse of economic assistance given to Pakistan in the last 75 years is as under

On29^thAugust 2022,the Executive Board of the International Monetary Fund IMF completed the combinedseventh and eighth reviews of the Extended Arrangementunder the Extended Fund Facility EFF for Pakistan, allowing the authorities to draw the equivalentof SDR 894 million.

• Political turmoil to the lust for power leading to fiscal slippages

On10^thAprillast year, PDM Pakistan Democratic Movement won the vote of no-confidence against the then Prime Minster, Imran Khan. The meddling of foreign parties in the ousting of the former Prime Minister led the political engineering in the country, as done in the past. Cited in the bookWorld Order Henry Kissingerwhat are the strategies of the US to intervene in the foreign policies of the Third World countries for its interests. Consequently, the economic saga hangs the Damoclean sword on the poor of the country. Thus, the strategies of Daar and Miftah fail and seek assistance from the IMF.The forex reserve dropped to USD 8.24 billion.

• Catastrophic flash floods 2022 and the climate crisis

Antonio Guterres pleaded in the 77^thsession of UNGA to succor nations that are going towards economic turmoil. He further delineated the catastrophic floods in Pakistan, revealing Pakistan is drowning, not only in floodwater but in debt too.According to a recent report,Pakistan received 90 per cent more rain this year and the average rainfall received in the last thirty years.Thus, the break neck-speed of food insecurity, terrorism, unemployment, and inflation in the country, leads to the edge of default and bankruptcy.

• Draconian spikes of covid-19, Russia-Ukraine war, and skyrocketing prices of cartels

The stemming of Covid-19 crashed the economic activities and stock markets globally.Exports dropped by a minimum of 3.3 per cent in January and a maximum of 20.3 per cent in April.On the other hand, the Russia-Ukraine war added fuel to the fire. Economic recession, skyrocketing prices of oils and petroleum, the upsurge of LNG rates, disturbed energy and commodity supply chains, and soaring food prices are exemplified in this regard.Dr. Muhammad Abdul Kalam wrote in his article A Crises in the makingabout the implication of the Ukraine-Russia War on Pakistan. Pakistan s wheat import from Ukraine is almost39 of the country s total imported wheat.

• Depreciation of the Pakistani rupee against the US dollar through a market-based exchange rate

The devaluation of the Pakistani rupee patently increases the cost of imported items such as wheat, tea, threads, buttons, edible oils, sugar, and such forth, making industries products non-competitive in the international market. The devaluation of the currency augments the product cost, ultimately, imposes the indirect tax on the masses. The same case goes for the public debt of Pakistan without borrowing a single dollar, by the explanation of one rupee devaluation addsPRs 265.48 dated 1^stFebruary 2023. According to the seventh and eighth reviews of Pakistan s economy, the IMF called for the exchange rate to market-based code. Resultantly,the Pakistani rupee was derogated by 17 per cent in July 2022. However, theneo-liberal economic orderfails to stabilize the growth from itsmarket-based exchange policy.

• The inverse relationship between interest rates and foreign direct investments FDI

The tightening of monetary policy enshrined the State Bank and the real state of the economy to soar the interest rate. Thus, the IMF implements a tight monetary policy on Pakistan to get the next program from it.The interest rates increase from 9.75 per cent December 2021 to 15 per cent October 2022 . Consequently, the consumer price index CPI increased to 26.6 per cent in October 2022 as compared to 14.6 per cent in January 2022.The increased interest rates uncover two damages in the economic saga first, lending from all capital banks and second snail-speed economic growth. Lending from all capital banks means increasing capital costs. It discourages foreign direct investment in the country and shrinks the employment opportunities that lead to a vicious cycle of poverty however, insecurities up the rear. Similarly, the slow economic growth divulges lowering tax collection and lowering developmental projects. Thus, political and constitutional engineering has devastating impacts on the economy.

• Incremental taxation measures by cutting developmental expenditures

The policy of tight fiscal code under the IMF program unveils the austerity measures imposed on the governments. These measures comprise of nipping the developmental expenditures and increasing taxes on oil and petrol. In other words, the government is to wean off public spending in the form of subsidies, public investments, social security programs, and increased taxes. The seventh and eighth reviews of Pakistan s economy by the IMF open the curtain of curtailing public investment by ending thePublic Sector Development Projects PSDP to save Rs. 15 billion at the federal level and Rs. 384 billion at the provincial level.

After discussing the impacts of the IMF loans on the economy of Pakistan, it is high time to delve into the meticulous and scrupulous measures for strengthening the economy. Starting from the adaptive measures, the nexus of the IMF loans with investments pledges from Saudia, Qatar, and the World Bank ought to deplete the balance of payment so that the masses living under the poverty line start nurturing. It is solely possible by de-materializing thePainful Adjustment Programs.In the same way, some mitigating measures are needed to pledge the glory of the country. For that, local products should be prioritized, eventually leading to the international markets. Next to it, the local governments for economic recovery and poverty alleviation are nourished in this account. Similarly, a projection of a soft image of the state is a dire need to attract foreign investors it is only possible through a conducive environment for business.

The Liquidity crisis and fuel shortage in the country shout the devastating impacts of theNeo-Liberal Model of the IMF,which are tight monetary policy, tight fiscal policy, market-based exchange rate, and increase in utility prices. The demand management policies of the IMF shackle the living cost of the masses, that hardly have one-time bread per day. Lessons fromSrilankan defaultare needed to learn. Similarly, relying so much onChinais not the solution, as Chinese interests reveal the geopolitical security against India and the US. It is a dire need to save Pakistan from the edge of default by sitting at the same pace politically, socially, and above all, economically. The role of Russia is significant in this regard. In addition, Pakistan needs to shift toe-governancefor transparency and accountability, a panacea to economic indicators. Therefore, last-ditch steps need to be taken before it is too late. The early one takes action, the better it is.

Boiled down, Pakistan is at a challenging economic juncture. The major reasons are the admiral of conditions imposed by the IMF increase in interest rate by decreasing capital investment, depreciation of the Pakistani rupee against the US dollar through a market-based exchange rate, and incremental taxation measures by cutting developmental expenditures. Some remedial measures are called out for a long-term escape from the IMF trap.

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