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IMF and Pakistan: A Historical Account

IMF and Pakistan: A Historical Account

Afnan Wasif

Pakistan has availed 23 IMF programs since 1958, but due to internal and external reasons, adoption of IMF policies has not benefited substantially. Pakistan has earned the unfortunate title of “one-tranche nation” which alludes to the nation’s history of taking out loans at crucial junctures and then prematurely abandoning them due to a balance of payments crisis.

Pakistan first sought assistance from the IMF in 1958 when General Ayub Khan initiated the country’s engagement with the IMF by signing an agreement to obtain special drawing rights (SDR) 25 million through a Standby Agreement.

After a while, in 1965 and 1968, respectively, Ayub’s finance team pursued two consecutive IMF programs. On this occasion, however, they ultimately withdrew the entire agreed upon amount, or about SDR 112 million. At this point, Pakistan formally joined the IMF’s clientele.

The second time Pakistan knocked the door of IMF was during the tenure of Zulfiqar Ali Bhutto on May 18, 1972. Under Bhutto’s leadership, Pakistan approached the IMF three times, withdrawing 314 million out of an agreed amount of 330 million SDR. Pakistan’s relationship with the IMF became strained after Bhutto was succeeded by General Zia Ul Haq, who continued the country’s reliance on the IMF. During Zia’s regime, Pakistan approached the IMF twice, securing 2.187 billion SDR of which 1.079 billion was utilized.

Over time, Pakistan’s reliance on IMF loans increased. During the tenures of Benazir Bhutto and Nawaz Sharif, Pakistan approached the IMF a total of eight times. The Pakistan People’s Party (PPP) sought IMF assistance five times, while the Pakistan Muslim League-Nawaz (PMLN) sought it three times. Even during the military rule of General Pervez Musharraf, who took power in 1999 after ousting Nawaz Sharif, Pakistan continued to seek IMF support, approaching the IMF twice within nine years and securing 1.33 billion SDR.

After democracy was restored in 2008 following General Musharraf’s departure and the Pakistan People’s Party (PPP) assumed power, their initial strategy was to approach the IMF for a substantial bailout, securing the largest IMF package in Pakistan’s history amounting to 4.94 billion SDR. In accordance with IMF conditions, Pakistan was required to implement certain reforms, including enhancing tax administration, eliminating certain tax exemptions, and establishing an interest rate corridor. However, these macroeconomic policies did not adequately address the underlying structural challenges in the economy. There was general agreement between the authorities and the IMF mission on key policy priorities, which included tighter fiscal measures, a less accommodative monetary policy stance, and structural reforms. Nonetheless, the economy’s performance remained below its potential.

Upon returning to power in 2013, the PML-N government followed past practices by promptly approaching the IMF and securing the second-largest loan in Pakistan’s history, totaling 4.399 billion SDR. According to the IMF’s assessment, this three-year program, completed in September 2016, enhanced macroeconomic stability. The IMF’s final assessment indicates that as a result of this program, economic growth improved, the fiscal deficit was reduced, and foreign currency reserves were replenished. Additionally, structural reforms were initiated as part of this process.

In 2019, during the PTI government, the IMF’s executive board approved a three-year, $6 billion loan for Pakistan, disbursing $2 billion annually under an extended fund facility (EFF).

Subsequently, in 2023, during the PDM government, Pakistan approached the IMF again as the previous EFF had expired. On June 30, 2023, the IMF reached a staff-level agreement with Pakistan on a $3 billion standby arrangement.

Following the 2024 General Elections, the PML-N government led by Shehbaz Sharif is preparing to conclude negotiations for a new IMF loan by May 2024, aiming for a minimum of $6 billion. With the existing $3 billion IMF arrangement expiring in late April, the government is seeking a larger, extended loan to maintain macroeconomic stability and facilitate essential structural reforms. This marks Pakistan’s 24th medium-term bailout package, emphasizing a commitment and dedication to lasting and enduring structural changes.

The author is a student of Strategic Studies at National Defence University, Islamabad. He tweets @afnanwasif

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