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Impact of IMF Loan on the Economic
Growth of Pakistan
Impact of IMF Loan on the Economic
Growth of Pakistan
Introduction
Pakistan
is a developing country and facing critical economic problem with no option
other than to get a loan from theInternational Monetary Fund (IMF). The IMF is
an international organization and provides loans to its member countries with
objective of global growth. The impacts of IMF loans on economic growth remained
controversial. The study of literature reveals that the countries which got
loan from IMF, remained unsuccessful to achieve the goal. Scholars argue that
the IMF’s borrowers are trapped in long lasting economic crises.
IMF
has approved a loan of $ 7 Billion Bailout for Pakistan to stable its economy
but its potentials to improve long term growth and development are not clear
because it focuses on to increase revenues and transparency in government while
ignores the structural problems of Pakistan economy. As it focusses to increase
revenues while does not addresses county’s spending pattern.
This
paper will help the readers to find out positive and negative impacts of IMF
loan on Pakistan’s economy.
Body
In
1943, forty-four countries led by the Western powers including the UK, France,
Germany, and the USA held a conference remembered as Bretton Woods Conference (Heakal,
2021). The following year, the conference attendants founded the IMF to finance
the member countries in economic crises.
This role of IMF transformed
it from currency regulatory authority to an international organization. As an
international organization, IMF started to indulge itself in the policies of
third world countries from the debt crises in 1982. The members of IMF
contribute in its fund, which is called quota and the size of the quota is
related to the member country’s economy. Each member country can draw up to 25%
of its quota and if it requires more than its quota then IMF imposes conditions
and polices through an agreement. To receive credit installment, the member
country has to fulfil those conditions and follow the policies according to the
agreement. These conditions and policies mostly belong to fiscal austerity,
reduction in government expenditures, increment in taxes, and raise
interestrate to reduce the credit facility, withdrawal of subsidies and tighten
the monetary policy. Consequently, study reveals that the credit and policies
of IMF affect the economy of any country in both cases either country gets loan
to decrease budget deficit or maintain foreign reserves.
During
the last 50 years Pakistan has taken a lot of loan from the IMF. This loan has
completely changed spending pattern of the Pakistan’s economy because Pakistan
has to plan its spending and saving according to the repayment schedule of IMF’s
loan. It is necessary to know the impacts of IMF’s loan on the economy of the Pakistan
so that policy makers can make effective policies. Postulation of proper
polices according to the impacts of IMF’s credit on economy of the Pakistan is
significant (Majid, 2019). Because generally
loans are taken for development purpose and these loans lead to devaluation of
money and the devaluated money causes to inflation. In this way the whole
economic cycle is related to the loan. Pakistan has gone 25th time to IMF to
seek loan. Pakistan’s coalition government lead by the Pakistan Muslim League
Nawazaz Sharerif (PMLN) requested the IMF to provide loan for 25th
time. Prime minister of Pakistan, Shebaz Sharif informed that Pakistan has met
all the conditions set by IMF to qualify for the loan and on 25th September,
2024 IMF formally approved the loan to help the Pakistan to stable its economy.
These different bailout programs has
imposed many conditions on the government of Pakistan as, taxes, subsidies,
government expenditures and interest rate. But most strict condition of this
bailout is the provision of details of accounts regarding Pak China economic
corridor and not to divert this loan to pay the China debt. Main objective of
the IMF is to increase the revenues of borrowing countries. In the case of Pakistanit
could not do more in the past. According to terms and conditions of loan
agreement Pakistan will seek new tax areas to increase its foreign exchange
reserves. For this purpose Pakistani people have to pay high cost in the form
of depreciation in currency, reduction of spending on non-developmental government
activities, withdrawal of subsidies on electricity and gas. Pakistan has
assured to change it policies and not repeat the failure practices of previous
program. All these activities will cause to create difficult environment for
the economic activities.
Whether
the loan will be beneficial or harmful for the economy of Pakistan, it depends
upon the response of public to the conditions and policies of the IMF and how
thoughtfully government implement it. The current situation of the Pakistan’s
economy and future agendas of the government indicate that Pakistan’s economy
has fallen in the debt trap. The liabilities and debt has risen speedily as
compare to its revenues and government intends to take more credit from IMF and
friendly countries. While IMF has clearly informed that next tranche will be
subject to implementation of prior polices and confirmation of financial
commitments with international partners. This reveals that FBR has to explain
its future strategy to increase revenues in next budget. The state bank will
have to assure that rupee-dollar parity will be set on the basis of free market
float.
Conclusion
The
above discussion concludes that Pakistan has no other option except to take
loan from IMF. Because country’s foreign exchange reserves are not enough to
cover the expenditure and it is facing the challenges of high inflation,
raising poverty level and low economic growth. Last year the growth rate was
2.4 percent while the population growth rate was 20.6 percent .Tax revenues
were only 12 percent of the GDP while the expenditures were 20 percent of the
GDP. This difference between tax revenues and expenditures, deficit of state
owned institutions, payments of foreign debt, low revenue from exports and high
expenditures on imports All these elements brought the economy
near-default-like situation in 2023 which caused to seek the loan from the IMF.(United
States institute of peace, September 25, 2024). The Pakistan should focus on to
make this loan more beneficial to strengthen its economy. Keeping in view all
above situation I hope, the plan will be beneficial not only in short run but
also in long run due to the pressure of the IMF.
References
Majid, A., 2019.
Impact of IMF loan on Pakistan's economy: In long run and short run.
[viewed 23 July 2022]. Available from: file:///C:/Users/E-TINE/Downloads/impact-of-imf-loan-on-pakistans-economy.pdf%20(1).pdf
Heakal, R. 2021. An Introduction to the International Monetary Fund (IMF). Available at: https://www.investopedia.com/articles/03/030703.asp (Accessed: 30 July 2022).