REPORTIMF AND ITS IMPACT ON

PAKISTAN ECONOMY

COURCE: ECONOMICS

SUBMITED TOSIR SARFARAZ PREPARED BY * * * *

S.NO PARTICULARS PG.NO

1. Introduction to IMF 2. Objectives of report 3. Definition of IMF 4. Objectives of IMF 5. System data dissemination 6. History of IMF 7. Lending 8. Surveillance 9. Success and failures of IMF 10. Criticisms of IMF11. Economy of Pakistan12. History of economy of Pakistan13. The today’s economy of Pakistan14. IMF and economy of Pakistan15. IMF agreements with Pakistan16. IMF conditions for Pakistan17. Why Pakistan need IMF18. IMF agreements and its implementation19. IMF conditions effects on economy20. Negative assessment by the IMF21. Pakistan does’ not need IMF22. Solutions of not getting loans from IMF23. Conclusion 24. Article “no to IMF”

IMF AND ITS IMPACT ON PAKISTAN ECONOMY

INTRODUCTION TO IMFAfter World War II, economists and politicians created the International Monetary Fund (IMF) to help keep the international financial system stable. From the beginning, the Fund’s specific roles were to promote balanced growth of international trade, provide funding to countries in economic problems, and protect income levels which is necessary for people to purchase essential goods and services. IMF provides funds to the member country when it faces balance of payments problems that cause severe macroeconomic Under a stand-by arrangement, an IMF member country is provided a specified amount during a given period, usually in trenches, subject to the borrower’s compliance with performance criteria and other conditions embodied in the agreement. The International Monetary Fund IMF adjustment programs are of two types: a) short-term, in which the macroeconomic disequilibrium is thought to be reversible in one or two years, and b) medium-term in which the macroeconomic disequilibrium is caused a heavy external debt burden. The Standby Arrangement (SBA) is an example of the IMF short-term program. The priority course of action in SBA is expenditure reduction. IMF medium-term programs aim to correct serious external payments disequilibrium due to structural impediments to growth and debt overhang. The program involves a strategy that keeps expenditures in line with output and increases growth.

Objectives of reportThe objective of making report on IMF is

1. To know about IMF2. Conditions on giving loans to PAKISTAN.3. Study past and current agreements of IMF with

Pakistan.4. To know why Pakistan need loans from IMF.5. Its impact on Pakistan economy

International Monetary Fund (IMF).

The International Monetary Fund (IMF) is an organization of 187 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.

International Monetary Fund

Official Logo for the IMF

FormationAdopted: July 22, 1944Entered into force: December 27, 1945

TypeInternational Economic Organization

Headquarters Washington, D.C.United States

Membership 185 Nations (Founding); 187 Nations (To Date)

Official languagesEnglish, French, and Spanish

Managing Director Christine LagardeMain organ Board of GovernorsWebsite http://www.imf.org

Objectives of IMF

The objectives are as Follows:

To promote co-operation among economies of world. To strengthen the economies of member countries by

making fund's resources available to them. To promote exchange stability and to facilitate the

expansion and balanced growth of International trade.

To lesson the chances of disequilibrium in the international BOP of member countries.

To reduce the poverty in member countries and to promote high employment by facilitating sustainable economic growth.

The IMF describes itself as

“an organization of 187 countries (as of July 2010), working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty”

HEADQUARTERS:

Its headquarters is in Washington, D.C.

System Data Dissemination

In 1995 the International Monetary Fund began work on data dissemination standards with the view of guiding IMF member countries to disseminate their economic and financial data to the public. The International Monetary and Financial Committee (IMFC) endorsed the guidelines for the dissemination standards and they were split into two tiers: The General Data Dissemination System (GDDS) and the Special Data Dissemination Standard (SDDS).

The IMF established a system and standard to guide members in the dissemination to the public of their economic and financial data. Currently there are two such systems: GDDS and its superset SDDS, for those member countries having or seeking access to international capital markets.The primary objective of the GDDS is to encourage IMF member countries to build a framework to improve data quality and increase statistical capacity building. This will involve the preparation of meta data describing current statistical collection practices and setting improvement plans. Upon building a framework, a country can evaluate statistical needs, set priorities in improving the timeliness, transparency, reliability and accessibility of financial and economic data.

HISTORY OF IMF:

The IMF was conceived in July 1944 originally with 45 members and came into existence in December 1945 when 29 countries signed the agreement, with a goal to stabilize exchange rates and assist the reconstruction of the world’s international payment system. Countries contributed to a pool which could be borrowed from, on a temporary basis, by countries with payment imbalances. The IMF was important when it was first

created because it helped the world stabilize the economic system. The IMF works to improve the economies of its member countries.

Lending When a country requests a loan, the IMF will give the

country the money needed to rebuild or stabilize its currency, re-establish economic growth and continue buying imports. Several of the types of loans offered

include: Poverty Reduction and Growth Facility

(PRGF) loans. 

These are low-interest loans for low-income countries to reduce poverty and improve growth for these countries.

Exogenous Shocks Facility (ESF) loans .

These are loans to low-income countries that provide lending for negative economic events that are outside the control of the government. These could include commodity price changes, natural disasters and wars that can interrupt trade.

Stand By Arrangements (SBA ).  

These are used to help countries with short-term balance of payment issues.

Extended Fund Facility (EFF) . 

This is used to assist countries with long-term balance of payment issues that require economic reforms.

Supplemental Reserve Facility (SRF).

This is provided to meet short-term financing on a large scale, like the loss of investor confidence during the Asian Financial Crisis that caused enormous outflows of money and led to massive IMF financing.

Emergency Assistance loans .

These are designed to provide assistance to countries that have had a natural disaster or are emerging from war.

Successes of the IMFThe IMF has had many successes and failures. Below we will highlight examples of a previous success and failure. 

Jordan   –  

Jordan had been impacted by its wars with Israel, civil war and a major economic recession. In 1989 the country had a 30-35% unemployment rate and was struggling with its inability to pay its loans. The country agreed to a series of five-year reforms that began with the IMF. The Gulf war and the return of 230,000 Jordanians because of Iraq's invasion of Kuwait put strain on the government, as unemployment continued to increase. In the period from

1993 to 1999, the IMF extended to Jordan three extended fund facility loans. As a result the government undertook massive reforms of privatization, taxes, foreign investment and easier trade policies. By 2000 the country was admitted to the World Trade Organization (WTO), and one year later signed a free trade accord with the United States. Jordan was also able to bring down its overall debt payment and restructure it at a manageable level. Jordan is an example of how the IMF can foster strong, stable economies that are productive members of the global economy.

CRITICISMS OF IMF:

IMF only lends money when if countries agree to

1. sell their resources cheaply

2. cut public spending

A criticism says this serves to increase problems of poverty in poor member countries.

Economy of Pakistan

Pakistan economy mainly encompasses

. Textile

. Chemicals

. Food processing

. Agriculture

HISTORY OF ECONOMY

OF PAKISTANAt the time of independence 1947, Pakistan was a very poor country and its economy major depend on agricultural. Since independence, Pakistan average economic growth rate have been higher the than the average growth rate of the world economy during the period. Average annual was 6.8% in the 1960’s,4.8% in 1970’s and 6.5% in 1980’s.averahe annual growth fall 4.6% in 1990’s with the significant lower growth in the second half of the decade. During 1960’s Pakistan was seen

as a model of economy development around the world, and their was much praise for its economic progress.

THE TODAY’S ECONOMY OF PAKISTAN

The World Bank considers Pakistan a low-income country. GDP is around $166 billion at the official exchange rate. The population numbered some 167 million in 2008 with a 1.81% growth rate. No more than 55.0% of adults are literate, and life expectancy is about 64 years. In FY 2008-2009, the GDP growth rate was 3.7%, and unemployment was estimated at 14%. Year-over-year consumer price inflation averaged 13.6% in 2009. Main inflation drivers include food and utility prices, the Pakistani rupee’s depreciation versus the U.S. dollar, and higher international commodity prices. Low levels of spending in the social services and high population growth have contributed to persistent poverty and unequal income distribution. Pakistan's extreme poverty and underdevelopment are key concerns, especially in rural areas. The country’s economy remains vulnerable to internal and external shocks due to internal security concerns and the global financial crises. Pakistan remains dependent on IMF and other international assistance for budgetary support and to keep the country more or less solvent.

IMF and economy of Pakistan

The IMF, directly and indirectly, has played a crucial role in the macroeconomic stability of Pakistan since1988. it has provided direct bilateral support to Pakistan in order to handle its macroeconomic imbalances like balance of payment deficits. On the other hand, the IMF has indirect influence on lending by other donor agencies. In the last few months, there was a lot of speculation and discussion on the government decision to call for IMF loan to meet its liquidity and financial problems. Pakistan is a developing country suffering from the deficiency of saving and investment and needing long-term confessional financing to grow out of poverty. Its problems of development could not be addressed by short-term balance of payment support from the IMF. However, with the passage of time, Pakistan accumulated a large bilateral and multilateral debt that was used unproductively, leading to a major debt-servicing problem without the buildup of debt-repayment capacity. When it got to the stage close to a debt default, the government knocked at the doors of the IMF in the 1980 and has remained locked in that position since then.

IMF AGREEMENTS WITH PAKISTAN

IMF loans have been an important source to manage the financial problems of Pakistan such as balance of payment deficits, stabilization of currency, rebuilding international reserves, managing liquidity problems along with enabling

the respective countries to meet their short term needs by providing various types of loans which IMF calls as its lending ‘facility’. In the last few months, there was a lot of speculation and discussion on the government decision to call for IMF loan to meet its liquidity and financial problems. In spite of effective policy actions taken by State Bank of Pakistan, issues such as sharp depreciation of exchange rate, depletion of foreign exchange reserves of $5 billion till November 2008, inflation rate of more than 25%, and increase in import bill by 35.2% created immense challenges for the government and State Bank of Pakistan.  Finally, the IMF loan of $7.6 billion was approved to help Pakistan come out of the liquidity and financial crisis albeit with certain IMF conditions. The IMF facility is still an important topic of discussion until the real gains from IMF loans are realized.

To determine the effects of IMF loans on Pakistani economy, it is important to analyze the history of IMF loans to Pakistan briefly. Since 1988 when Pakistan became member of IMF, almost eleven loan arrangements (including the recent IMF loan of $7.6 billion in 2008) have taken place under various IMF facilities/programs. Almost six loan arrangements were made during the regime of Benazir Bhutto including standby arrangement, Structural Adjustment Programs (SAP), Poverty reduction and Growth Facility (PRGF) and Extended SAP. Two IMF loan arrangements were made during Nawaz Sharif regime and two standby agreement and PRGF under Musharraf regime to stabilize the economy. It is important to note that in the tenure of last two decades, on average almost 44% of the

total lending amount has been drawn from the original 100% agreed upon lending amount because of the failure of the government to act upon the strict measures determined by IMF. For the first time in the year 2000, this tradition was broken in Musharraf regime when Musharraf’s government successfully implemented the conditions proposed by IMF and successfully drew the whole lending amount of $1.3 billion. It is also very interesting to note that only two loan arrangements were made during the military regime whereas nine IMF agreements (including the recent IMF loan) were made during the civilian regime.

The conditions posed by IMF mostly include the close monitoring, reduction of government spending, revision in tax collection policies, change in policy/discount rate etc. to make sure that funds granted to the borrower country are utilized in optimal manner. The IMF loans greatly impact the economic indicators and bring change in the regulatory framework which has both positive and negative impacts on the country.  Pakistan saw a decline in GDP growth rate and other economic indicators right after infusion of IMF funds in the economy except in the second last lending arrangement in Musharraf’s regime when full amount of loan was drawn from IMF. The economic indicators after IMF loans in the last two decades followed a typical cycle. Usually the trend after IMF loans show immediate decline in GDP growth rate, increased tax revenues to GDP ratio, increased CPI, increased debt on the country and then restoration of the conditions back to their previous states because of the cancellation of loans in the later years. The cancellation of IMF loan agreements in the previous

regimes along with the initial IMF loan effects created quite negative impacts on the economy as a whole which shows that there were very few times when IMF loans were fully optimized.

The current IMF loan is expected to have both positive and negative impacts. The immediate benefits include quick influx of liquidity, improvement in credit rating by reducing the country’s default risk, enhancement of foreign exchange reserves, stabilization of rupee (which faced 25% depreciation against U.S. dollar till November), increased investor’s confidence in both money and capital markets and increased financial assistance from the friends of Pakistan. However the negative impacts associated with the increase in policy rate include increased costs for the banks, increase in unemployment (because many banks and organizations will go for restructuring and downsizing to reduce their operating costs) and increase in poverty rate.

 Owing to the great financial crisis faced by the many economies, Pakistan is pursuing contraction monetary policy which is quite different from the policies followed by the other economies. The regulator’s perspective is quite valid in arguing that our conditions are different from the rest of the economies.  For conformance to IMF conditions, the government is taking fiscal measures such as increase in general sales tax by 1%, increase in efforts in tax collection, removal of subsidies on domestic petroleum products, higher electricity tariffs and effective measures to solve the issue of circular debt.  the cyclical trend on the macroeconomic indicators after the IMF loans and overall

condition of the economy can be improved with the effective fiscal control and effective policy measures.  The negative effects were not seen in the last IMF loan taken in the year 2000  (in Musharraf regime) and improvement in growth indicators were imminent to make the conclusion that the cycle and the negative impacts can be the result of improper implementation of measures prescribed by IMF. The expected doubts about Pakistan’s growth can be removed if government remains committed to proper policy measures and restoration of market mechanisms to make sure that IMF loans are effectively utilized for the betterment of economy.

IMF conditions for Pakistan•

1. Industrial and agriculture tax has to be increased.2. Reducing foreign exchange market intervention by the State Bank of Pakistan 3. Focus on quarterly quantitative targets for: government borrowing from the State Bank of Pakistan 4. Reduce the budget deficit.5. Contracting or guaranteeing of non concessional loans by the public sector. 6. Phasing out electricity subsidies.7. Phasing out fuel subsidies.8. Interest rate has been increased to tighten monetary policy. 9. Government expenditure must be reduced. 10. Reduce 1/3 of Military spendindings. 11. Reduced 50% of pensions

12. The GST was to be implemented by retail outlets with turnovers in excess of PR s 5million 13. The budget deficit was to be reduced from 6.4 percent of GDP to 5.2 percent of GDP 14. Petroleum prices were to be adjusted in line with international market changes.

why Pakistan need loan?

• For financial resources and resolving the balance of payment problems• to secure access to funds from other financial institutions and bilateral donors• to obtain a “seal of approval” for seeking commercial and export credit facilities• to shift the blame for some politically unpopular decisions to external pressures and compulsions

• The desire of reformist economic managers to restrain and block the pursuit of populist

The IMF Arrangement and its Implications

In fact by providing large financial support to Pakistan, the IMF is sending a strong signal to the donor community about the country’s improved macro-economic prospects. The IMF arrangement is part of a broader package which involves other multilateral institutions and donor countries. It aims to restore macro-economic stability and investor

confidence through a reduction of economic and monetary policies, while simultaneously preserving social stability and enough support for the poor, stated the press release issued by the IMF. The loan trenches are subject to quarterly reviews by the IMF which has set forth certain conditions. Nevertheless, most of the conditions are already part of the government’s economic agenda announced during the budget in June this year. The Fund stipulates bringing Pakistan’s financial deficit down from 7.4 percent of GDP to 4.5 percent and 3.3 percent in 2010/11 by phasing out energy and electricity subsidies and strengthening revenue mobilization through tax policy and administration measures. These measures, if implemented successfully, will help to meet the target to some extent, particularly the phasing out of subsidies. In the short run, reforms in tax administration and, particularly the one percent increase\in the general sales tax from 15 to 16 percent implemented in the 20011 budget will help raise tax-to-GDP ratio. In the medium-term, the government will have to take a number of measures such as eliminating exemptions in the general sales tax and the income tax, and introducing a commercial agriculture tax. To provide support to the poor, spending on the social safety net will be increased from 0.6 to 0.9 percent of GDP in 2009 with the help of IMF.

IMF conditions effect on the economy

IMF support programs have a big and a clear effect on the economy of Pakistan

1.Increase unemployment : IMF worsened the unemployment situation in the economy, which was 1.7% of the total labor force in 1970 and has worsened to 7.8% of the total labor force in 2011.2.Reduction in public expenditure:

Is one of the main conditional ties of the IMF in all these programs. The reduction in public expenditure can be achieved either by restricting the acquisition of the supplies or limiting the employment cost through reduction in employment or limiting the increase in the nominal income below the inflation rate

3. External debt:

External debt and its continued dependence on financial aid. Foreign loans and grants provide approximately 25 percent of government revenue, and debt service obligations total nearly 50 percent of government expenditure, which means that as much as half of all government expenditures are used to repay loans.

4. Increase in inflation:

The policy variables, money supply and the exchange rate and other contributors to increase rate of inflation.

5. Decrease currency rate: The depreciation of the Pak Rupee increased the prices of machinery and crude oil. Both are the basic inputs in domestic industry, and the rise in their prices increased the pressure of cost-push inflation, the main source of inflation in Pakistan.6. lack of capital formation: Due to the increase in liability of foreign debts. Their is a lack of formation of capital.7 . Hostage to the demands of the west: Disadvantages of IMF loans are that Pakistani government becomes a hostage to the demands of the West if it agrees to take a loan. Many tough measures in the budget are required to be taken to conform to the requirements of the IMF loans and most of these measures directly and adversely affect the masses of the country while doing nothing to alleviate the macro economic condition of the entire country. Loans should only be taken to support massive revenue generating infrastructure projects. Taking loans just to provide budget support fills the pockets of the corrupt politicians and gives them even more leverage to plunder the tax monies received from the poor population.8. financial reforms: The sequencing of financial reforms has been critical in the sense that these reforms were undertaken before the reduction in the budget deficit. Financial reforms increased the competitiveness of the government in generating funds

from the public, which increase the funds rates. Increases in the interest rate on the funds bills and other government securities caused the debt servicing of the government to accelerate. As the government faced the conditionality of reducing public expenditure an increase in debt servicing put pressure on the government to reduce development expenditure, which resulted in a rapid increase of poverty incidence.

9. Prices high:Make necessary items expansive.10. Increase charges:The IMF led to increase the charges of gas, electricity, petrol and telephone. The imposition of sales tax and cut in tariff rates on the advice of IMF has greatly affected the income s of the poor and middle class earners.

Negative assessment by the IMF

A negative assessment by the IMF or even a failure to complete on time places the reputation capital of the borrowing country at great risk, erodes its credibility in the financial markets and reduces financial flows into the country. There are instances where this created an effect amplifying the disequilibrium in macroeconomic balances as the IMF and other financiers collectively withdrawn their assistance. Since 1988, Pakistan has not enjoyed smooth relations with the IMF, because of the latter’s satisfaction with the economic performance of Pakistan. Pakistan signed several agreements with the IMF, but due to a variety of factors most of them emailed incomplete, with the IMF refusing to lend the full amounts to Pakistan.

PAKISTAN doesn’t need the International Monetary Fund; neither its loans nor its

advice, nor its supervision, nor its intrusive monitoring.

At the moment, Pakistan’s foreign exchange reserves, which include previously lent IMF money, are sufficient, and while some international payments need to be made in the near future, adding more loans is certainly not the best way forward for an already heavily indebted country. What Pakistan’s economy needs is some clear thinking about substantial structural reforms based on the consensus of political actors. For this, one doesn’t need the IMF.

The need for the IMF arises when a country is nearing default, is in a crisis particularly with regard to its balance of payments, when it may default on international commitments, or as more recently, may have suffered on account of a financial crisis stemming from debts and loans, as experienced by some European countries, such as Greece, Spain

and Iceland. Pakistan’s economy is nowhere near the crisis or default state in these countries, and, despite the false cries of ‘crisis’ is in far better shape. Pakistan’s economy has numerous problems, but it is not going to collapse in the near or even distant future.

Pakistan does not need the IMF to tell it what needs to be done. The issues and problems which affect the economy, are quite uncomplicated and commonplace. Issues related to the absence of revenue generation on account of an inequitable and inefficient taxation regime, which has been responsible for a high fiscal deficit and continuous and increasing reductions in public-sector development expenditure, is one of those central and perennial economic problems. Other issues related to the high and now chronic inflation over the last three years, are also not difficult to identify. Investment continues to be low and job creation is also lagging, affecting poverty and unemployment.

Some problems which afflict Pakistan’s economy are not related to economic fundamentals, and are due to political choices and arrangements made by the previous military regime in the way it took decisions related to the war on terror, the consequences of which this government and the people of Pakistan continue to face.

No measure of right-structuring of Pakistan’s

economy is going to result in a quick and certain increase in the flow of investment, whether local or foreign. The problems of militancy or extremism, which have resulted in numerous and considerable economic problems, are not in the least related to bad economic management. It is not the IMF which can help Pakistan or its government resolve such issues which have consequences for the economy.

There is a long to-do list, which the Pakistan government and its finance ministry need to follow through, one by one, preferably through political consensus. One doesn’t require the IMF to advise the Pakistan government that it needs to raise taxes on untaxed incomes to address numerous shortfalls which affect the economy. The finance minister is aware of this, and many other economists have also been writing on this issue. In fact, it is the IMF and numerous economists who have been giving the wrong sort of advice in supposedly helping Pakistan meet its revenue target. The IMF-supported Reformed General Sales Tax is an unfair and inequitable tax, as is the flood surcharge and other measures forced through by a presidential ordinance. Most of these measures penalise those who already pay taxes, not those who are out of the tax net.

In a democracy, good technocratic advice depends on how politics plays itself out, and economic decisions will always be based on political choices and their consequences. One doesn’t need the IMF to solve

Pakistan’s economic problems, one needs competent political leadership.

SOLUTIONS OF NOT GETTING LOANS FROM IMF

1: Credit ControlOne of the important monetary measures is monetary policy. The central bank of the country adopts a number of methods to control the quantity and quality of credit. For this purpose, it raises the bank rates, sells securities in the open market, raises the reserve ratio, and adopts a number of selective credit control measures, such as raising margin requirements and regulating consumer credit.

2:Demonetization of Currency . One of the measures is to demonetize currency of higher denominations. Such a measure is usually adopted when there is abundance of black money in the country.

3: CONTROL INFALTIONControl inflation in county either it is cost pull inflation or demand pull inflation.

4: Reduction in Unnecessary Expenditure . The government should reduce unnecessary expenditure on non-development activities. This will also put a check on private expenditure which is dependent upon government demand for goods and services. But it is not easy to cut government expenditure. Though economy measures are always welcome but it becomes

difficult to distinguish between essential and non-essential expenditure. Therefore, this measure should be supplemented by taxation.

5:BUILD UP FOREIGN EXCHANGEForeign exchange is very important for any country to increase capital formation. so government should take some steps to improve foreign exchange policies.

6: PROVIDE SUBSIDIESA subsidy (also known as a subvention) is a assistance paid to a business or economic sector. Most subsidies are made by the government to producers or distributors in an industry to prevent the decline of that industry (e.g., as a result of continuous unprofitable operations) or an increase in the prices of its products or simply to encourage it to hire more labor (as in the case of a wage subsidy).Subsidies should be provided to every sector for economic development. Subsidies , should be provided to different consumer goods sectors to increase production

7:PRODUCTION PRODUCITIVITY MANUFACTURING AND AGRICULTURAEIncrease the production of essential consumer goods like food, clothing, kerosene oil, sugar, vegetable oils, etc. (ii) If there is need, raw materials for such products may be imported on preferential Basis to increase the production of essential commodities.Some steps should be taking by the government to develop agricultural sector.

8: Price Control .

Price control and rationing is another measure of direct control to check inflation. Price control means fixing an upper limit for the prices of essential consumer goods. They are the maximum prices fixed by law and anybody charging more than these prices is punished by law. But it is difficult to administer price control.

9: cash transfer

Cash transfers are direct transfer payments of money to eligible people. Cash transfers are usually provided by the state and federal government. Cash transfer programmers in developing countries is constrained by three factors: financial resources, institutional capacity and ideology. so government should take some steps to improve this factors. So that can cash should be properly transfer to eligible people.

10: Surplus Budgets .

An important measure is to adopt anti-inflationary budgetary policy. For this purpose, the government should give up deficit financing and instead have surplus budgets. It means collecting more in revenues and spending less. 11: Public Debt At the same time, it should stop repayment of public debt and postpone it to some future date till inflationary pressures are controlled within the economy. Instead, the government should borrow more to reduce money supply with the public.

12: BANKING GROWTHBank play a very important role for ant country development because it gives loans to help increase business, trade, and industrial activity in a particular country or area, it is very important to have a good banking system in country.13: TAXATIONTo cut personal consumption expenditure, the rates of personal, corporate and commodity taxes should be raised and even new taxes should be levied, but the rates of taxes should not be so high as to discourage saving, investment and production. Rather, the tax system should provide larger incentives to those who save, invest and produce more. Further, to bring more revenue into the tax-net, the government should penalize the tax evaders by imposing heavy fines. To increase the supply of goods within the country, the government should reduce import duties and increase export duties.

Conclusion

*It is conclude that Pakistan is one of the best member and having long relations with IMF.IMF play an important rule in the economy of Pakistan. IMF provides $7.6 billionloan to Pakistan under a certain programs and seem that it help the economy of Pakistan, but on other hand impose a harsh condition which spoil the economy of a country . IMF as an institution which provides emergency credits to those countries which needs funds and they assures the IMF that they can repay the loan., effect of poor economic policies and financial crisis in a member country. In from

return they inflict or impose painful policies, which extract the deficit budget, through spending cuts or increased revenue (taxation), a rise in interest rates to reduce inflation, and variation of the exchange rate etc. *Pakistan is the country of many natural resources in it. We should be self sufficient, we should rely on ourselves. Sincerity is the key to success so we should be sincere with our country and work hard for its development. if we have financial crises, we should not beg for aid from IMF, but we should handle the problem by over selves. We should pay more taxes and we should try to remove corruption from every department. The government should make such opportunities that foreign investment is attrac towards us. By applying these things we don’t need to depend on IMF.

Article

The ‘No’ to the IMF

Dr Ashfaque H Khan

Pakistan’s current IMF programme, which has remained suspended since May 2010 owing to Pakistan’s failure to achieve key economic and structural reform targets, will be expiring on September 30, 2011. Pakistan has decided not to seek a new IMF programme because it believes that its external balance of payments is in a comfortable position and likely to remain so at least during the remaining period

of the current fiscal year.

The decision for not seeking a new IMF programme is political in nature. The Senate election will be taking place in March 2012 and the government is not inclined to take any difficult decisions that may antagonise the provincial assembly members of the ruling party as well as parties in alliance.Also the government appears to be planning for an early general election, perhaps after the Senate election, and as such does not want to take unpleasant decisions that would antagonise general voters. The reason why the IMF programme has remained suspended since May 2010 is that the government failed to take adequate measures to broaden its tax base and address power sector and circular debt issues.

Had Pakistan requested a new IMF programme, these outstanding issues would have been part of prior action. However, as it was disinclined to pursue a disciplined fiscal policy, the government did not want to risk seeking a new programme in the election years. Politics has overtaken economics. I consider it my moral obligation to apprise the people of Pakistan about the consequences of such a decision.

Firstly, the global economic environment is becoming inhospitable. We are living in the midst of an unprecedented global financial and economic crisis. Never before in modern history have the policy-makers had to face as many risks as they are on the horizon today. In such difficult times ahead, Pakistan would need the support of an

institution like the IMF more than ever. Secondly, without an IMF programme, the Pakistani rupee may come under severe strain. It has already lost Rs.2.12 per dollar since June 2011 until September 17. The unscrupulous element is already active in the market and driving the exchange rate artificially low. The economic fundamental relevant to the exchange rate stability (export, import, remittances, inflation and current account) has not changed, and yet the rupee has been under pressure since the beginning of the new fiscal year. These unscrupulous elements may play havoc with the exchange rate.

The implications of the exchange rate depreciation are widespread. Without borrowing a single dollar, Pakistan has already added over Rs100 billion in public debt since June 2011. Further depreciation would add even more debt. Interest payment will rise thus eroding the government’s fiscal space. Depreciation of the rupee will make imported oil and fuel for electricity generation more expensive. In order to please the voters, the government is not likely to pass on the high cost of oil and electricity. As such, it will have serious budgetary implications and will further aggravate circular debt issues. Exchange rate depreciation is inflationary by definition, thereby fuelling inflation and hurting the common voters the most.

Thirdly, the budget deficit has averaged over 6.3 percent of the GDP during the last four years in the midst of the IMF programmer. Without such a programmer, the political leadership will maximize their utility (enticing voters) subject to no budget constraint. The government will not

take any measures to increase tax revenue, but at the same time will freely dole out resources to entice voters, resulting in further deterioration of fiscal situation.

Financing of deficit in the midst of depleted external flows will force the government to rely heavily on domestic sources, and that too on the banking system and the State Bank of Pakistan (SBP). There would be no IMF pressure to desist from borrowing from the SBP. The SBP will be forced to keep the discount rate at an elevated level. The private sector will be crowded out as the bulk of the credit would go to the government to finance fiscal deficit. Higher interest rates will discourage private investment, causing the deceleration of the economic growth and giving rise to unemployment and poverty.

Fourthly, the emerging external balance of payments situation is disturbing. Pakistan’s exports benefited immensely on account of an unprecedented surge in cotton prices. That benefit is rapidly fading. Depressed economic activity in the industrialized countries (our major export market) is likely to weaken the demand for our exports. Domestic energy constraints and deteriorating law and order situation in the country will serve as major headwinds for exports.

Pakistan’s capital account may deteriorate as well. Sans an IMF programme , the lending from the development financial institutions is likely to decline drastically. Money from the Kerry-Lugar is also uncertain and foreign investment has nosedived. There is a danger that Pakistan

may witness a financing gap in balance of payments, which may precipitate a serious crisis on the external side.

Not seeking a new IMF programme means fiscal indiscipline will be the order of the day. The government has avoided seeking a new programme to provide relief to the voters, but the outcome of the decision is likely to hurt these very voters the most.

The economic team has not done their job honestly. They should have explained the consequences of such decisions to the political leadership. They know that they cannot say no to the political leadership bent upon doling out resources to entice voters. They have also lost the shield of the IMF. In doing so, they have become partners to the economic destruction of the country. This nation of 175 million people will never forgive the economic team for the pain and miseries that they have brought on them.

The writer is principal and dean at NUST Business School, Islamabad.