IMF – Pakistan needs to reform in borrowing policies

The International Monetary Fund (IMF) is an international organization that aims to promote global economic growth and financial stability, encourage international trade, and reduce poverty.

The IMF is based in Washington, D.C., and currently consists of 189 member countries, each of which has representation on the IMF’s executive board in proportion to its financial importance, so that the most powerful countries in the global economy have the most voting power.

History of the IMF

The IMF was originally formed in 1945 as part of the Bretton Woods Agreement, which attempted to encourage international financial collaboration by introducing a system of exchangeable currencies at fixed exchange rates, with the dollar redeemable for gold at $35 per ounce.

The IMF acted as a gatekeeper. Countries were not eligible for membership in the International Bank for Reconstruction and Development (IBRD)—a World Bank forerunner that the Bretton Woods agreement created in order to fund the reconstruction of Europe after World War II—unless they were members of the IMF.

Since the Bretton Woods system collapsed in the 1970s, the IMF has promoted the system of floating exchange rates, meaning that market forces determine the value of currencies relative to one another. This system continues to be in place today.

Lending

The IMF makes loans to countries that are experiencing economic distress in order to prevent or mitigate financial crises. Members contribute the funds for this lending to a pool based on a quota system.

These funds total around SDR 675 billion, (U.S. $945 billion) as of September 2019. IMF assets are denominated in special drawing rights or SDR, a kind of quasi-currency that is comprised of set proportions of the world’s reserve currencies.

Pakistan and the IMF

Pakistan has been a member of the International Monetary Fund (IMF) since 1950. Due to the unpredictable nature of the economy and heavily dependent on imports, IMF has given loans to Pakistan on 33 occasions since its membership, recent in 2020.

IMF lending programs are of two types: General Resource Account (GRA), and Poverty Reduction Growth Trust (PRGT). GRA is reserved for not-so-poor to wealthy countries, whereas, PRGT is for poor countries. GRA is used to give loans to the stand-by arrangements (SRA). Economists mostly called SRA as a bail-out package.

Based on these classifications, since its membership, Pakistan has been bailed-out on 13 occasions, largest in Imran Khan Administration in 2019.

Interest rate

It is defined as the proportion of an amount loaned which a lender charges as interest to the borrower, normally expressed as an annual percentage. Under Islamic principles, usury is forbidden; it has been declared a direct war with God Almighty.

Pakistan’s debts

The overall debt relief would mean suspension of $1.8 billion payable by Pakistan to 11 countries during May this year to June 2021, both in the shape of the principal amount of the loan and its interest.

These amounts would then be built into the remaining repayment schedule. An IMF report shows Pakistan has $12.731 billion of external debt repayment obligations in FY2021 that could be subject to treatment under the debt relief plan.

However, the plan targets official bilateral creditors, it is understood by authorities around the world that commercial creditors will also be asked to follow the same template. Pakistan has $2.545bn of debt service payments owed to commercial creditors for FY2021, of which $2.3bn is to China.

After this, $6.744bn is owed to non-Paris Club bilateral creditors, of which $3.48bn is to China, $2.245 to Saudi Arabia and $1bn to the UAE.

After this, the country has $1.627bn payments to multilateral creditors, of which half is to the Asian Development Bank and the rest to the World Bank. Paris Club creditors are owed $787 million next year, with Japan and France accounting for the bulk of the amount.

SBP statistics

According to the State Bank of Pakistan (SBP), the total debt and liabilities of Pakistan as on March 2019 are Rs 40,214 billion. During the last financial year in June 2018, the loans increased by more or fewer Rs 10,000.

According to official statistics, our total debt was 16,228 billion seven years ago, as of June 2013. And every Pakistani had a debt of Rs 96,422. When the PML-N left the government, the debt reached 136,000. Today, each of us is indebted to Rs. 181,000.

Compared to Pakistan’s GDP, current debt and liabilities are 104.3% of our GDP. If the situation persists these loans could be more than double the loans of the last 70 years during the PTI regime.

Need to be calibrated borrowing policy

Pakistan is facing an economic crisis and the previous governments’ disastrous policies have indebted the country for generations to come.

The last 10-years have seen a continuous and significant deterioration in Pakistan’s debt sustainability, and decades of economic mismanagement bears the blame.

All economies in the world, from the most advanced industrial economies, like the United States and Japan, to those endowed with vast natural resources, like Saudi Arabia and Venezuela, borrow money.

There is nothing wrong with a country floating bonds, financing infrastructure projects through long-term debt instruments, and using capital markets, both domestic and external, to meet its financing needs.

What is important, however, is for countries to follow a carefully calibrated borrowing policy that minimizes the various risks associated with taking on additional debt, such as interest rate and refinancing.

If Pakistan is to become an honorable country so it is essential to get rid of debt. Instead of borrowing more, the government desperately needs to mobilize manpower and reform in its fiscal policies.