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Structural Adjustmenta Major Cause of Poverty

"Debt is an efficient tool. It ensures access to other


peoples raw materials and infrastructure on the
cheapest possible terms. Dozens of countries must
compete for shrinking export markets and can export
only a limited range of products because of Northern
protectionism and their lack of cash to invest in
diversification. Market saturation ensues, reducing
exporters income to a bare minimum while the
North enjoys huge savings. The IMF cannot seem to
understand that investing in [a] healthy, well-fed,
literate population is the most intelligent
economic choice a country can make."
Susan George, A Fate Worse Than Debt, (New York:
Grove Weidenfeld, 1990), pp. 143, 187, 235
Many developing nations are in debt and poverty
partly due to the policies of international institutions
such as the International Monetary Fund (IMF) and
the World Bank.
Their programs have been heavily criticized for many
years for resulting in poverty. In addition, for
developing or third world countries, there has been
an increased dependency on the richer nations. This
is despite the IMF and World Banks claim that they
will reduce poverty.
Following an ideology known as neoliberalism, and
spearheaded by these and other institutions known
as the Washington Consensus (for being based in
Washington D.C.), Structural Adjustment Policies
(SAPs) have been imposed to ensure debt repayment
and economic restructuring. But the way it has
happened has required poor countries to reduce
spending on things like health, education and
development, while debt repayment and other
economic policies have been made the priority. In
effect, the IMF and World Bank have demanded that
poor nations lower the standard of living of their
people.
IMF And World Bank Reform?
Throughout the period of structural adjustment from
the 80s, various people have called for more
accountability and reform of these institutions, to no
avail.

Following the IMF and World Bank protests in


Washington, D.C on April 16, 2000, and coinciding
with the Meltzer Report criticizing the IMF and World
Bank, there has been more talk about IMF reforms.
At first thought the reforms sound like the protests
and other movements efforts are paying off.
However, as Oxfam noted, some of the reform
suggestions may not be the way to go and may do
even more harm than good. In their own words:
While some of the reform proposals now being
debated are sensible, the thrust of the reform
agenda is a source of concern for the following
reasons:
It reflects a growing disenchantment with
multilateralism
It threatens to replace inappropriate IMF conditions
with inappropriate conditions dictated by the G7
countries
It fails to address the real policy issues at the heart
of the IMFs failure as a poverty reduction agency
It does not address the politicization of IMF loans,
especially with regard to the US Treasurys influence
It does not adequately consider the democratic
deficit which prevents poor countries from having
an effective voice in the IMF
Reforming the IMF, Oxfam International Policy
Paper, April 2000
Into 2008, and the global financial crisis has been so
severe that rich countries have been affected. Calls
for reform have therefore increased, even from
within some of these institutions themselves. These
calls have included more transparency and
accountability as well as specifics such as creating a
more stable financial system, and cracking down on
tax havens.
This time, however, developing countries are
demanding more voice, and have more power that in
past years to try and affect this. In April, the IMF
conceded just 3% of rich country votes to the
developing countries, but developing countries
rightly want more.

Historically democracy and power have not gone


well together, and as journalist John Vandaele has
found,
The most powerful international institutions tend to
have the worst democratic credentials: the power
distribution among countries is more unequal, and
the transparency, and hence democratic control, is
worse.
John Vandaele, Democracy Comes to World
Institutions, Slowly, Inter Press Service, October 27,
2008
If change is to be effective, these fundamental
issues will need resolving. Powerful countries may
try to reshape things only in so far as they can get
themselves out of trouble and if they can avoid it,
they will try to limit how much power they concede
to others. And perhaps a sad reality of geopolitics
will be that any emerging nations that become truly
influential and powerful in this area will one day try
to do the same. For now, however, developing
countries generally have a common agenda of more
voice and will therefore champion common
principles of better democracy and accountability.
Sitglitz, the former World Bank chief economist, is
worth quoting a bit more to give an insight into the
power that the IMF has, and why accusations of it
and its policies being colonial-like are perhaps not
too far off:
The IMF is not particularly interested in hearing the
thoughts of its client countries on such topics as
development strategy or financial austerity. All too
often, the Funds approach to the developing
countries has had the feel of a colonial ruler. A
picture can be worth a thousand words, and a single
picture snapped in 1998, shown throughout the
world, has engraved itself in the minds of millions,
particularly those in the former colonies. The IMFs
managing director, Michel Camdessus (the head of
the IMF is referred to as its Managing Director), a
short, neatly dressed former French Treasury
bureaucrat, who once claimed to be a Socialist, is
standing with a stern fact and crossed arms over the
seated and humiliated president of Indonesia. The

hapless president was being forced, in effect, to


turn over economic sovereignty of his country to the
IMF in return for the aid his country needed. In the
end, ironically, much of the money went not to help
Indonesia, but to bail out the colonial powers
private sector creditors. (Officially, the ceremony
was the signing of a letter of agreement, an
agreement effectively dictated by the IMF, though it
often still keeps up the pretense that the letter of
intent comes from the countrys government!)
Defenders of Camdessus claim the photograph was
unfair, that he did not realize that it was being taken
and that it was viewed out of context. But that is
the pointin day-to-day interactions, away from
cameras and reporters, this is precisely the stance
that the IMF bureaucrats take, from the leader of
the organization on down. To those in the developing
countries, the picture raised a very disturbing
question: Had things really changed since the
official ending of colonialism a half century ago?
When I saw the pictures, images of other signings of
agreements came to mind. I wondered how similar
this scene was to those marking the opening up of
Japan with Admiral Perrys gunboat diplomacy or
the end of the Opium Wars or the surrender of
maharajas in India.
Joseph Stiglitz, Globalization and its Discontents,
(Penguin Books, 2002), pp. 4041
The above passage is from Stiglitzs book,
Globalization and its Discontents. In it, he highlights
many, many more issues, criticisms and aspects of
IMF/Washington Consensus ideological fanaticism
that have hindered development, and in many cases,
as he points out, worsened situations. It is surprising
and also quite illuminating to get the insider
image of the workings of some large institutions in
this way.
https://www.imf.org/external/pubs/ft/scr/2016/cr
1694.pdf
http://www.finance.gov.pk/mefp/MEFP_201314_201
516.pdf
http://www.slideshare.net/hjhabib/internationalmonetary-fund-imf-33325666
With economies around the world on the verge of collapsing. Some are pointing to the IMF as a
potential saviour of the world economy. They argue that the IMF can play a key role in avoiding
financial crisis and restoring confidence to a battered international economy. Yet, at the same
time many view the IMF with disdain, arguing that their intervention causes more problems than it
solves

International monitory Fund has supports Pakistan in restructuring its economy structural reforms suggested
by IMF and implemented by the Pakistani governments. IMF always pushes government to make good living
standard of peoples of Pakistan. It provides the technical as well as material support to carry out different
reforms in Pakistan. In this research paper attempt has been made to see that how the institution of IMF
helps to increase the assistance to see Pakistan as a developed state of the world, because, IMF play a
vittles role to stabilize the Pakistani economy but on its own conditions. It maintains a high level merits while
giving the aid. An attempt has also been made to see that how and in which condition IMF support Pakistan
to improve the Pakistan s Balance of Payments deficits.

International Monetary Fund

The International Monetary Fund (IMF) is an international


organization that was initiated in 1944 at the Bretton Woods
Conference and formally created in 1945 by 29 member countries. The
IMF's stated goal was to assist in the reconstruction of the
world's international payment system postWorld War II. The IMF
currently has a near-global membership of 188 countries. To become a
member, a country must apply and then be accepted by a majority of
the existing members. Upon joining, each member country of the IMF
is assigned a quota, based broadly on its relative size in the world
economy. The IMF provides policy advice and financing to members in
economic difficulties and also works with developing nations to help
them achieve macroeconomic stability and reduce poverty.
The external current account deficit was somewhat higher than expected
over the past two quarters, with lower goods exports and higher imports
partially compensated by strong remittances performance. Above quote is from this
article should have been enough for any bank in UK to refuse loan to an individual.
Alas Pakistan is issued loans without applying any affordability criteria and people of
Pakistan and their grandchildren will also pay the price whilst few in power today
enjoy the benefit in the name of commission or as it is known in Pakistan corruption
and kick backs. Why isn't people in media & power talking about it?

Background

Macroeconomic imbalances and longstanding structural impediments to growth


have prevented full realization of Pakistans potential. Problems in the energy
sector, security concerns, and a difficult investment climate have combined with
adverse shocks to undermine economic performance in the past decade. As a
result, GDP growth has only averaged 3 percent over the past few years, well
below what is needed to provide jobs for the rising labor force and to reduce
poverty. With the population still increasing rapidly, per capita income growth has
lagged behind many emerging economies.
Prior to the onset of the current IMF-supported program, the fiscal deficit widened,
driven by weak tax collections, energy sector subsidies, and increased provincial
government spending. Domestic deficit financing crowded out private sector
borrowing and contributed to inflation. The external position weakened
significantly, and, reinforced by an absence of access to external market financing,
central bank reserves declined to critical levels.

Role of the IMF

The current government took office with a strong mandate to implement ambitious

economic reforms to stabilize the economy and put Pakistan on the path to growth
and prosperity. The governments plan focuses on strengthening macroeconomic
and structural policies to shore up confidence, reduce economic imbalances, foster
sustained inclusive growth, and provide employment opportunities.
Since September 2013, the IMF has been supporting the governments economic
program by means of a 36-month extended arrangement under the Extended Fund
Facility (EFF). The EFF arrangement, together with other multilateral and bilateral
program support, provides needed external financing for Pakistan, and signals the
authorities determination to implement sound policies, thereby bolstering market
confidence and catalyzing private investment and other inflows. That way, the EFF
provides a framework in helping Pakistan to retain macroeconomic stability, and
therefore to promote growth and protect the most vulnerable part of the
population.

The Challenges Ahead

Much has been accomplished in the first half of the program. The fiscal deficit has
been reduced, international reserves have increased substantially, and the threat
of a crisis has greatly receded. Macroeconomic prospects are favorable. However,
more remains to be done to consolidate and reinforce the gains in economic
stability and strengthen reforms for higher growth and job creation. Pakistans
aspiration is to catch up over time with other emerging market countries in key
macroeconomic and business climate indicators.
The key challenges facing the authorities are to:
Continue to build external buffers and maintain price stability. Central Bank
reserves reached over 2.5 months of imports and inflation is under 4 percent. The
central bank should continue to rebuild its foreign exchange reserves, making use
of Fund disbursements, financial support from other donors, foreign exchange
interventions, and exchange rate flexibility. A continued focus on price stability will
also be important.
Continue with prudent fiscal policy to ensure medium-term fiscal
sustainability. The reduction in the headline deficit from 8.8 percent of GDP in
2012/13 to 5.5 percent of GDP in 2013/14 (an improvement of about 1.5 percent
of GDP after accounting for one-off factors), and further to 4.9 percent of GDP in
2014/15 are important achievements. Building on these, further efforts will be
needed in the coming years to strengthen Pakistans resilience to shocks.
Facilitating higher investment. Despite recent successes in reinforcing economic
stability, investment as a share of GDP has remained too low to generate the
desirable high rates of sustainable economic growth. Over time, public investment
needs to increase significantly. To generate the necessary resources for this and
other priority spending such as health, education, and social safety nets, the taxto-GDP ratio must be raised considerably by broadening the tax base and
improving significantly on taxpayer compliance.
Implement structural reforms to achieve inclusive growth. To facilitate
higher private investment and remove obstacles to private sector-led growth, there
is a need to address longstanding problems in the energy sector (especially dealing
with the circular debt on a sustainable basis), continue reforms of the trade
regime, restructure or privatize public sector enterprises, and strengthen the
business climate.
Protect the most vulnerable. Since the outset of the arrangement, the number
of beneficiaries of the targeted income support program increased by 10 percent,
and stipends were raised by 50 percent. Throughout the program, it is a top

priority of the government to protect the poor from direct and indirect impacts of
fiscal consolidation and price adjustments by means of targeted income support.

1. The IMF dictated the content of the program.


The government mostly produced the policies supported in this program, which
respond to key challenges facing Pakistan today.
The economic section of the PML-N party manifesto shows that most of the policies
agreed with the IMF were actually those proposed by Prime Minister Sharif and his team
before the elections, such as: fiscal consolidation, tax reform, measures to tackle the
energy crisis, restructuring and privatizations of public sector enterprises, trade policy
reforms, and steps to boost the investment climate.
2. The program doesnt address some important problems.
The program cant do everything, but it tackles Pakistans biggest economic issues
as quickly as possible.
Many have questioned particular parts of the program. Some feel the program should do
more to improve tax collections, or to cut corruption, or to reform the civil service, or to
boost provincial tax revenues. These are certainly important issues but given time and
capacity constraints we cant focus on everything immediately.
The government and the IMF agreed the most important issues were: (1) the very large
fiscal deficit, which could no longer be financed; (2) the critically low level of
international reserves; and (3) the need for structural reformsparticularly in the energy
sectorto get the economy out of the low-growth trap it has been mired in for years. The
program aggressively tackles all threethe deficit will come down from 8 percent of
GDP to around 3 percent of GDP over 3 years, international reserves will be rebuilt to
sustainable levels, and structural bottlenecks will be significantly eased.
Once the government addresses these core issues they can tackle other important
challenges, but without stabilization first, the economy will be too unstable to support the
other efforts.
3. The program may address the right issues, but in the wrong order.
With the economy in serious trouble, Pakistan didnt have the luxury of postponing
key stabilization measures.
Some have argued the program errs in focusing first on economic stabilization and then
on growth. Others wanted to focus on improved tax collections before increases in tax
rates. Likewise, some feel that energy supply should have been increased first, with tariff
increases later. Lets take these in turn.

If Pakistan wanted to postpone its stabilization efforts to focus on growth stimulus, how
would the government pay for the postponement? And how would it finance the
stimulus? Unlike the United States, which can sustain very large deficits because the
world is willing to buy U.S. government bonds, Pakistan doesnt have this luxury.
Moreover, even if you could finance it, how effective will temporary stimulus be if
investors know the government has not yet addressed underlying imbalances?
On improving tax collections and energy supply improvements, these reforms take years
to bear fruit. Tax administration reforms will take 2-3 years to generate significant
improvements in revenues. Energy supply enhancements can take even longer. So while
it was essential to start those at the beginning of the program, the government made the
wise decision to include quick wins early on to address the vulnerabilities while the
reforms with longer gestation periods are ramping up.
4. IMF policies will hurt the poor, who will pay the brunt of the adjustment.
The program will broaden the tax base, and cut subsidies for the rich, while
maintaining low energy prices for the lowest consumers and increasing public
spending on the poorest.
In this program, deficit reduction will come not from cutting education and health
programs, but mostly from raising revenues. This involves bringing people into the tax
net by eliminating loopholes and special privileges, and by improving tax administration
and enforcement. In Pakistan, a country of 180 million people, only 1.2 million
individuals and firms file income tax returns, of which about half are corporate filers.
That must change so that more of the burden falls on those who can most afford to pay.
Energy subsidies mostly benefit a small proportion of the population. The wealthiest are
those who consume the most energy, so an across-the-board subsidy helps them most.
The rest of the population has to endure 8-10 hours a day of load shedding during the
summer months without being able to afford the private generators of the rich. Under the
program, the lowest consumption levels will continue to be subsidized, while prices will
go up to fully cover costs for the wealthiest. Energy supply will be better and loadshedding will fall.
The program also includes higher social spending. The 2013/14 budget includes a
significant rise in education spending. The program also entails a large increase in
targeted transfers to the poorest, through the expansion of the Benazir Income Support
Program (BISP), a national cash-transfer scheme. The government will expand the
program with the help of donors, which currently reaches 4.9 million households, to
reach 6.6 million families. The stipend has increased by about 20 percent, and it will be
adjusted for inflation in the future.
5. The program will generate recession; hurt the economy and the business sector.
Growth will initially fall, but will be much higher over time.
In the short-run it is true that fiscal adjustment will reduce growth. But continued
instability would hurt growth much more by pushing the economy into crisis. The
government has geared its structural reforms to enhance growth in the medium- and longterm. These reforms include measures to ease the energy bottlenecks that strangle
economic activity, and steps to promote trade, improve the business climate and the

competitiveness of Pakistani industry. More efficiency and competition will help generate
more investment and millions of new domestic jobs.
6. This program is doomed to fail as did previous programs.
While success is by no mean guaranteed, this is an historic chance to fix longstanding economic problems and put the country on a higher growth path.
The governments program aims to overhaul some of the structural deficiencies that have
plagued the countrys economic prospects, while pursuing, at the same time sound
macroeconomic policies and protecting the most vulnerable from the effects of fiscal
consolidation, through the expansion of social safety nets. Program design has been
adjusted to take into consideration the lessons of past failures and the IMF is willing to be
flexible to adapt to unexpected developments. Support from other institutions is being
mobilized to help. Prospects for success are enhanced by a democratically elected
government firmly committed to doing what it needs to do to fix these long-standing
problems and achieve its objective of making life better for 180 million Pakistanis.

https://blog-imfdirect.imf.org/2013/12/19/pakistan-the-realities-of-economicreform/

Top Ten Reasons to Oppose the IMF


What is the IMF?

The International Monetary Fund and the World Bank were created in 1944 at a conference
in Bretton Woods, New Hampshire, and are now based in Washington, DC. The IMF was
originally designed to promote international economic cooperation and provide its member
countries with short term loans so they could trade with other countries (achieve balance of
payments). Since the debt crisis of the 1980's, the IMF has assumed the role of bailing out
countries during financial crises (caused in large part by currency speculation in the global
casino economy) with emergency loan packages tied to certain conditions, often referred to
as structural adjustment policies (SAPs). The IMF now acts like a global loan shark, exerting
enormous leverage over the economies of more than 60 countries. These countries have to
follow the IMF's policies to get loans, international assistance, and even debt relief. Thus, the
IMF decides how much debtor countries can spend on education, health care, and
environmental protection. The IMF is one of the most powerful institutions on Earth -- yet few
know how it works.

The IMF has created an immoral system of modern day colonialism that SAPs
the poor
The IMF -- along with the WTO and the World Bank -- has put the global economy on a
path of greater inequality and environmental destruction. The IMF's and World Bank's
structural adjustment policies (SAPs) ensure debt repayment by requiring countries to
cut spending on education and health; eliminate basic food and transportation
subsidies; devalue national currencies to make exports cheaper; privatize national
assets; and freeze wages. Such belt-tightening measures increase poverty, reduce
countries' ability to develop strong domestic economies and allow multinational
corporations to exploit workers and the environment A recent IMF loan package for
Argentina, for example, is tied to cuts in doctors' and teachers' salaries and decreases
in social security payments.. The IMF has made elites from the Global South more
accountable to First World elites than their own people, thus undermining the
democratic process.

The IMF serves wealthy countries and Wall Street


Unlike a democratic system in which each member country would have an equal vote,
rich countries dominate decision-making in the IMF because voting power is determined
by the amount of money that each country pays into the IMF's quota system. It's a
system of one dollar, one vote. The U.S. is the largest shareholder with a quota of 18
percent. Germany, Japan, France, Great Britain, and the US combined control about 38
percent. The disproportionate amount of power held by wealthy countries means that
the interests of bankers, investors and corporations from industrialized countries are put
above the needs of the world's poor majority.

The IMF is imposing a fundamentally flawed development model


Unlike the path historically followed by the industrialized countries, the IMF forces
countries from the Global South to prioritize export production over the development of
diversified domestic economies. Nearly 80 percent of all malnourished children in the
developing world live in countries where farmers have been forced to shift from food
production for local consumption to the production of export crops destined for wealthy
countries. The IMF also requires countries to eliminate assistance to domestic industries
while providing benefits for multinational corporations -- such as forcibly lowering labor
costs. Small businesses and farmers can't compete. Sweatshop workers in free trade
zones set up by the IMF and World Bank earn starvation wages, live in deplorable
conditions, and are unable to provide for their families. The cycle of poverty is
perpetuated, not eliminated, as governments' debt to the IMF grows.

The IMF is a secretive institution with no accountability


The IMF is funded with taxpayer money, yet it operates behind a veil of secrecy.
Members of affected communities do not participate in designing loan packages. The
IMF works with a select group of central bankers and finance ministers to make polices

without input from other government agencies such as health, education and
environment departments. The institution has resisted calls for public scrutiny and
independent evaluation.

IMF policies promote corporate welfare


To increase exports, countries are encouraged to give tax breaks and subsidies to
export industries. Public assets such as forestland and government utilities (phone,
water and electricity companies) are sold off to foreign investors at rock bottom prices.
In Guyana, an Asian owned timber company called Barama received a logging
concession that was 1.5 times the total amount of land all the indigenous communities
were granted. Barama also received a five-year tax holiday. The IMF forced Haiti to
open its market to imported, highly subsidized US rice at the same time it prohibited
Haiti from subsidizing its own farmers. A US corporation called Early Rice now sells
nearly 50 percent of the rice consumed in Haiti.

The IMF hurts workers


The IMF and World Bank frequently advise countries to attract foreign investors by
weakening their labor laws -- eliminating collective bargaining laws and suppressing
wages, for example. The IMF's mantra of "labor flexibility" permits corporations to fire at
whim and move where wages are cheapest. According to the 1995 UN Trade and
Development Report, employers are using this extra "flexibility" in labor laws to shed
workers rather than create jobs. In Haiti, the government was told to eliminate a statute
in their labor code that mandated increases in the minimum wage when inflation
exceeded 10 percent. By the end of 1997, Haiti's minimum wage was only $2.40 a day.
Workers in the U.S. are also hurt by IMF policies because they have to compete with
cheap, exploited labor. The IMF's mismanagement of the Asian financial crisis plunged
South Korea, Indonesia, Thailand and other countries into deep depression that created
200 million "newly poor." The IMF advised countries to "export their way out of the
crisis." Consequently, more than US 12,000 steelworkers were laid off when Asian steel
was dumped in the US.

The IMF's policies hurt women the most


SAPs make it much more difficult for women to meet their families' basic needs. When
education costs rise due to IMF-imposed fees for the use of public services (so-called
"user fees") girls are the first to be withdrawn from schools. User fees at public clinics
and hospitals make healthcare unaffordable to those who need it most. The shift to
export agriculture also makes it harder for women to feed their families. Women have
become more exploited as government workplace regulations are rolled back and
sweatshops abuses increase.

IMF Policies hurt the environment


IMF loans and bailout packages are paving the way for natural resource exploitation on
a staggering scale. The IMF does not consider the environmental impacts of lending

policies, and environmental ministries and groups are not included in policy making. The
focus on export growth to earn hard currency to pay back loans has led to an
unsustainable liquidation of natural resources. For example, the Ivory Coast's increased
reliance on cocoa exports has led to a loss of two-thirds of the country's forests.

The IMF bails out rich bankers, creating a moral hazard and greater instability
in the global economy
The IMF routinely pushes countries to deregulate financial systems. The removal of
regulations that might limit speculation has greatly increased capital investment in
developing country financial markets. More than $1.5 trillion crosses borders every day.
Most of this capital is invested short-term, putting countries at the whim of financial
speculators. The Mexican 1995 peso crisis was partly a result of these IMF policies.
When the bubble popped, the IMF and US government stepped in to prop up interest
and exchange rates, using taxpayer money to bail out Wall Street bankers. Such
bailouts encourage investors to continue making risky, speculative bets, thereby
increasing the instability of national economies. During the bailout of Asian countries,
the IMF required governments to assume the bad debts of private banks, thus making
the public pay the costs and draining yet more resources away from social programs.

IMF bailouts deepen, rather then solve, economic crisis


During financial crises -- such as with Mexico in 1995 and South Korea, Indonesia,
Thailand, Brazil, and Russia in 1997 -- the IMF stepped in as the lender of last resort.
Yet the IMF bailouts in the Asian financial crisis did not stop the financial panic -- rather,
the crisis deepened and spread to more countries. The policies imposed as conditions
of these loans were bad medicine, causing layoffs in the short run and undermining
development in the long run. In South Korea, the IMF sparked a recession by raising
interest rates, which led to more bankruptcies and unemployment. Under the IMF
imposed economic reforms after the peso bailout in 1995, the number of Mexicans living
in extreme poverty increased more than 50 percent and the national average minimum
wage fell 20 percent.

The IMF is often depicted as a heartless


moneylender which forces poor countries to adopt bad policies
and takes its pound of flesh back while the countries sink further
into poverty. Pakistans long IMF clientship provides some
insights into this accuracy. Pakistan is among the most frequent
users of IMF loans, having borrowed IMF money 12 times since
1980. However, 10 of these programmes were abandoned midway
due to Pakistans failure to fully adopt the IMFs policy

recommendations. There is debate on whether this failure was due


to Pakistans poor implementation or the IMFs poor programme
design. A 2002 evaluation by the IMFs own Independent
Evaluation Office (IEO) helps in disentangling this Gordian knot.
The report identifies several problems with Pakistans
implementation, eg, inadequate political will and
mismanagement. Thus, there is little doubt that Pakistans
economic malaise today is primarily due to its own failure to
undertake appropriate economic reforms. However, the IEO also
identifies serious problems with the IMFs programme designs,
which echo the opinions of external IMF critics, eg, undue US
interference, inadequate political analysis capacities within the
IMF, inappropriate sequencing and over-ambitious agendas given
the short loan durations. For example, Pakistan was advised to
reduce import duties before it developed alternative taxation
measures to cover the ensuing tax revenue shortfalls. This
increased Pakistans public debt significantly as it had to borrow
to cover the resulting fiscal deficits.
However, Pakistan must partly share the blame since it accepted
the loan conditions. True, distressed borrowers often have little
choice. If an illiterate village widow signs unfair borrowing
conditions with a landlord while her child is sick, one would
largely blame the landlord. While this analogy holds for some
African countries, which lack both the technical capacities to
analyse the IMF conditions and alternative financing options,
Pakistan is no illiterate village widow. It has sufficient technical
analytical capacities and can easily generate the additional tax and
export revenues needed to eliminate the IMF loans.
Having assigned primary responsibility to the patient though, one
must also analyse the quality of advice of the IMFs doctors.

Although the IMF-IEO evaluations for several other countries


have also raised similar criticisms as in the Pakistan evaluation
and have led to some limited flexibility in the IMF loan conditions,
deep-seated problems still exist. While IMF loans are essentially
aimed at resolving short-term balance-of-payments problems, the
attached conditions covering fiscal, monetary, exchange rate,
privatisation, deregulation and financial liberalisation issues
restructure the whole economy and affect its long-term
development potential.
Although most developing countries are in need of fundamental
reform along the general economic principles advocated by the
IMF, the problem lies with the specifics of the IMF reform agenda.
Most successful East Asian countries have adopted these general
principles but have utilised very different specific tools which
preserve long-term development, unlike IMF-recommended tools.
Instead of widespread immediate privatisation, China initially
introduced managerial incentive systems in agriculture and
industry. This boosted Chinese productivity without the massive
economic ruin that the IMF-advised mass-scale privatisation
caused in Russia in the 1990s. In fact, no developing country
sticking entirely to the IMF approaches has achieved the type of
success achieved by East Asian countries.
The problem lies in the fact that the IMF is filled almost entirely
with macro-economists who specialise in short-term
macroeconomic stabilisation issues but have little background in
long-term development issues. Moreover, IMF loans are usually
short term and given when countries are already in distress and
thus ill-equipped to afford belt-tightening or major reforms. It
would be best to drop conditions entirely from IMF loans and
attach them with the funding given by the World Bank, the Asian

Development Bank and bilateral donors, since these give longer


duration funding during normal times and also have staff with
broader specialisations.
IMF AND US

Over the years, the International Monetary Fund (IMF) has


emerged as a key influence on Pakistans macroeconomic
policies. Since the late 1980s, it has been imposing various
conditions on successive governments increasingly crippled by
debt servicing. Surprisingly, one finds that almost all discussion
centres on Pakistans failure to meet targets set by the IMF and
hardly any on what success might mean for Pakistans own
development.
Typical IMF conditions comprise contractionary macroeconomic
policies (fiscal and monetary), inflation targeting regimes,
financial deregulation and increased openness to international
capital flows, trade liberalisation (including reduction of tariff and
non-tariff barriers) and privatisation of public-sector enterprises.
In short, an abandonment of state-led development strategy.
Given space constraints, let us confine ourselves for the time being
to analysing the effect of IMF conditions on fiscal policy in general
and government spending in particular.
One might begin by asking what the aim of macroeconomic policy
should be in a developing country. First and foremost, it should
facilitate and never impede long-run development goals. There is
enough evidence now to suggest that it should also be countercyclical. In other words, government spending should expand to
fill in for a fall in private spending during a downturn and contract
during an upturn. The IMFs argument that government spending
will crowd out private investment does not stand up to scrutiny,

nor is it backed by empirical evidence. Indeed, as research by the


United Nations Conference on Trade and Development
(UNCTAD) and the United Nations Development Programme has
shown, government spending, especially on infrastructure, health,
education, technology and communication, has actually had the
effect of crowding-in private investment in a number of
countries (UNCTAD 2003, Roy and Weeks 2004). This is
especially true in times of crisis when private investors become
even more risk averse.
It is difficult to see how the IMFs recommended contractionary
policies aimed at controlling inflation and reducing the deficit are
consistent with Pakistans development goals. Indeed, a recent
study by the Centre for Economic Policy Research (CEPR) finds
that in 2008-09, 31 out of the 41 IMF agreements made with
countries in response to the global recession included pro-cyclical
fiscal or monetary policy, with 15 having both. This inclination of
the IMF has been criticised by several other economists including
the Nobel Laureate Joseph Stiglitz, who criticised the IMFs
handling of the East Asian Crisis in the following terms: All
the IMF did was make East Asias recessions deeper, longer, and
harder. Slashing the development budget in Pakistan so that the
deficit could be reduced, even when the Pakistani economy was
battered by the 2010 floods, was consistent with the IMFs general
policy but countered Pakistans own development needs.
The IMFs insistence that government deficits cause inflation is
both theoretically and empirically disputed in academic circles.
The reality is far more complex; inflation comes from various
sources including escalating global commodity prices, currency
devaluation, wage-price spirals and low productivity, issues that
would not be solved merely by cutting the deficit. This does not
mean that inflation is not a serious issue in Pakistan. On the

contrary, it presents a huge burden for the common man, but this
is more because of stagnant wages due to the absence of
industrialisation than due to the deficit. It is worth noting that
countries such as Japan, South Korea and Brazil grew rapidly with
higher inflation than Pakistan did. This was made socially and
politically sustainable because real wages were rising too. In
Pakistan, another IMF favourite slashing subsidies on basic
commodities only serves to enhance the pain inflicted by
inflation rather than leading to any competitiveness.
Ironically, even if we were to make deficit reduction our primary
goal, over and above any developmental goals that we may have,
the IMF dictated policies are unlikely to achieve even that. This is
due to the fact that the nature of cuts the IMF advocates stifle
prospects for long-term growth by retarding development. The
IMFs policy towards Public Sector Enterprises (PSE) is a case in
point. The policy is to privatise PSEs and use the proceeds to
repay debt and prevent the PSEs from being a further drain on the
exchequer. This view continues to hold despite the fact that
competing countries have created national champions out of their
PSEs. Rather than driving them into the ground, they have used
them to develop valuable capabilities and develop key sectors.
Countries that started behind Pakistan and have since overtaken
it, developed their human capital by investing in crucial areas
including, health and education. The IMF, on the other hand,
advocates privatisation of these while insisting on the most
unproductive expenditure of all: domestic and external debt
service. According to the Ministry of Finance, Pakistans debt
service alone made up nearly 30 per cent of the current
expenditure in FY 2011-12 . That is over 1.5 times the
development expenditure for the same period. Also ignored are

the effects of other IMF-backed policies on the fiscal deficit; an


influential study by John Toye (2000) shows that trade and
financial liberalisation reforms can lead to a six to seven per cent
increase in the deficit.
A pro-cyclical macroeconomic policy that is not coherently tied to
development aims is likely to make the debt situation worse by
retarding economic growth. European policymakers are
increasingly realising the futility of pursuing fiscal
austerity in order to reduce the debt burden. Pakistani
policymakers, too, would do well to consider different policy
options; as long as the IMF continues to prioritise creditors over
the interests of the country as a whole, growth will not only
remain low, but the debt burden will continue to be unsustainable.
PLZ DONT BLAME IMF FOR EVERYTHING

I write with regard to the article by Natalya Naqvi titled The IMF
and us, which appeared on August 27, 2012. Ms Naqvi has a go
at everyones favorite bugaboo: the International Monetary Fund.
Her article is interesting but I beg to differ with much of what she
says. However, since there is only so much I can write here, she is
welcome to get in touch with me via email.
Ms Naqvis first sentence that the IMF has had a key influence
on the conduct of macroeconomic policies in Pakistan leaves me
bewildered. Considering we have never implemented an IMFfinanced programme (save the one during the previous regime
or so it is claimed), this postulate has no merit at all. However, I
will concede that some reforms were undertaken as part of our
agreements with the IMF in the areas of central bank autonomy,
prudential supervision, open market operations, interest and
exchange rate flexibility, and privatisation (even if that was
handled by financing from the World Bank). In other areas, and
especially on the fiscal side the mother of all evils Pakistan

has implemented absolutely nothing, despite IMF conditionality.


Indeed, if anything, we keep regressing, adding new exemptions,
concessions and amnesty schemes, so that we have the most
regressive, distortionary, dysfunctional, fragmented and corrupt
fiscal system in the world.
So I would put it to the writer that the IMFs imprint on our
macroeconomic policies has been marginal and fleeting at best. It
is for a very good reason that Pakistan has been given the
undistinguished title of a country characterised by start-stop
adjustment in the IMF. Actually, I prefer the description startstop-roll back. As soon as we have abandoned (another)
programme, we roll back any reforms that we may have
implemented. Removing exemptions and concessions and then
promptly restoring them is a case in point.
Ms Naqvi talks of counter-cyclical fiscal policy and how the IMF
simply does not get it. This point has been mentioned by others.
Indeed, in the case of one specific person, he said that Pakistan
should have rejected the IMFs recommendations to tighten both
fiscal and monetary policies in the context of the 2008 stand-by
arrangement because it was bad for growth. I say to both Ms
Naqvi and the gentleman that their recollection of the conditions
prevailing at the time is a little blurred. The facts were that, prior
to the engagement with the IMF in 2008, the Pakistan economy
was heading off a cliff: growth had slowed, inflation was
accelerating, there was massive capital flight, asset price bubbles
had burst, the exchange rate was in free-fall and our foreign
exchange reserves were disappearing at an astonishing speed.
Given this grim picture, does Ms Naqvi seriously think that a
counter-cyclical fiscal stance (and, as a sweetener, a dash of

monetary easing as well), would have been the right policy


prescription? Or would such an injection of stimulus have done no
more than hasten the plunge off the cliff? Would this be the right
policy prescription again today with an FY12 budget deficit
clocking in at 8.5 per cent of the GDP, inflation in double-digits
and our foreign exchange reserves under immense downward
pressure?
It is true that there were countries that had built-up fiscal
buffers prior to the global financial crisis of 2008 and had room
to manoeuver. China and India come to mind. Both countries had
the fiscal space for discretionary policy action and were able to
safeguard their growth and development objectives. Pakistan did
not. The Pakistan economy was over-stretched, overheating
and in peril. It had no choice but to undertake drastic adjustment
measures to halt the downward spiral.
Ms Naqvi is harsh on IMF-imposed cuts in development. But
her angst is misdirected. Based on experience, the prerogative of
where and how much to cut on the spending side is that of the
authorities, not the IMF. They certainly make suggestions and
typically focus on non-interest current spending. It will also do
well to note that the World Bank and the Asian
Development Bank are at the negotiating table to ensure,
inter alia, that development spending is not unduly compressed
for the sake of fiscal adjustment. Cutting development
spending, or delaying the release of funds to projects to meet fiscal
targets is an entirely home-grown Pakistani initiative. Yet, the
irony is that despite across-the-board cuts that are disruptive and
destructive, we still failed to meet fiscal deficit targets!
Ms Naqvi then has a predictable dig at another IMF favourite, as
she calls it, of cutting subsidies. The IMF is not against subsidies.
It is, however, very much against open-ended, untargeted and

burdensome subsidies that benefit primarily the rich. Most levelheaded economists would be too. On her additional point about
PSEs (public sector enterprises) becoming national champions,
I would ask her how she would rate our national champions of
today: PIA, the railways and the Pakistan Steel Mills? Should we
just hang on to these dying national champions?
Finally, if the writer thinks that the persistence of double-digit
inflation in Pakistan has very little to do with fiscal slippages (and
how they are financed), and everything to do with domestic and
external shocks, I recall a story told to me about a meeting of the
Economic Committee of the Cabinet (ECC) which Ms Benazir
Bhutto chaired. She was being assured that inflation was being
caused by the price of onions and potatos, and had nothing to do
with the stance of macroeconomic policies. With economic advice
like that, no wonder her government was toppled twice.

IMF
chit for release of
$1.1 gives
billionclean
to Pakistan
The International Monetary Fund (IMF) says its mission held productive
discussions with government and central bank officials on Pakistans economic
performance under the EFF program and is encouraged by the overall progress
in strengthening macroeconomic stability and output growth.
In a statement after the talks with Finance Minister Senator Ishaq Dar and senior
Pakistani officials, the IMF said the mission reached staff-level understandings
with the authorities on a Memorandum of Economic and Financial Policies which,
upon managements approval, will be considered by the IMF Executive Board in
December to conclude the fourth and fifth reviews. Upon the Boards approval,
SDR 720 million (about US$1.1 billion) will be made available to Pakistan.
The International Monetary Fund (IMF) staff mission, led by Mr. Jeffrey Franks,
visited Dubai from October 29-November 8, 2014 to conduct discussions on the

fourth and fifth reviews of Pakistans SDR 4.393 billion (about US$6.6 billion)
Extended Fund Facility (EFF), approved by the IMFs Executive Board on
September 4, 2013. The mission met with Finance Minister Ishaq Dar, State
Bank of Pakistan (SBP) Governor Ashraf Wathra, and other senior officials.
The IMF statement said Pakistans economic indicators are improving, with
growth expected to reach 4.3 percent in fiscal year (FY) 2014/2015, inflation on a
downward trajectory, and credit to the private sector expanding at a robust pace.
The external current account deficit was somewhat higher than expected over
the past two quarters, with lower goods exports and higher imports partially
compensated by strong remittances performance. The rapid build-up of gross
reserves which rose from US$5.4 billion at the end of March to US$9.1 billion by
the end of June 2014 stalled thereafter due to delays in divestment and Sukuk
transactions and the effects of political uncertainty on capital flows. However,
going forward reserves are expected to surpass 3-months of imports by the end
of FY 2014/2015.
It said despite some difficulties, the authorities reform program remains broadly
on track, with the government and SBP meeting most quantitative performance
criteria for end of June and end of September 2014. The authorities are
committed to taking the necessary corrective actions for missed targets, and with
these actions, they will be on-track to meet their objectives for end-December.
The mission was pleased that the government met the indicative targets on
social transfers to the poor under the Benazir Income Support Program (BISP).
Staff welcomed the governments efforts to expand support to the poor through
the BISP to 4.8 million eligible families by the end of this year.
The mission was encouraged by the strong fiscal performance achieved during
FY 2013/2014, and by the authorities determination to further lower the deficit to
4.8 percent of GDP in the current fiscal year. Progress is being made in
broadening the tax base by eliminating tax concessions and exemptions granted
through Statutory Regulatory Orders (SROs), strengthening anti-money
laundering legislation, and implementing tax administration reforms to enhance
compliance and enforcement. However, continued efforts are needed to improve
the tax-to-GDP ratio and create resources to finance much-needed spending on
investment and social development, while making the taxation system more

efficient, transparent and equitable.


The SBP remains committed to a prudent monetary policy stance to assure
attainment of its inflation and reserves accumulation objectives. While legislation
to enhance the SBP autonomy is still in the Parliament, internal reforms are
underway to enhance the central banks effectiveness. Banking sector
performance remains strong due to improved earnings and solvency.
The IMF mission urged the authorities to deepen their structural reform agenda in
order to improve Pakistans competitiveness in global markets. In the energy
sector, declining world oil prices and the expected start of imports of liquefied
natural gas provide an opportunity to improve energy supply and continue tariff
reforms while containing price increases to consumers. High priority needs to be
placed on enhancing governance and efficiency of energy firms, and in
strengthening the capacity of regulatory bodies. The mission supports the
governments strategic private partnership agenda and encourages stronger
reform efforts in improving the business climate.

What are the various disadvantages of


IMF?
Disadvantages of IMF

Though IMF funds are helpful in many ways, there are certain areas where
the IMF fails to address the member nations. The disadvantages of IMF are
discussed briefly below

1. Passive approach by IMF


The IMF has been passive in its approach and not been effective in
promoting

exchange

stability and

maintaining orderly exchange

arrangements. This is considered as one of the major disadvantages of


IMF. The original fund agreement permits fluctuations of exchange rate
within limits. It can fluctuate within a range of one per cent above or
one per cent below the official price. This is called adjustable peg
system. The exchange rate of currency was fixed in terms of golden
dollar. Over years, U.S gold stock declined and U.S balance of
payments suffered. It led to the collapse of Bretton Wood System in
August

1971

when

U.S

refused

convertibility

of

dollars

into

currency. Member countries were also following diverse exchange


policies. These events simply prove that IMF was not able to maintain
a uniform international exchange system which is a big disadvantage.

2. Unsound policy for fixation of exchange


rate by IMF
The unsound policy for fixation of exchange rate is one of the
disadvantages of IMF. Some of the provisions of IMF are unsound. For
example, devaluation is justified when international inflation causes
fundamental

disequilibrium.

If

inflation

persists,

devaluation

of

currency cannot be effective. Appropriate adjustments are desired only


through internal economic policy changes. Further, member countries
have changed the par value of currencies with impunity. In 1949,
about 23 countries devalued their currencies in total disregard to the
IMF rule. The IMF could not contain the situation and remained
ineffective.

3. Non-removal of
restrictions by IMF

foreign

exchange

One of the important objectives of the IMF has been to remove foreign
exchange restrictions which retard the growth of global trade. Still,
member countries follow unhealthy practices of exchange controls and
multiple exchange rates. Consequently, the international business is
adversely affected.

4. Inadequate resources
The resources at the disposal of the IMF are not adequate to cater to
the needs of member countries which is a setback of IMF. Uncertain
capital inflows into the international financial system necessitates the
strengthening of the fund resources. The resources of the fund may be
enhanced by raising the quota. But developed countries are reluctant
to increase the quota of the fund.

5. High interest rates by IMF


High interest rates charged on its advances are considered one of the
major disadvantages of IMF. So, the debt servicing for the less
developed countries is difficult. For example, since 1982 the interest
charged for loans out of the ordinary resources of the fund is 6.6 per
cent. The interest rates payable on the loans made out of borrowed
funds is as high as 14.56 per cent. So, developing countries
experience a lot of difficulties in redeeming their loans borrowed from
the IMF.

6. Stringent conditions by IMF is one of


its disadvantages
The stringent conditions imposed by IMF on its member nations are
one of the big disadvantages of IMF. The IMF is criticized for its strict
conditional clauses while extending credit to member countries. Till
1970, the conditional clauses attached to loans were not stiff. The IMF
insisted that the borrowing countries reduce public expenditure in
order to tide over BOP deficits. But after 1970, the IMF imposed stiff
conditional clauses. Among them are periodic assessment of the
performance of the borrowing countries with adjustment programmes,
increases

in

productivity,

improvement

in

resource

allocation,

reduction in trade barrier, strengthening of the collaboration of the


borrowing country with the World Bank, etc.

Conditional clauses imposed by IMF:


The conditional clauses imposed by IMF after 1995 are pretty stiff
which are big disadvantages of IMF. To state a few:
liberalizing trade by removing exchange and import controls;
eliminating all subsidies so that the exporters are not in an
advantageous position in relation to other trading countries; and
treating foreign lenders on an equal footing with domestic
lenders. The fund maintains a close watch on the activities of the

borrowing country related to monetary, fiscal, trade and tarif


programmes. IMFs intervention in the domestic economic
matters of the borrowing countries places them in a difficult
position.

7. Failure to play an effective role in


international monetary matters is one of
the disadvantages of IMF:

One of the disadvantages of IMF is that it has failed to play an


effective role in international monetary matters. For example, it does
not provide facilities for short term credit arrangements. This has lead
to the swap arrangements among the central banks of the Group 10
(Group of 10 leading industrialized countries). This arrangement
provides for the exchange of each others currency and also short term
credit to correct temporary equilibrium in balance of payments. The
swap facility paved way to the growth of Euro-currency market. This
has undermined the role of IM as a central monetary institution.

8. Failure to tackle East Asian currency


crisis is one of the disadvantages of IMF:
The failure to tackle East Asian currency crisis is considered one of the
disadvantages of IMF. In July 1997, the occurrence of the East Asian
currency crisis affected East Asian countries like Thailand, Malaysia,
Philippines, South Korea, Singapore, Hong Kong and Indonesia.
Depreciation of their currencies led to fall in the prices in the stock
markets. The functioning of the financial institutions and flow of
foreign capital were badly affected. In this context, the IMF advocated
the East Asian countries to adopt high interest rates and cut public
expenditure. But this advice proved to be faulty. As a result, in 1998
the

whole

East

Asian

region

witnessed

widespread

recession,

unemployment and low growth rates. The IMF was expected to follow
a debt rescheduling plan. But this scheme was not introduced at the
insistence of the United States and other advanced countries. Milton

Friedman blamed the IMF for global crisis.

9. Domination by rich countries is one of


the disadvantages of IMF:
The domination by rich countries is another major disadvantages of
IMF. Though the majority of the members of the IMF are from the less
developed countries of Asia, Africa and South Africa, the IMF is
dominated by the rich countries like USA. It is said that the policies
and operations of the IMF are in favor of rich countries. At one stage,
the IMF was regarded as rich countries club. These rich countries are
partial towards the issues faced by poor countries.
As reported in The Hindu (May 2, 2007), Venezuelas president Hugo
Chavez announced his countrys decision to leave IMF and the World
Bank. He accused them of exploiting small countries. He branded the
IMF and the Wold Bank as mechanisms of American imperialism.
Moreover, the OPEC nations leader Mr. Chavez said: we are going to
withdraw. and let them pay back what they took from us. He issued
an order to his Finance Minister to begin proceedings to withdraw
Venezuela from both IMF and World Bank.
Though IMF funds are helpful in many ways, there are certain areas
where

the

IMF

fails

to

address

the

member

The disadvantages of IMF are discussed briefly below.

approach by IMF

1.

nations.

Passive

The IMF has been passive in its approach and not been effective in
promoting

exchange

stability and

maintaining orderly exchange

arrangements. This is considered as one of the major disadvantages of


IMF. The original fund agreement permits fluctuations of exchange rate
within limits. It can fluctuate within a range of one per cent above or

one per cent below the official price. This is called adjustable peg
system. The exchange rate of currency was fixed in terms of golden
dollar. Over years, U.S gold stock declined and U.S balance of
payments suffered. It led to the collapse of Bretton Wood System in
August

1971

when

U.S

refused

convertibility

of

dollars

into

currency. Member countries were also following diverse exchange


policies. These events simply prove that IMF was not able to maintain
a uniform international exchange system which is a big disadvantage.

2. Unsound policy for fixation of exchange


rate by IMF
The unsound policy for fixation of exchange rate is one of the
disadvantages of IMF. Some of the provisions of IMF are unsound. For
example, devaluation is justified when international inflation causes
fundamental

disequilibrium.

If

inflation

persists,

devaluation

of

currency cannot be effective. Appropriate adjustments are desired only


through internal economic policy changes. Further, member countries
have changed the par value of currencies with impunity. In 1949,
about 23 countries devalued their currencies in total disregard to the
IMF rule. The IMF could not contain the situation and remained
ineffective.

3. Non-removal of
restrictions by IMF

foreign

exchange

One of the important objectives of the IMF has been to remove foreign
exchange restrictions which retard the growth of global trade. Still,
member countries follow unhealthy practices of exchange controls and
multiple exchange rates. Consequently, the international business is
adversely affected.

4. Inadequate resources
The resources at the disposal of the IMF are not adequate to cater to

the needs of member countries which is a setback of IMF. Uncertain


capital inflows into the international financial system necessitates the
strengthening of the fund resources. The resources of the fund may be
enhanced by raising the quota. But developed countries are reluctant
to increase the quota of the fund.

5. High interest rates by IMF


High interest rates charged on its advances are considered one of the
major disadvantages of IMF. So, the debt servicing for the less
developed countries is difficult. For example, since 1982 the interest
charged for loans out of the ordinary resources of the fund is 6.6 per
cent. The interest rates payable on the loans made out of borrowed
funds is as high as 14.56 per cent. So, developing countries
experience a lot of difficulties in redeeming their loans borrowed from
the IMF.

6. Stringent conditions by IMF is one of


its disadvantages
The stringent conditions imposed by IMF on its member nations are
one of the big disadvantages of IMF. The IMF is criticized for its strict
conditional clauses while extending credit to member countries. Till
1970, the conditional clauses attached to loans were not stiff. The IMF
insisted that the borrowing countries reduce public expenditure in
order to tide over BOP deficits. But after 1970, the IMF imposed stiff
conditional clauses. Among them are periodic assessment of the
performance of the borrowing countries with adjustment programmes,
increases

in

productivity,

improvement

in

resource

allocation,

reduction in trade barrier, strengthening of the collaboration of the


borrowing country with the World Bank, etc.

Conditional clauses imposed by IMF:


The conditional clauses imposed by IMF after 1995 are pretty stiff

which are big disadvantages of IMF. To state a few:


liberalizing trade by removing exchange and import controls;
eliminating all subsidies so that the exporters are not in an
advantageous position in relation to other trading countries; and
treating foreign lenders on an equal footing with domestic
lenders. The fund maintains a close watch on the activities of the
borrowing country related to monetary, fiscal, trade and tarif
programmes. IMFs intervention in the domestic economic
matters of the borrowing countries places them in a difficult
position.

7. Failure to play an effective role in


international monetary matters is one of
the disadvantages of IMF:

One of the disadvantages of IMF is that it has failed to play an


effective role in international monetary matters. For example, it does
not provide facilities for short term credit arrangements. This has lead
to the swap arrangements among the central banks of the Group 10
(Group of 10 leading industrialized countries). This arrangement
provides for the exchange of each others currency and also short term
credit to correct temporary equilibrium in balance of payments. The
swap facility paved way to the growth of Euro-currency market. This
has undermined the role of IM as a central monetary institution.

8. Failure to tackle East Asian currency


crisis is one of the disadvantages of IMF:
The failure to tackle East Asian currency crisis is considered one of the
disadvantages of IMF. In July 1997, the occurrence of the East Asian
currency crisis affected East Asian countries like Thailand, Malaysia,
Philippines, South Korea, Singapore, Hong Kong and Indonesia.
Depreciation of their currencies led to fall in the prices in the stock
markets. The functioning of the financial institutions and flow of
foreign capital were badly affected. In this context, the IMF advocated
the East Asian countries to adopt high interest rates and cut public

expenditure. But this advice proved to be faulty. As a result, in 1998


the

whole

East

Asian

region

witnessed

widespread

recession,

unemployment and low growth rates. The IMF was expected to follow
a debt rescheduling plan. But this scheme was not introduced at the
insistence of the United States and other advanced countries. Milton
Friedman blamed the IMF for global crisis.

9. Domination by rich countries is one of


the disadvantages of IMF:
The domination by rich countries is another major disadvantages of
IMF. Though the majority of the members of the IMF are from the less
developed countries of Asia, Africa and South Africa, the IMF is
dominated by the rich countries like USA. It is said that the policies
and operations of the IMF are in favor of rich countries. At one stage,
the IMF was regarded as rich countries club. These rich countries are
partial towards the issues faced by poor countries.
As reported in The Hindu (May 2, 2007), Venezuelas president Hugo
Chavez announced his countrys decision to leave IMF and the World
Bank. He accused them of exploiting small countries. He branded the
IMF and the Wold Bank as mechanisms of American imperialism.
Moreover, the OPEC nations leader Mr. Chavez said: we are going to
withdraw. and let them pay back what they took from us. He issued
an order to his Finance Minister to begin proceedings to withdraw
Venezuela from both IMF and World Bank.

Criticism of IMF

Criticisms of IMF include:


1. Conditions of Loans
On giving loans to countries, the IMF make the loan conditional on the
implementation of certain economic policies. These policies tend to involve:

Reducing government borrowing Higher taxes and lower spending

Higher interest rates to stabilise the currency.

Allow failing firms to go bankrupt.

Structural adjustment. Privatisation, deregulation, reducing corruption and


bureaucracy.

The problem is that these policies of structural adjustment and macro economic
intervention make the situation worse.

For example, in the Asian crisis of 1997, many countries such as


Indonesia, Malaysia and Thailand were required by IMF to pursue tight
monetary policy (higher interest rates) and tight fiscal policy to reduce the
budget deficit and strengthen exchange rates. However, these policies
caused a minor slowdown to turn into a serious recession with mass
unemployment.

In 2001, Argentina was forced into a similar policy of fiscal restraint. This
led to a decline in investment in public services which arguably damaged
the economy.

2. Exchange rate reforms. When the IMF intervened in Kenya in the 1990s, they
made the Central bank remove controls over flows of capital. The consensus was
that this decision made it easier for corrupt politicians to transfer money out of the
economy (known as the Goldenberg scandal, BBC link). Critics argue this is
another example of how the IMF failed to understand the dynamics of the country
that they were dealing with insisting on blanket reforms.
The economist Joseph Stiglitz has criticised the more monetarist approach of the
IMF in recent years. He argues it is failing to take the best policy to improve the
welfare of developing countries saying the IMF was not participating in a
conspiracy, but it was reflecting the interests and ideology of the Western
financial community.
3. Devaluations In earlier days, the IMF have been criticised for allowing
inflationary devaluations.
4. Neo Liberal Criticisms There is also criticism of neo-liberal policies such as

privatisation. Arguably these free market policies were not always suitable for the
situation of the country. For example, privatisation can create lead to the creation
of private monopolies who exploit consumers.
5. Free market criticisms of IMF
As well as being criticised for implementing free market reforms Other criticise
the IMF for being too interventionist. Believers in free markets argue that it is
better to let capital markets operate without attempts at intervention. They argue
attempts to influence exchange rates only make things worse it is better to
allow currencies to reach their market level. [criticism of IMF]

There is also a criticism that bailout countries with large debt creates
moral hazard. Because of the possibility of getting bailed out it encourages
people to borrow more.

6. Lack of transparency and involvement


The IMF have been criticised for imposing policy with little or no consultation with
affected countries.
Jeffrey Sachs, the head of the Harvard Institute for International Development
said:
In Korea the IMF insisted that all presidential candidates immediately endorse
an agreement which they had no part in drafting or negotiating, and no time to
understand. The situation is out of handIt defies logic to believe the small
group of 1,000 economists on 19th Street in Washington should dictate the
economic conditions of life to 75 developing countries with around 1.4 billion
people.source
7. Supporting military dictatorships
The IMF have been criticised for supporting military dictatorships in Brazil and
Argentina, such as Castello Branco in 1960s received IMF funds denied to other
countries.

Response to criticism of IMF


1. Crisis always lead to some difficulties

Because the IMF deal with economic crisis, whatever policy they offer, there is
likely to be difficulties. It is not possible to deal with a balance of payments
without some painful readjustment.
2. IMF have had some successes
The Failures of the IMF tend to be widely publicised. But, its successes less so.
Also criticism tends to focus on short term problems and ignores longer term view
3. Confidence
The fact there is a lender of last resort provides an important confidence boost
for investors. This is important during current financial turmoil
4. Countries are not obliged to take an IMF loan
It is countries who approach the IMF for a loan. The fact so many take loans
suggest there must be at least some benefits of the IMF.
5. IMF easy target
Sometimes countries may want to undertake painful short term adjustment but
there is a lack of political will. An IMF intervention enables the government to
secure a loan and then pass the blame on to the IMF for the difficulties.

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