According to the website of the International Monetary Fund (IMF), Pakistan has taken 21 loans from the global lender in the last 70 years. The story of requesting the IMF for loans began as early as December 8, 1958, just a decade after Pakistan’s creation in 1947 as an independent country. Though the first amount the IMF agreed to loan Pakistan was not withdrawn, it initiated a cycle that has become a round of begging appeals now. The first successful loan transaction took place on March 16, 1965.
$31.73 billion is the total amount that the IMF has agreed to loan Pakistan so far since 1958. Out of this, Pakistan has withdrawn a total of around $20 billion so far in different transactions. A loan amount agreed upon by the IMF is released in different instalments based on meeting the norms set by the lender. The fact that Pakistan has been able to withdraw just 62.72% of the total loans agreed on also indicates that it has failed to meet those norms many times.
The loan has come in the form of ‘Stand-By Arrangements (SBA)’ 12 times, as ‘Extended Fund Facility (EFF)’ six times, as ‘Extended Credit Facility (ECF)’ three times and once as ‘Structural Adjustment Facility Commitment’.
The SBA was created by the International Monetary Fund in June 1952. It is considered one of the main lending instruments for emerging and advanced economies. It covers a period of up to 36 months and pushes the borrowing countries to weed out the factors that in the first place forced them to go for an IMF loan. The IMF draws a quantitative programme and asks the borrowing countries to achieve the targets if they have to continue getting loan assistance.
The EFF is a loan tool to address the balance of payment crisis that Pakistan is currently facing. Pakistan has become a perfect example of how the IMF defines this lending tool: “When a country faces serious medium-term balance of payments problems because of structural weaknesses that require time to address, the IMF can assist through an EFF. Compared to assistance provided under the SBA, assistance under an extended arrangement features longer program engagement—to help countries implement medium-term structural reforms—and a longer repayment period.”
Structural weaknesses have become so ingrained in Pakistan that the balance of payment crisis is now pushing the country towards defaulting on the external debt of $130 billion. While facing a spiralling debt crisis, the country chose to look the other way and increased its defence allocation by 11% in the 2022-23 budget. It is disastrous for a country to reserve 16% of the current expenditure for military services when annual debt services alone are a worrisome figure of 41.58% of the total expenditure of the country.
A bailout loan under the EFF means the IMF puts up specific conditions that the borrowing country has to accept. It asks the country to follow strong structural reforms to address macroeconomic fundamentals like income, revenue, tax base and free market penetration. Policy reforms are considered a must to address the institutional or economic weaknesses owing to economic and structural problems the IMF says. While discussing the next round of the EFF that the IMF agreed to on July 3, 2019, the lender was very categorical in asking Pakistan to trim its defence budget.
The ECF is an IMF loan instrument for countries facing “protracted balance of payments problems”. IMF says the ECF has its genesis in the broader Poverty Reduction and Growth Trust (PRGT) programme to help low-income countries (LICs). ECF comes with tough conditions like the development of suggested structural benchmarks, policy measures and quantitative variables on the economy like monetary aggregates, international reserves, fiscal balances, and external borrowing and expects the borrowing countries to get aligned with the IMF expectations. It largely restricts the government’s spending capacity.
The Structural Adjustment Facility, under which the 1988 IMF loan was given to Pakistan, asked Pakistan to liberalise interest and lending rates and reduce public sector borrowing. The programme also asked Pakistan to reform its banking institutions, reduce the budget deficit, reduce domestic and external debt, control inflation and improve foreign exchange reserves and work on currency depreciation.
The International Monetary Fund loans directly affect the sovereignty of a borrowing country with the IMF executive board playing the role of monitor and the country’s government a deputy in policy matters. For these very reasons, IMF loans are considered bad loan instruments and are advised to be used as a last resort.
Pakistan, an IMF member since July 11, 1950, has used this “last resort” 22 times in the last 57 years. Also, a transition in its loans, from SBA to EFF further confirms its downward spiral, from an emerging economy to a lower-income country with a protracted balance of payment crisis.
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