Before discussing this topic let's talk about "IMF"
what is IMF and how it works?
The International Monetary Fund (IMF) is an organization of 189 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.
Created in 1945, the IMF is governed by and accountable to the 189 countries that make up its near-global membership.
Now lets talk about Advantages and disadvantages of joining International Monetary Fund (IMF)
IMF Advantages
The IMF helps part countries in a few unique limits. On the off chance that a nation has a parity of installments shortage, the IMF can venture in to fill the hole. It fills in as a board and consultant to nations endeavoring another financial strategy. It likewise distributes papers on new monetary points.
Its most imperative capacity is its capacity to give credits to part countries needing a bailout. The IMF can connect conditions to these advances, including endorsed financial approaches, to which obtaining governments must consent.
IMF Disadvantages
Notwithstanding its grandiose status and exemplary targets, the IMF is endeavoring to pull off an about outlandish monetary accomplishment: flawlessly timing and measuring financial intercession on a worldwide scale.
The IMF has been censured for not doing much and for overextending. It has been condemned for being too ease back or excessively anxious, making it impossible to help coming up short national strategies. Since the United States, Japan and Great Britain include noticeably in IMF approaches, it has been blamed for being a device for nothing market nations as it were. All the while, free-showcase supporters completely censure the IMF for being excessively interventionist.
Major Effects on Pakistan's economy
Introduction:
Pakistan has been suffering from economic crises since its inception. There are various reasons behind the plight of Pakistan economy mainly the corrupt leadership and volatile political situation; however, to keep the balance of payments in check and to meet the financial obligations government of Pakistan unfortunately always resorts to take loans.
This is where IMF comes into play in Pakistan’s economy.
Over the past ten years, the International Monetary Fund (IMF) has emerged as a key
player, which has greatly influenced the Pakistan’s macroeconomic
policies. Since the late 1980s, it has been imposing various conditions on many governments who have been greatly crippled by debt servicing, including Pakistan. The main objective of Pakistan
’s
governments to take loans from IMF was to stabilize their deteriorating economy, exchange rates and balance of payments. IMF provides huge amount of loans for such purposes, which seems very lucrative and attractive offer at first sight for a short-term perspective but infact nothing is free in this world. IMF provides loans in exchange of many demands and conditions, which are to be fulfilled to get loans from IMF. Typical IMF conditions comprise contract based macroeconomic policies (fiscal and monetary), inflation targeting policies, financial deregulation and increased openness to international
capital flows, trade liberalization (including reduction of tariff and non-tariff barriers) and privatization of public-sector enterprises.
Details:
- ‘Pakistan is facing an increasingly difficult economic situation, with high fiscal and current account deficits, and low international reserves. This mostly reflects the legacy of an overvalued exchange rate, loose fiscal policy and accommodative monetary policy. The fast rise in international oil prices, normalization of US monetary policy, and tightening financial conditions for emerging markets are adding to this difficult picture. In this environment, economic growth will likely slow significantly, and inflation will rise.
- The team welcomes the policy measures implemented since last December. These include 18 percent cumulative depreciation of the rupee, interest rate increases of cumulatively 275 bps, fiscal consolidation through the budget supplement proposed by the minister of finance, a large increase in gas tariffs closer to cost recovery levels, and the proposed increase in electricity tariffs. These measures are necessary steps that go in the right direction.
- Additional decisive policy action, anchored in a comprehensive strategy, and significant external financing will be needed in the near term. Policies should include more exchange rate flexibility and monetary policy tightening, further fiscal adjustment anchored in a medium-term consolidation strategy, and strengthening the performance of key public enterprises together with further increases in gas and power tariffs. Together, these steps would help reduce current account pressures and improve debt sustainability. Importantly, to protect the more vulnerable segments of society, there is a need to further strengthen social protection through the Benazir Income Support Program. These policies will help stabilize the economy and lay the foundations for sustainable and inclusive growth.
- Once stabilization is beginning to take hold, the focus should increasingly shift to reforms to foster sustained and inclusive growth and strengthen key institutions.
- Priority areas include modernizing the tax system and public financial management, strengthening fiscal federalism arrangements, improving governance and eliminating losses of public enterprises, enhancing the SBP’s autonomy, intensifying AML/CFT efforts, improving the business climate and anti-corruption efforts, and fostering the economic inclusion of the poor, youth, and women.
In the Current Account Deficit article, we estimated that Pakistan would need about USD 12 billion to shore up its foreign reserves, and get a breather in making import, and other debt related payments. Although, the incumbent government took its own sweet time in being explicit about whether it will go ahead with borrowing from IMF, but the writing has been on the wall for months now.
Technical gibberish aside, here is a summary of how it will affect a common man:
Depreciation of PKR
It is estimated that PKR is overvalued by around 15 percent. As emerging market currencies across the board depreciate against the USD, it is only a matter of time before PKR takes another plunge, and settle in the range of 140 against the USD. As PKR loses its value, imports become more expensive. Pakistan imports everything from crude oil, and gasoline, to pulses, tomatoes, and even diapers. A hike in prices across the board cannot be ruled out.
