IMF Programs in Pakistan (1988-2008) – An Analysis

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Jamil Nasir


Pakistan’s relationship with the IMF dates back to 1958 but the association deepened with the structural Adjustment Program of 1988.Since then, our reliance has increased on the IMF. The Fund is still a major source of loans, required to bridge the fiscal gap. This paper is an attempt to determine the effectiveness of the IMF programs during the period 1988-2008, on the basis of Before-and-After Analysis of major economic variables. Based on this analysis, it can be conjectured that the IMF programs failed to achieve the desired objectives during the period 1988-1999.Analysis of potential factors responsible for worsening of economic variables during this period is also presented. However, during the period 1999-2008, major economic variables show improvement till the year 2007. This period is coincidently characterized by the economic boom at the global level that might have contributed towards improved economic variables. It is, however, difficult to empirically delineate the effects of boom and reforms undertaken as part of IMF conditionality. The paper also analyses the major components of the conditionality of the Fund and argues that austerity in public spending, devaluation, and monetary tightness etc may not deliver in every setting and country. Further, implementation of IMF conditionality may contribute to political instability, which in turn results in non-achievement of stated objectives of the Program. This is an interesting hypothesis and warrants further empirical research. In a nutshell, IMF programs show a mixed result in the case of Pakistan. They might have provided a temporary relief but failed to bring sustainable improvement in the economy. Political instability, harsh and standard type conditions of the Fund, and lack of ownership may be some of the potential culprits for the failure/less effectiveness of IMF Programs.

Pakistan is one of those countries that have frequently approached the IMF for standby loans, adjustment facility (adjustment lending) and Economic stabilization packages. The loans of the IMF accompanied a structural package, requiring Pakistan to meet certain targets for economic stabilization. In several cases, the country was required to meet certain performance parameters before sanctioning of the loan. The Fund extended its first standby loan to Pakistan in 1958 but association between Pakistan and IMF deepened in 1988, when loan of US$516 Million was extended to Pakistan. It was the largest loan advanced by the Fund to any country under this Facility. It was a “soft loan but with hard adjustment” as interest rate was low but conditions attached were stringent. The structural Adjustment Facility program (SAF) of 1988, however, generated a debate in the country about the efficacy and efficiency of the Fund programs.

Needless to mention here that the SAF was introduced by the Fund in 1986 and immediately afterwards, negotiations for loan started between Pakistan and the Fund authorities. The negotiations lingered on as Pakistan was not initially prepared to accept the hard strings. With the change of regime, the Fund negotiated the loan with the interim set up of the government. It may be mentioned here that interim set ups are generally less accountable to the people compared with a regular democratic set up. The arrangement with the IMF was formally finalized just within three weeks of swearing in of the new set up[1]. The Program failed to achieve the targets. Another Adjustment Facility loan was negotiated under SAF in 1991. The objectives of the program were consistent with the earlier program, which included reducing budget deficit, bringing down public expenditures through elimination of subsidies, increasing Foreign exchange reserves, reducing external debt, controlling inflation, reducing domestic borrowing for budgetary support and currency devaluation. This structural adjustment program remained in operation till 1994.

Again there was agreement with the Fund in 1994.The strings were even harsher this time.  Emphasis was on trade reforms including elimination of multiple exchange rates, full convertibility of Rupee, rationalization of tariff, extension of general sales tax and imposition of excise tax on utilities. Additionally, budget deficit and inflation were to be controlled. Succinctly speaking, during the period 1988-2000, Pakistan entered into nine different agreements with the Fund. The agreements were not fully implemented and almost half of the amount remained undrawn.[2]

In May 1998, Pakistan declared itself a nuclear state and foreign currency accounts were frozen to avert the likely outflow of capital from the country.[3] There was military takeover in Oct 1999.The balance of Payment position had deteriorated badly.  Pakistan, therefore, again approached the Fund for standby loans in 2000. The Government implemented the conditions of the loan in letter and spirit, which facilitated the approval of another SBA. The 9/11 episode and Pakistan’s strategic position in the American War against terror in Afghanistan might have played a role in approval of this SBA. The economy took a kick-start and till 2007, Pakistan was enjoying high growth rates. Pakistan did not even withdraw the last two installments from the Fund, claiming that the country has regained its economic sovereignty and loans from the Fund were no longer required.[4] Whether the spectacular growth in economy during 2003-2007 was a result of reforms undertaken under IMF umbrella or there were some other contributory factors, warrants analysis. The macroeconomic situation, however, deteriorated precipitously since 2007/2008 due to external and domestic factors. Resultantly, Pakistan embarked on a stabilization program for 2008-2009 and 2009-10 in October, 2008.The program aims at restoring fiscal stability but this time with a human face.[5] The stabilization program calls for tightening of monetary and fiscal policy to bring down inflation and strengthen external position. It calls for strenuous fiscal efforts to raise budgetary revenue and create fiscal space for public investment and social spending. It also calls for eliminating subsidies to consumers on consumption of public utilities.

IMF programs did not achieve its objectives (as evident from ensuing analysis), particularly during the period 1988-1999 but different governments in the country have repeatedly approached the Fund. Question arises why successive governments opted for the IMF prescriptions. Was it only due to adverse balance of Payments or were there some other reasons? Following might be some of the plausible explanations:

a) Pakistan had nine different governments during the period 1988-2001 and Pakistan entered into nine different agreements with IMF. Besides the balance of payment problem, the successive governments wanted to get a ‘seal of approval’ for seeking commercial and export credit facilities from other IFIs. The IMF stabilization packages made it possible for successive governments to take unpopular decisions under the pretext of conditionality (Hussain, 2002) The Government of the day could shift the burden of the unpopular decision to external actors like IMF.

b) IMF loans are not sensitive to economic factors only but are dictated by political economy factors as well. The connections of the country with USA and other western countries also count for extension of the Fund loans to a country, besides the point that higher IMF loan-participation rate reduces economic growth and does not have significant effect on investment, inflation, government consumption and international openness (Barro, 2005). Pakistan’s relations with the USA and other Western countries in the 1980s due to engagement in the Afghan war and War against terrorism after 9/11 might have facilitated Fund loans. The argument is that loans of the Fund to Pakistan were not merely dictated by economic factors. The high rate of repetition of loans to Pakistan possibly implies that new loans were required, as the earlier loans had not worked. IMF loans are thus like foreign aid, and not discriminate between good policies and the bad policies. Pakistan is one of the those countries that had the highest growth rate in intensive Adjustment Lending loans, but consistently ran huge budget deficits that left it with a major public debt crisis by the end of the period (Easterly,2002).

The period starting from 1988 to 2008 can be divided broadly into two sub-periods for analysis i.e. 1988-1999 and 2000-2008.


Structural Adjustment Facility (SAF) Package 1988-1991(initial package was for three years) accompanied stringent conditions, which Pakistan was required to meet over the period of three fiscal years. The key conditions were the following:

  • Reduce the budgetary deficit to 6.5% of GDP in1988-9, to 5.5%in1989-1990 and further to 4.8% in 1990-1991.
  • Contain inflation to 10% in 1988-1989 and reduce it gradually to 7% in1989-1990 and to 6.5% in1990-1991.
  • Reduce external Current Account Deficit to 3.4% of GDP in 1988-1989 and further to 2.8% in 1989-1990 and 2.6% in 1990-1991.
  • Reduce the civilian external debt service ratio from 27-28 % in1986-1988 to the sustainable level of less than 22% by 1990-1991.
  • Increase gross official foreign exchange reserves of three weeks of imports to the level of about seven weeks of imports by 1990-1991.
  • Contain growth of domestic credit and money supply in line with the growth of nominal GDP at the target level of inflation.

The structural Adjustment Program (SAP) was a case of micro-management of economy[6], which laid down the minutest details like adjustment of power tariffs, domestic gas prices, water and sewerage tariffs, taxes, fees and user charges for roads, rail, ports, and aviation. Against this backdrop, it can be said that Governments in power since 1988 merely implemented IMF sponsored structural adjustment programs .The Governments tried to follow the details given in the Policy Framework Papers, which outlined the steps the Government was required to undertake to qualify the reimbursement of loan from the IMF.

The conditions attached with the Adjustment Package were incorporated in the budget of 1989-1990.General sales Tax was imposed through the Sales tax Act 1990. The government reduced the support price for essential crops like wheat, cotton, sugarcane and oilseeds.

IMF standby loan of 1993 and packages following it till 1999 were consistent with earlier packages as far as conditionality is concerned. The focus was mainly on reducing fiscal and current account deficit. Enhancing the net of GST, raising administered prices of utilities such as electricity, gas and petroleum products, privatization of state owned enterprises (SOEs) and devaluation of Rupee were the major policy tools to reduce the fiscal deficit. Reducing inflation was always one of the objectives of the Fund Program but primary emphasis was on reducing twin deficits i.e. fiscal deficit and current account deficit. Here lies the intricate difference between the objectives of the Fund packages for Latin American countries and Pakistan. In Latin America, the primary aim of Fund programs was to fight hyperinflation. It can however be argued that all these objectives are interwoven as change in one macroeconomic variable triggers change in the other variables as well.

In compliance with IMF conditionality, the Government of Pakistan took a number of steps to reduce budget deficit, which included wage restraint and freezing of employment in the public sector. Over the period of adjustment, employment cost fell from 35.5% to 32.3% of public expenditure (Anwar, 1996).Thus Government wage policy contributed to a decline in real wages. The middle level public sector employees, mostly clerical staff, experienced a real wage cut of 12.75 % in the first three years of the Adjustment Program. The erosion of real wages of middle grade employees added to the number of the poor over the period of adjustment.

Regarding revenue measures, GST was introduced in November 1990. Generally GST is considered more regressive as compared to Income Tax. The evidence about its progressivity or otherwise in case of Pakistan is however mixed. It has been argued that incidence of GST was the most for the lowest group, while for the highest group tax incidence declined over the period (Kemal, 1992). Most of the necessities like milk, meat, eggs, vegetables, wheat and wheat flour, rice, juices and house rent, etc were exempt from GST. Several goods and services used by the common people like vegetable ghee, gas cylinder, cooking oils, kerosene oil, fans, air coolers, bicycles, and TVs, etc were however subjected to GST.[7] Based on a wide range of exemptions in GST, Saadia (2003) has found that GST in Pakistan was progressive contrary to popular perception about this tax. Leaving this debate aside, the fact remains that certain items of common use by the poor sections of society were subjected to GST, which might have added to the number of poor people in the country. However, what hit the poor people most was the elimination of subsidies.

In order to set the prices right, subsidies were removed from wheat, fertilizers, and edible oil. Petroleum prices were increased by 42% in 1990 to pass the rise in international prices to consumers. Power prices were also increased. The natural gas prices to households increased by 37 % (Economic Survey, 1993).

In addition to these measures, IMF package included privatization of state owned enterprises and devaluation of the currency. Switching from the fixed exchange rate to the floating exchange rate led to massive devaluation, which made imports expensive.  Trade liberalization also reinforced the surge of imports, which increased the current account deficit from 7.4% in 1988 to 8.7% of GDP in 1990-91.i.e the first three years of Adjustment Facility. Let us draw a comparison of stabilization and structural indicators on the basis of before-and-after adjustment criterion (Table-1).

Table 1: (A) Comparison Of stabilization Indicators

Indicator Pre-adjust (1977-78—-1987-88) Post adjust (1988-89—1997-98)

Inflation                                           7.6%                                        10.7%

Budget Deficit (%GDP)                   7.1                                            6.7

CAD (% GDP)                                4.5                                            5.5

Total Revenue (%GDP)                   16.8                                          17.4

Public expenditure (%GDP)           24.5                                          24.4

Exports of Goods (%GDP)             16.7                                          19.2

Imports of Goods (%GDP)             18.7                                          17.9

Growth Rate of Exports                 10.5                                          7.5

Growth rate of Imports                   6.8                                           6.7

Depreciation of nominal Ex Rate    6.8                                           9.4

Growth rate of M2                          13.6                                         15.6

Nominal Interest Rate                     8.0                                           6.2

(B)  Comparison of Structural Indicators

GDP Growth Rate                        6.4                                            4.5

Growth of agriculture                   4.0                                            3.6

Growth of Manufacturing            8.9                                            5.0

Domestic savings (%GDP)          8.2                                            13.4

Private Investment (% GDP)       7.3                                             9.1

Growth in FDI (US Million)       19.1                                           12.5

Growth in Total Debt servicing   21.9                                           19.4

Total debt servicing (% GDP)    4.1                                              7.1


Source: Various issues of Economic Survey of Pakistan

The above comparison of pre-adjustment and post-adjustment period (comparison of two decades) shows that most of the variables deteriorated during adjustment compared with pre-adjustment period. Both inflation rate and current account deficit increased. The growth rate of the economy witnessed a declining trend during the adjustment period. Growth in both manufacturing and agriculture slowed down. There was slight improvement in variables like budget deficit and revenue measured in terms of percentage of GDP. Based on the above comparison, we can conjecture that the adjustment program of IMF during the 1990s failed to bring macroeconomic stabilization in Pakistan.

Evidence also suggests that poverty and inequality also deepened during the adjustment period. About 24% of the people of Pakistan lived in a state of poverty in 1987-88, whereas in 1998-99, 30% of the people were poor. It implies that about 14 million people were added to the number of the poor during the decade of adjustment program.

Table 2: Poverty Estimates

1988             1999         %change

Poverty Incidence (Head-count Index)

Pakistan                                                                   23.5              29.7            26

Urban                                                                      18.6              25.0             34

Rural                                                                       25.5              31.6             24

Poverty Depth (Poverty Gap Index)

Pakistan                                                                     4.4                6.5              48

Urban                                                                         3.5                5.7              63

Rural                                                                          4.8                6.9              44

Poverty Severity

Pakistan                                                                      1.3                 2.1             62

Urban                                                                          1.0                 1.9             90

Rural                                                                           1.4                 2.3             64

Source: Estimated from household surveys, 1987-88 and 1998-99 (reproduced from Haroon Jamal)

Income distribution also deteriorated during this period. According to Economic Survey 1999-2000, household Gini Coefficient increased from 0.342 in 1987-88 to 0.410 in 1998-99. The worsening of income distribution was more pronounced in rural areas compared with urban ones. Following were the transmission channels for increase in poverty and inequality:

1- Wage Freeze and Ban on Public sector Employment

The Government of Pakistan put Wage freeze and ban on employment in the public sector for fiscal consolidation. The social safety nets for the public employees were almost non-existent. No Government run unemployment benefit scheme was initiated to compensate for real wage cuts. The freeze of nominal wages is generally based on the assumption that inflation rate will almost be reduced to zero (very low), but in case of Pakistan inflation increased during the adjustment period. Thus, freeze on wages badly hit employees at the lower and middle level. Ban on recruitment in the public sector also had its impact on employees working in the private sector. About 40% of  employees work in the informal sector in Pakistan, with no employment or minimum wage guarantees. Freezing of employment in public sector is likely to have deteriorated the conditions especially of the unskilled workers in the private sector. Furthermore, poor are more susceptible to the negative economic shocks like decline of income. They lack assets and have limited access to market. They are comparatively less mobile due to a lack of education and do not possess marketable skills. So, they have little opportunities of inter-temporal consumption smoothing. It is also a well- recognized fact that the poor get their sizable income from wages. Thus freeze on wages and ban on employment in the public sector increased both poverty and unemployment in the country as evident from Table-3.

Table 3: Distribution of Unemployment Rates

Year                                          Pakistan                    Urban                  Rural

1989-90                                       3.1                             4.6                      2.6

1992-93                                       4.7                             5.8                      4.3

1993-94                                       4.8                             6.5                      4.2

1994-95                                       5.4                             6.9                      4.8

1996-97                                       6.1                             7.2                      5.7

1998-99                                       6.4                              8.9                     5.0

Source: Kemal (2001), page 27

2- Spending Cuts

Spending cuts especially in public sector works, education, and health is another transmission channel for a increase in poverty and inequality. Agenor (2001) has however argued that assessing the effect of macroeconomic policy on the poor by merely looking at aggregate measures of public expenditure can be misleading. His argument is that spending on education and health, etc are disproportionately appropriated by the middle class and the rich and if there is a spending cut on health and education, it is not the poor who will bear the brunt. The argument of Agenor might be generally valid but it does not fully apply to the situation prevailing in Pakistan. Public sector education system (especially at the primary and secondary level) in Pakistan meets the needs of the lower and lower middle class. The rich and the middle class send their children to private sector schools, which are considered far better in quality as compared with public schools. Same is the case of public sector hospitals. There is a parallel private sector health system for the rich and upper middle class. My argument is that cut in education and health expenditures is likely to hit the poor the most in a country like Pakistan. Iqbal and siddique (1998) have empirically shown that 10% decline in public expenditure on education and health reduces activities in the education sector by 7.6% and the health sector by 5.1%.Their results further show that the poorest urban and rural groups were more affected more than better-off urban and rural groups due to the spending cut in education and health expenditures.

Table 4: Public Spending cuts on subsidies, education, and health

Year          subsidies (%GDP)          Health (%GNP)         Education (%GNP)

1987-88             1.50                                1.0                                2.4

1988-89             1.66                                1.0                                2.4

1989-90             1.47                                1.0                                2.2

1990-91             1.10                                0.9                                2.1

1991-92             0.94                                0.7                                2.2

1992-93             0.73                                 0.7                               2.2

1993-94             0.58                                 0.7                               2.2

1994-95             0.35                                 0.6                               2.4

1995-96             0.64                                 0.8                               2.4

1996-97             0.54                                 0.8                               2.6

1997-98             0.48                                 0.7                               2.3


Source: Various issues of Economic Survey of Pakistan

As evident from the above table-4, there was a huge cut in subsidies. Total per capita subsidies (at constant prices) decreased from Rs 64.4 in 1987-88 to Rs 24.7 in 1996-97.In terms of percentage of GDP subsidies declined from 1.50% in 1987-88 to 0.48% in 1997-98.Iqbal and Siddique (1998) have analyzed the impact of cut in subsidies. Their findings are that the richest urban and richest rural (income more than Rs 7000) were the most affected as their income declined by 3.5% and 2.3% respectively, if overall subsidies (without categorization) are taken into account. The second most affected income group from reduction in subsidies were the poorest urban and the poorest rural (income less than Rs 2500) as their income is reduced by 2.1% and 1.9% respectively. If consumption and production subsidies are decomposed, production subsidies affect the poorest group the most. Reduction in production sector subsidies might have adverse effect on agriculture sector. These results seem consistent with the earlier observation that poverty increase was higher in rural areas.

3- Increase in Public Sector Prices

Increase in prices of goods and services produced by the public sector, was another potential transmission channel for increase of poverty during the adjustment period.  The increase in international prices of petroleum by42% in November 1990 resulted in an increase in power prices by 13% in 1989-90 and by 8% in 1990-91. Natural gas prices to households increased by 37% in 1988-89 (Economic survey, 1993). The increase in petroleum and oil prices not only affected the households directly but it also had indirect impact, through increase in public and private transport fares.

The IMF supported programs were thus not successful in Pakistan during the period 1988-1999. Most of the stabilization and structural macroeconomic variables worsened while the program was in operation. Poverty and inequality increased. Continuous devaluation of Rupee against the dollar pushed up the prices of crude oil, machinery and other intermediate inputs imported by the domestic industry. Cut in public investment outlays slowed down economic activity. Unemployment increased. Growth rate was low.


The decade of 1990s was a tumultuous period in the economic and political history of Pakistan. Changes in political regimes were frequent and every government led to a new agreement with IMF. In May 1998, Pakistan went nuclear under peculiar geographical compulsions of the region. It was feared that capital flight would take place from the country, so the government put a freeze on foreign currency accounts. In October 1999, there was a military coup in Pakistan. Remittances from abroad plummeted to$1 billion. Foreign investment inflows were less than US $400 million .There was an exponential increase in oil import bill due to rise in oil prices at the international level. The most daunting challenge faced by the Government of Pakistan in 1999 was the liquidity problem i.e. its ability to meet its current obligations such as imports of goods and services, and its debt services obligations.

It was against this backdrop that Pakistan approached the IMF for stand by arrangement for 9 months in 2000, which was followed by three-year Poverty reduction and Growth Facility (PRGF).[8] The 9/11 incident and Pakistan’s declaring itself frontline state against terrorism is also likely to have played a role in PRGF funding to Pakistan. A leading newspaper of Pakistan wrote:

“Pakistan is under considerable pressure from the United States to accept certain political conditions in return for an IMF bail-out package ————The biggest issue is Pakistan’s Afghan Policy. One of the biggest economies of the world, the US holds majority shares in the IMF and greatly influences the Fund’s decisions through the Federal Treasury to fulfill Washington’s political agenda. The unofficial set of political conditions include a change in Pakistan’s policy on Taliban Government————, acceptance of UNSC monitors on Afghanistan, reining in of Jihadi (militant) organizations, freezing of the nuclear and missile programs, and improvement in relations with India ———–Despite the implementation of a painful reform program dictated by the IMF, any deviation by Pakistan on political condition will make it difficult for Islamabad to get the PRGF.”[9]. Another leading newspaper of Pakistan wrote just after one week of 9/11:

“The United States being one of the key stakeholders in international financial institutions IMF and the World Bank, is expected to be much favorable than in the past———–Pakistan’s recent pledge to work with the international community against terrorism is expected to win a lot of support from the financial institutions.”[10]

The conditions of standby loan and three-year facility PRGF were similar to those of earlier adjustment programs. The element of micromanagement of the economy was also present in both Standby loan and PRGF funding. Pakistan had to meet specific targets and was required to introduce wide ranging structural reforms. The then state Bank Governor remarked that:

“The distortions caused by such acute micromanagement by the IMF are quite severe, and paradoxically, they retard the progress in meeting performance criteria——–The IMF specified conditions lead to mistrust and coercive relationship.[11]” The broad set of conditions of the IMF was the following:

  • Reduce overall budget deficit by increasing tax collections. Widen tax base, improve tax administration, and impose strict expenditure controls.
  • Reduce public debt burden.
  • Maintain competitive and flexible exchange rate and adopt tight monetary policy
  • Introduce and implement Structural reforms in fiscal and financial sector
  • Take measures for Poverty alleviation (to give the program human face).

The period of 2000-2004 witnessed moderate growth. There were wide ranging reforms in line with prescriptions of Washington consensus.

Capital controls were practically done away with and the foreign investors could now bring in and take back their capital, remit profits, dividends, royalties etc without any prior approvals. Restrictions on foreign companies to raise funds from domestic banks and capital markets were removed.

Financial sector reforms were introduced. The foreign exchange regime was liberalized. The Government claimed to have granted full autonomy to the Central Bank. Several big national banks were privatized. Mergers and consolidation of financial institutions however wiped away a number of weak players.

The government embarked on the fiscal policy reforms by reducing expenditures, cutting down subsidies, privatization of state owned enterprises to reduce budget deficit.[12] A number of SOEs were privatized in oil, gas, banking, and telecommunication sectors. Foreign investors were encouraged to participate in privatization process. It initiated an ambitious plan of tax reforms called TARP (Tax Administration Reforms Project) to modernize its tax machinery, widening tax base, reducing contact between taxpayer and tax collector and expanding General sales tax. These reforms accompanied by rationalization of Pakistan customs tariff. The number of duty slabs was reduced to four 5%, 10%, 15%, 20% and 25%. Quantitative import restrictions in most of the sectors were removed. Import duties on about 4000 items were eliminated.

Pakistan did not withdraw last two installments of the loan from the Fund under the SBA, as mentioned earlier. Thus, the IMF program was operational during 2000-2004.A comparison of economic variables on the basis of before-and-after criterion is tabulated below:

Table 5: Comparison of Key Macroeconomic Indicators

Indicator 2000 2004

Fiscal Balance  (%GDP)                               -5.4                                     -2.3

Current Account Deficit (%GDP)                 -0.3                                     1.9

Tax Revenue (%GDP)                                   10.6                                    10.8

FDI (%GDP)                                                   0.4                                      1.1

Total FDI (US$M)                                          308                                     1118

Workers remittances (US$M)                         1075                                   3945

Trade of Goods BOP (%GDP)                         -2                                      -1.3

Total Government Revenue (%GDP)             13.4                                   13.5

Total Government Expenditure (%GDP)        18.9                                    16.6

International reserves (US$M)                         2056                                    10616

International reserves/imports (In months)       3                                         9

Real GDP Growth                                            3.9                                      6.4

Public Debt (%GDP)                                       84                                       70.5

External Debt (%GDP)                                   43.9                                     35.1

Inflation                                                            3.6                                       4.6

Poverty (in %)                                                  32.6                                      24


Source: Key Economic Indicators 2009, ADB & Various issues of Economic Survey

The above comparison shows that most of the economic variables witnessed improvement in year 2004 compared with 2000. There was a big positive change in foreign remittances and FDI. International reserves position also shows a significant improvement. Real growth rate increased. Poverty declined and both public debt and external debt decreased in terms of percentage of GDP. Inflation however increased from 3.6% in 2000 to 4.6% in 2004.

Thus based on before- and- after adjustment period analysis, it can be said that prima facie macroeconomic stabilization program was a success compared with its predecessor adjustment program of 1990s.Most of the economic variables sustained this favorable trend in the period 2004-2007 as is evident from the following:

  • The real GDP growth in 2000-01 was 2%. During the years 2003-04 to 2006-07, Pakistan witnessed a good growth rate (on average above 6%). After 2006-07, the real GDP started declining and in 2008-09, the growth rate was 2% (same as in year 2000).

Source: Key Economic Indicators 2009, ADB

  • The current account balance improved during 2001-2004, when IMF program was operational in the country. Afterwards, it declined and in year 2008-2009, the current account deficit was about 9.5% in terms of GDP.

Source: Key Economic Indicators 2009, ADB

  • Inflation rate was below 4% 2000-01 when Pakistan was implementing the IMF conditionality. There was a slight decrease in year 2002-03 and 2003-04 but the inflation rate was higher in 2004-05 when Pakistan abandoned the program. In the following years, it has increased persistently (as evident from the following graph).

Source: State Bank of Pakistan

  • The growth patterns of industry, agriculture, and service sectors show an inconsistent pattern of growth. In the years 2003-04 and 2004-05, industry grew at a respectable rate. In year 2007-08, there was increase in industrial growth compared with 2005-06. In year 2008-09, there is negative growth. Agriculture also grew at a reasonable rate in years 2004-05 and 2005-06. The services sector has witnessed reasonable growth during 2002-03 and 2007-08(see the graph given below).

Source: Key Economic Indicators 2009, ADB

  • The fiscal balance in terms of GDP percentage declined, though it was never positive. After 2004-05, it has widened in every year. In 2008-09, the fiscal deficit was equal to 7.5 of the GDP.

Source: Key Economic Indicators 2009, ADB

  • During the period 2003-04 to 2007-08, both public and private investments increased. There is a declining trend after 2007-08.

Source: Different Issues of Economic Survey of Pakistan, Ministry of Finance

  • Imports have grown at a faster rate as compared with exports. We can see a surge in imports after 2001-02 .This surge continued till 2006-07, afterwards there is a decline. Surge in imports was due to the factors like reduction in tariff rates and increased economic activity in the country due to huge inflows. Trade deficit widened as the increase in exports was slower compared with imports.

Source: Key Economic Indicators 2009, ADB

  • International reserves increased on sustained basis during 2000-01 to 2007-08.In 2007-08, international reserves were sufficient for 12 months of imports. After 2007-08, we can see the depleting trend in international reserves.

Source: Key Economic Indicators 2009, ADB

  • Capital flows (FDI) increased on sustained basis. After 2000-01, there is a big upward jump in FDI. The growth in FDI inflows after 2007-08 has decreased as it was 4% of the GDP in both 2007-08 and 2008-09.Foreign workers remittances have also grown exponentially after 2001.This trend of upward growth in foreign remittances is still continuing as evident from the graph given below:

Source: Key Economic Indicators 2009, ADB

It is clear from the above analysis that Pakistan’ economic indicators showed a consistent improvement in most of the economic variables. IMF vides its country report 08/21 showed its satisfaction on the economic performance of Pakistan. According to the IMF country report:

“Economic developments in Pakistan in fiscal year 2006/2007 were generally good but the current account deficit widened. Real GDP growth increased to 7%——-The debt to GDP ratio continued to decline and gross international reserves rose ——-.Average inflation, however remained relatively high close to 8%. Current account deficit rose to 4.9% of GDP, owing mainly to significantly lower export growth. The deficit was more than covered, however by record high capital inflows.”

It was in 2004 that Pakistan had claimed to regain economic sovereignty from IMF but the situation again changed in 2008 due to external shocks and political instability in the country. Pakistan again entered into SBA with IMF in October 2008.In its letter Of Intent to IMF, the Government of Pakistan, emphasized that in the last decade, Pakistan’s economy witnessed a major economic transformation.

The country’s real GDP increased from $60 billion in 2000/01 to$170 billion in 2007/08 (fiscal year starts on July 1st), with per capita income rising from under $500 to over $1,000. During the same period, the volume of international trade increased from about $20 billion to nearly $60 billion. For most of this period, real GDP grew at more than             7 percent a year with relative price stability. The improved macroeconomic performance enabled Pakistan to re-enter the international capital markets in the mid-2000s. Large capital inflows financed the current account deficit and contributed to an increase in gross official reserves———. Buoyant output growth, low inflation, and the government’s social policies contributed to a reduction in poverty and an improvement in many social indicators———–This strong macroeconomic performance resulted from the implementation of a series of important structural reforms. In the early 2000s, with financial support from International financial institutions (IFIs), including the IMF, the World Bank, and the Asian Development Bank, the government expanded the role of markets in the economy, privatized a number of large state-owned enterprises, established market-based regulatory bodies, and took steps to reduce the cost of doing business in Pakistan——————The macroeconomic situation ,however ,deteriorated significantly in 2007/2008 and the first four months of 2008/09 owing to adverse security developments, large exogenous price shocks (oil and food), global financial turmoil, and  policy inaction during the political transition to the new government.”(Letter of Intent, November 20, 2008)

Thus after a spurt of excellent growth during 2003-2007, Pakistan’s economy was again in doldrums. Economic woes are continuing.[13] During the period 2003-2007 Pakistan experienced record capital inflows. The country was enjoying political stability during this period. In the wake of 9/11 episode, there was an increase in foreign remittances. The government could not resist pump priming due to increase in capital inflows and foreign remittances. It led to high growth but the budget deficit widened.  Government spending was, however, not accompanied by an increase in fiscal effort. There was a surge in imports due to economic growth.  Private sector confidence crowded in investment. Thus, increased government private spending resulted in an investment-saving gap. Pakistan adopted an expansionary fiscal and monetary policy (contrary to IMF standard prescriptions). The expansionary policies were pro-cyclical. It was a boom period for the country. The main drivers of growth were consumption, both private and public, and gross fixed capital formation (ADB working paper). The government provided cheap credit to meet the rising aggregate demand. It resulted in overheating of economy. The growth of economy is mainly attributable to huge capital inflows and expansionary policies of the government. Pakistan thus followed pro-cyclical policies contrary to most other developing countries during this boom period. Once the boom period was over, its economic vulnerabilities were exposed and it approached the Fund in October 2008.

Standby loan conditions (Nov 2000 to Sep 2001) and PRGF (Dec2001 to 2004) were fully implemented by the government. Pakistan had to take a dozen prior actions and fulfill 30 performance criterion and structural benchmarks over a period of 15 months in 2000-2001. The measurement of actual outcomes of conditionality is however quite difficult due to the role of exogenous variables.

IMF packages normally included the following [14]:

1-      Fiscal austerity (contract in public deficit, borrowing less from central bank, cuts in state spending, public improvement and social service programs, and higher prices for products supplied by public enterprises)

2-      Devaluation of currency

3-      Control of inflation through monetary tightness (restrictions on credit to the public sector, reducing private credit, and interest rate increase)

4-      Market oriented policies like reducing state interventions in domestic markets, lowering trade barriers, cut in real wages, removing restrictions on exchange controls, and price incentives for exporters

5-      Income policies like wage restraint, abolishing of subsidies and transfer programs, and export promotion etc

Every program for Pakistan invariably contained the above policy prescriptions (sometimes with slight variations). Do these prescriptions always pay? We have already discussed policies mentioned at 1, 4, and 5 above and the analysis showed that the outcome of these policies was not promising in Pakistan’s case.

Does Devaluation Always Work to Increasing Exports?

One standard prescription for Pakistan from the Fund was devaluation of the currency. Pakistani currency has persistently declined especially against the dollar. The devaluation of currency is primarily meant to stimulate growth of exports. With devaluation, your exports become cheaper, hence more demand. It is however important to note that devaluation might turn out to be contractionary depending on the existing trade deficit (Krugman et al, 1977). If a country is having a current account deficit, devaluation is likely to be contractionary as increase in price of tradable will increase real income abroad and reduce it at home. The larger the trade deficit, bigger will be the contractionary effect. The contractionary effect will also depend on the sensitivity of imports to devaluation. The price of raw material and intermediate goods will increase, which will have its impact on exports as well. In case of Pakistan, empirical evidence (Sadia Bader, 2006) suggests that the long run elasticity of exports with respect to imports is about 37%, however the effect appears with a lag. The contribution of raw materials and capital goods is 24 and 16% respectively. Additionally, devaluation has its balance sheet effects as well. Pakistan’s foreign exchange liabilities were persistently declining since 1999 but there is an increase in 2008-09.  According to the Economic Survey 2008-2009, total public debt increased by Rs 1367 billion in the first nine months of 2008-09, reaching a total outstanding amount of Rs 7268 billion (an increase of 23.2% in nominal terms). Out of the increased debt, 60% is dollar denominated debt. The rise in foreign currency debt is mainly due to devaluation of Pak Rupee in the first quarter of the Fiscal Year. In absolute terms, US$ 3.1 billion were added to the public external debt in the period July-March 2009. A big chunk of Rs 246 billion was due to the depreciation of currency. According to the Economic survey 2008-2009, 18% of total increase to Public debt and 30% increase in foreign component were due to depreciation of Rupee against dollar.

It can be argued that overvaluation of exchange rate may be the reason of Pakistan’s poor performance in the export sector, which caused a widening of trade deficit. Jesus Felipe et al (2008) have ruled out this possibility. Pakistan’s exports have not increased due to supply-side constraints. It has not upgraded its export structure in the past years. The exports are heavily concentrated on the low end of textiles and garments. Devaluation is helpful in enhancing exports, when you have demand side constraints. Thus, devaluation of currency in case of Pakistan is not always a good policy prescription and might turn out to be contractionary.

Should Inflation Be The Prime Concern For Pakistan?

Economists have attempted to analyze the relationship between growth and inflation. Price stability is one of the fundamental policy objectives of the Central Banks in both developed and developing countries. Stiglitz et al (2006) have argued that there is little evidence that moderate inflation is detrimental to growth. They have examined growth in several countries that have experienced low levels, moderate levels, and hyperinflation. Their findings suggest the following:

1) Low inflation is generally not associated with high growth.

2) Moderate inflations 20-30% generally do not have adverse impact on growth; rather they have been associated with high growths.

3) Hyperinflation in general is associated with low growths and has high economic costs

Similar results were obtained by Bruno and Easterly (1998). They found no evidence that inflation rates below 40% have adverse impact on growth. In Pakistan, inflation has mostly remained within moderate limits. The Fund has, however, invariably prescribed that tight monetary and fiscal policies be adopted for containing inflation. Case of Pakistan is not that of hyperinflation. Objectives like employment creation and output should not be sacrificed at the altar of price stability. Epstein & Yeldan (2007),based on before-and-after analysis of macroeconomic variables of a group of countries that adopted inflation targeting ,have shown that the policy of Central Banks to keep inflation in single digits is in general ,neither optimal nor desirable as this inflation-focused policy is based on false premises. Blanchard et al (2010) of IMF in their latest paper have argued that stable inflation may be necessary but is not sufficient. According to them, inflation is not the only target, which policy makers should concentrate on (a lesson learnt from the recent global crisis). They need to take care of several other targets like composition of output and behavior of asset prices etc. On similar lines, Ocampo (2005) recommends that we should take a broader view of macroeconomic stability. Sound Macroeconomic frameworks should aim at well-functioning real economy, sustainable debt ratios, healthy private, and public sector balance sheet in addition to price stability and sound fiscal policies. A sound macroeconomic framework should make an active use of countercyclical policies.

A Little Digression:  Dependence on Capital Inflows

Pakistan has witnessed an increasing trend in foreign remittances and capital inflows since 2003. During the economic boom of 2003-07, capital inflows registered a phenomenal growth. It points to the pro-cyclical nature of capital inflows. In 2000/2001, external resources only counted for 4% of total investment, which increased to 38 % in 2007/2008.In 2000/2001, FDI represented 2.3% of total investment and 55.7% of external resources.In2007/2008, FDI represented 10.6% of total investment and 27.5% of external resources, implying thereby that the proportion of FDI in external resources has declined (ADB Working paper, 2008).

The change in composition of foreign flows has serious implications. There is every possibility that during the bust phase, when economic activity slows down, the capital flows will not be pouring in. This situation might cause a ‘sudden stop’[15] of capital inflows as it happened during the financial crisis in Latin American countries and East Asian crisis. In order to avert such a crisis, counter-cyclical policies can be good macroeconomic policy instruments. Prudential Regulations can also be put in place for banks, requiring them to keep high reserves against foreign-currency liabilities. Its impact will be similar to a tax. Introduction of high requirements for short-term borrowing might be a step to change the composition of capital inflows.[16]


The Fund Packages implemented in Pakistan have mixed results on the basis of before-and-after analysis i.e. pre –conditionality and after –conditionality macroeconomic indicators. The Adjustment programs implemented during the period 1988-1999 did not produce any positive effect on both stabilization and structural economic variables. There was slight reduction in budget deficit in terms of GDP. The implementation program failed to reduce inflation, which increased during the adjustment era. Reduction in subsidies, retrenchment of development expenditure, wage freezes and attempts at setting prices right increased both poverty and inequality. Succinctly speaking, 1990s was a ‘failed decade’ for Pakistan. Political instability was high during this period. Implementation of unpopular conditionality of the Fund might have contributed to the political instability or perhaps the political instability caused the failure of the program. It is an interesting question, which warrants further research and empirical analysis.

The before- and- after analysis of IMF program implemented during the period 2000-04 shows success in major areas. All the target macro-economic variables except inflation witnessed a positive trend. The boom continued up to 2007. It is however difficult to delineate the effects of IMF program and economic boom. We can only say that the Fund program caused improvement in macroeconomic variables in the short run. The IMF packages were however unable to bring sustainable improvements in the economic indicators. The chronic problems of the economy like twin deficits i.e. fiscal deficit and trade deficit , low tax-to-GDP ratio, huge public debts and low growth rates (except  for the period 2004-2007 when IMF program was not  operational) are  haunting the economy. Pakistan has approached the Fund repeatedly since 1988, which is also an indication that earlier programs were not successful, that is why new packages were required.

(The author is highly indebted to Mr Jose Antonio Ocampo, Professor at Columbia and former United Nations Under-secretary General for Economic and Social Affairs, for his valuable guidance).


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[1] For details, refer to IMF’s publication “IMF and the Poor: Soft Loans, Hard Adjustments”, Ch.14 of the Silent Revolution: the IMF 1979-1989, Oct. 1, 2001.

[2] Pakistan and IMF – a case study by Ishrat Hussain, former Governor of State Bank of Pakistan

[3] Following the nuclear test by Pakistan, economic sanctions were imposed by the Western countries that seriously affected the economy. Pakistan faced a severe foreign exchange crisis with foreign exchange reserves declining to $ 415 million in Nov. 1998 (equal to two weeks of import requirements). To prevent sovereign default, the government adopted short-term emergency measures that included freezing foreign currency deposits held by both residents and non-residents in domestic banks.

[4] Refer to Pakistan and IMF- a case study

[5] This time it has been claimed by the government that stabilization program is homegrown and IMF is lending its support for implementing the program. Poverty reduction has been claimed to be one of the basic objectives of the program. The fact, however, remains that conditionality of the Fund is consistent with its earlier prescriptions like setting the prices right, elimination of subsidies, and adoption of austerity measures by the government. The conditionality being the same as in earlier packages, it seems only a change of nomenclature. It is a case of old wine in new bottle.

[6] According to Meltzer Report (2000), detailed conditionality burdened IMF programs and made them unwieldy, highly conflictive, time consuming to negotiate and often inefficient. Ariel Buira’s paper “An Analysis of IMF conditionality” also mentions that average number of structural conditions per program per year increased during 1990-1999. For example, in 1997, the program stipulated 17 conditions to be met by the borrowers.

[7] Refer to sixth schedule of the Sales Tax Act 1990, Pakistan.

[8] In PRGF arrangements, there was slight decrease in the average number of conditions. According to an estimate, conditions reduced from around 16 to 15.

[9] The Nation, Islamabad, Sept. 3, 2001

[10] The Dawn, Karachi, Sept. 19, 2001

[11] Quoted by the Dawn, Karachi, Sept. 8, 2001

[12] The privatization of Pakistan steel mill ignited agitation in the country when the supreme court of Pakistan (apex court of the country) pointed out omissions and commissions in the privatization deal of the steel mill. This movement led by the lawyers of the country finally caused the exodus of President Musharraf from power.

[13] Pakistan is facing severe energy crisis. Due to frequent power outrages, hundreds of industrial units have been closed and industrial production has precipitously gone down. Ocampo et al (2010) in their document entitled “The Great Recession and the Developing World” have identified three channels of transmission of the financial crisis to the developing world i.e. decline in remittances, reversal of financial inflows, and decrease in trade. As regards Pakistan, the analysis shows that these channels are not fully applicable to the Pakistani situation. The problems like stagnant export growth and a big decline in manufacturing and industrial production are mainly due to supply side constraints faced by Pakistan.

[14] Refer to “Varieties of Stabilization Experience-Towards Sensible Macroeconomics in the Third World” by Lance Taylor (pages 8 and 9)

[15] The term Sudden Stop was coined by Professor Calvo of Columbia. It refers to large and unexpected contraction in capital inflows (Calvo, 1998)

[16] See Ocampo (2002:2006 &2007). Professor Ocampo of Columbia has consistently argued the case of counter-cyclical policies. The gist of his arguments is that counter-cyclical policies coupled with capital account management techniques / prudential regulations, can mitigate the negative impact of the financial crises.