A chronology of IMF – Pakistan rocky relationship

Dancing with dictators & dictating to democracies

21 June 2010 by Abdul Khaliq


As in most of the developing countries, IMF IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.

http://imf.org
funding patterns to Pakistan has been subject of intense debate, over the last three decades. Proponents and opponents of IMF have produced evidence to support their respective point of views, particularly in broader perspective of international relations. However, little effort is made to explore the genesis of funding patterns linkage with political objectives of the IMF. In order to understand this crucial aspect of IMF packages we have to go beyond the typical debate of purely economic effects of IMF policies on Pakistan.

A careful overview of particular history of IMF packages for Pakistan in terms of their volume, timing, term & conditions and rationale provides us an interesting picture of politically motivated patterns of funding.

Pakistan joined IMF in 1950.The first time government of Pakistan went for a loan from IMF was in 1958. It was a Stand By Agreement worth US $ 25 million. However, the loan was cancelled soon after. It was a period of political upheavals in Pakistan and our first dictator, Field Marshal Ayub Khan was about to take over. However, in 1960s, during Ayub regime, IMF happily gave two packages; standby agreement in 1965, 1968, to ease the dictator. When second dictator Gen Yahya placed in, IMF continued showering its financial blessing over him and made four more SBA agreements in 70s doling away US $ 330 million.

However, with the first popularly elected government of ZA Bhutto coming to power, IMF behavior towards democratic government became cooler and it almost deleted Pakistan from the favorite list on account of Bhutto’s socialist agenda. That was why Bhutto had to tell the Fund to “go to hell, we do not want your money”.

However, in 1979, with the toppling of ZA Bhutto government at the hands of third and most cruel dictator Gen. Zia ul Haq, the nature and extent of IMF involvement drastically changed and it extended lavish package for the dear dictator. Statistics show that in 20 years (1958-1979) Pakistan had collective IMF packages of worth US $ 460 million. However, in Nov 1980, it extended a huge amount of US $ 1.27 Billion to Gen Zia regime through long-term Extended Fund Facility (EFF). The amount was three times the entire amount lent through 7 SBAs packages in 20 years.

This rapid increase in IFM loans, from 1977-8 to 80-81 signifies the importance of Pakistan to IMF and its master US. However, IMF was so keen in financial pampering of Zia regime that besides such huge direct funding, it influences the aid-giving policies of a large number of Western countries, making them agree for funding to Zia’s Pakistan.

The trend clearly shows that IMF packages throughout the 1970s, being Stand By Agreements, the contracts had the essential characteristics of high interest rates Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation.
and there was no signs of let up for the democratic government of ZA Bhutto. However, contrary to the stringent measures of seventies, IMF extended mild and favorable conditions to Zia regime in Nov 1980.

The amount of package was ever biggest for any developing country until then. Not only was this exception, rescheduling of repayment of debts also arranged through “Aid to Pakistan” Consortium, rather than by Paris Club Paris Club This group of lender States was founded in 1956 and specializes in dealing with non-payment by developing countries.

. This was a clear deviation from standard lending practices and out of the way arrangement. There is a subtle difference between the approaches of Paris club and Consortium. Paris Club is primarily made of professional bankers while Consortium reflects long-term global political interests. Thus the fact shows the extent of politically motivated financial blessings for one of the worst dictators of history.

IMFs constant magnanimity towards Zia regime can easily be attributed to two major geo-political factors at that time; the Iranian revolution and Soviet Occupation of Afghanistan. Thus there were no economic factors, as usually claimed by Fund, for the positive change in behavior of IMF.

It is interesting to note that after the passage of decade of eighties (Zia period) there was major change in the character of IMF packages for the late 80s and 90s , when Pakistan had successive stints of democratic governments of PPP and PML. Now, one again more complex and tough conditions were being attached to loans offered to Pakistan. The number of conditions attached to structural adjustment Structural Adjustment Economic policies imposed by the IMF in exchange of new loans or the rescheduling of old loans.

Structural Adjustments policies were enforced in the early 1980 to qualify countries for new loans or for debt rescheduling by the IMF and the World Bank. The requested kind of adjustment aims at ensuring that the country can again service its external debt. Structural adjustment usually combines the following elements : devaluation of the national currency (in order to bring down the prices of exported goods and attract strong currencies), rise in interest rates (in order to attract international capital), reduction of public expenditure (’streamlining’ of public services staff, reduction of budgets devoted to education and the health sector, etc.), massive privatisations, reduction of public subsidies to some companies or products, freezing of salaries (to avoid inflation as a consequence of deflation). These SAPs have not only substantially contributed to higher and higher levels of indebtedness in the affected countries ; they have simultaneously led to higher prices (because of a high VAT rate and of the free market prices) and to a dramatic fall in the income of local populations (as a consequence of rising unemployment and of the dismantling of public services, among other factors).

IMF : http://www.worldbank.org/
loan, for Benazir Government (1988-91), was increased from average 27 in 1985 to 56 in 1989. It is said that conditions attached to 1988 IMF package were the most sever in the history of IMF-Pakistan interaction.

Not only the conditionalities were enhanced but their nature was also made more harsh and stringent. For instance, under structural adjustment program, Benazir government was forced to impose sales tax on 44 daily use items. Pressure was built up to withdraw subsidies on major public services and pushed to start privatization. Usually such steps are enough to make any government unpopular with in no time. But the most crucial question still remains there, why Benazir accept all the conditionalities imposed by IMF.

During the second term of PPP government of Benazir Bhutto, IMF took the civilian government to task and suspended Extended Structural Adjustment facility (ESAF) and Extended Fund Facility (EFF) after development of controversy with government over reduction in tariff rates. But IMF made financial screws so tight that PPP government bowed down to all conditionalities in order to get the package of US $ 1.2 Billion in 1995.

After removal of Benazir government in 1996 by Farooq Leghari, IMF pressure continued over the succeeding civilian government of Nawaz Sharif, who followed the line like a good chap. Over 66 industrial units were privatized in his period, rendering thousands of workers jobless. All such measures had their consequences, causing regular increase in external debt of Pakistan.

The IMF’s strict and anti-people financial prescriptions continued throughout the 90s. But with the sudden entry of yet another dictator, Gen Musharaf in 1999, coupled with 9/11 incident in 2001, IMF ceased its harsh attitude once again and as usual softened its behavior towards Pakistan’s new dictator. The moment Mushraff regime agreed to be part of US-led war on terrorism, IMF indicated easing out its position on the concessional Poverty Reduction and Growth Facility (PRGF). It is pertinent to mention that prospects of PRGF package for Pakistan were quite dismal till a week before 9/11.

However, IMF swiftly changed its position after 9/11 and quickly agreed to support Gen. Musharraf by extending financial support under much needed PRGF. Thus it is evident from the above mentioned fact that sudden and positive change in IMF attitude towards Pakistan was the result of political understanding between Gen. Musharraf and US administration, and not in line with the ethics of multilateral lending.

In nutshell, it is clear from the facts, discussed that IMF is not a democratic institution at all as claimed by its founders. It does not believe in its own capitalistic principals of economic liberalism or concept of multilateralism. It only serves as an extended hand of US treasury, at the service of his real master, always dancing with dictators and dictating the democracies.

Abdul Khaliq is the focal person of the Committee for Abolition
of Third World Debt (CADTM) in Pakistan
E.mail: cadtm.pakistan@gmail



Abdul Khaliq

CADTM Pakistan

CADTM

COMMITTEE FOR THE ABOLITION OF ILLEGITIMATE DEBT

35 rue Fabry
4000 - Liège- Belgique

00324 226 62 85
info@cadtm.org

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