http://www.imf.org/external/np/vc/2008/120308.htm
Questions and Answers on the Pakistan program
Last Updated: December 15, 2008
1. What are the advantages to Pakistan of undertaking an IMF-backed program?
2. How did Pakistan get into these balance of payments difficulties to begin with?
3. What is the conditionality associated with this loan?
4. Why is the Fund asking Pakistan to raise interest rates when in other countries the Fund is suggesting monetary easing?
5. At the G-20 summit, there was agreement among ministers that fiscal stimulus was necessary to help countries deal with the financial crisis. Why is the Fund advocating fiscal tightening in the case of Pakistan?
6. Is the Fund insisting on cutting back development expenditures? Military expenditures?
7. The program calls for fiscal restraint and monetary tightening. Won't this hinder the government's ability to invest in health and education?
8. The program calls for the removal of energy and electricity subsidies–which will adversely affect the poor. How does the program plan to protect the poor from these price increases?
9. Will agricultural income be taxed under the program?
10. What will the charges be for this loan? Is Pakistan paying more than other countries who are borrowing from the Fund? Why were the previous loans to Pakistan much cheaper?
11. Will the loan that Pakistan is receiving from the Fund be used to repay bondholders?
12. Where is the IMF's money going? Will it be used for anti-terrorism military operations?
13. Is the Fund concerned that in the absence of stronger measures the program will not succeed?
14. What contingency measures are the authorities considering if things turn out worse than expected?
Q1. What are the advantages to Pakistan of undertaking an IMF-backed program?
A. Financing from the IMF will help to ease the path of adjustment, as well as restore macroeconomic stability and investor confidence. Further, IMF financial support will help fill the external financing gap, rebuild international reserves, and catalyze additional external assistance from Pakistan's development partners. Additional assistance from donors is essential to help finance the expanded social safety net and to allow for higher spending on development programs.
Q2. How did Pakistan get into these balance of payments difficulties to begin with?
A. Pakistan's macroeconomic situation deteriorated significantly in 2007/08 and the four months of 2008/09 on account of domestic and external factors. Adverse security developments, large exogenous price shocks (oil and food), and global financial turmoil buffeted the economy. These shocks, combined with policy inaction during the political transition to a new government, led to slower growth, higher inflation, and a sharp deterioration of the external position.
Q3. What is the conditionality associated with this loan?
A. The loan supports the authorities' program, which has two key objectives: (i) restoring macroeconomic stability and confidence in the economy through a significant tightening of macroeconomic policies, and (ii) ensuring social stability and adequate support for the poor. The conditionality associated with the IMF's financing reflects the targets and policies set out by the Government to meet these two objectives.
These targets, and the associated conditionality, focus on quarterly quantitative targets for: government borrowing from the State Bank of Pakistan, the budget deficit, international reserves and net domestic assets of the State Bank of Pakistan, contracting or guaranteeing of non-concessional loans by the public sector, and external arrears. There are also specific commitments for improvements in banking and tax legislation, strengthening the social safety net for poor households (including working with the World Bank to develop a more comprehensive and better targeted safety net), phasing out electricity subsidies, reducing foreign exchange market intervention by the State Bank of Pakistan, working toward elimination of inter-corporate circular debt, and transition to a single Treasury account.
Q4. Why is the Fund asking Pakistan to raise interest rates when in other countries the Fund is suggesting monetary easing?
A. The Fund believes that each country's interest rate policy should reflect its own situation and economic objectives. In Pakistan's case, a tightening of monetary policy is necessary to restore confidence in the Pakistani rupee, help rebuild international reserves, and ensure that the domestic financing requirement of the government is met through market placements of government securities. To this end, higher interest rates are needed. Interest rates remain negative in real terms following the recent increases, even when compared with core inflation. The recent increase in interest rates will benefit domestic savers and reduce the implicit subsidy received by borrowers. It will also help reduce inflation, which will benefit the poor.
Q5. At the G-20 summit, there was agreement among ministers that fiscal stimulus was necessary to help countries deal with the financial crisis. Why is the Fund advocating fiscal tightening in the case of Pakistan?
A. Pakistan's circumstances are different from those of most G-20 countries, which have stronger fiscal positions and where a fiscal stimulus is needed to deal with recessionary pressures associated with the global financial crisis. Pakistan, on the other hand, faces severe balance of payments pressures stemming in part from loose financial policies. The global financial crisis is a contributory but not the principal cause of macroeconomic imbalances in Pakistan. Further, although economic activity has slowed in Pakistan, the economy is still growing. Accordingly, fiscal and monetary tightening are needed to address Pakistan's macroeconomic imbalances.
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