IMF back in business- By M. Sharif

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Some of the countries facing a financial crunch including Pakistan preferred to generate capital from the international financial market. Instruments like GDRs, privatisation proceeds and other methods were used; this was because there was enough liquidity in the international financial market to meet the requirements

There is widespread consensus among independent analysts that the International Monetary Fund (IMF) is back into business of lending credit, rendering technical advice and suggesting measures to distressed economies primarily because of the recent global financial crises that have created serious fiscal and balance of payment problems for a number of developing and emerging economies in Eastern Europe, Africa and Asia. Leaders in the United States, developed European and emerging Asian economies have been putting their acts together for the past few weeks to tide over the crises that have threatened the global financial system. Even if their economies have the depth and resilience to recover, it will, take time to address the crises.

Countries like Pakistan and Hungry are beneficiaries to the global system according to their capacity but their economies lack depth and resilience to bounce back without external financial credit. The only course left is either to seek credit from rich friends or from the IMF. By helping financially distressed countries, IMF will be promoting stability of the international monetary and financial system, which despite a few pitfalls is the instrument of economic growth and development for many countries. Until now, IMF officials have approved loans to three countries; Hungry ($12.5 billion), Iceland ($2.1 billion), Ukraine ($16.5 billion). Negotiations are also in progress with Pakistan and a few other countries for lending credit. The IMF is launching a new facility for emerging economies hit by the global crises to aid them overcome a temporary liquidity crunch.


Returning to business

IMF during the past a few years was least involved in rescuing economies in troubled waters, primarily for three reasons that are inter-linked. First, the global financial system had taken-off on a good note because of the free market regime. There was enough financial liquidity the in international market that landed in equity markets in developing countries also as FDI. Secondly, global trade developed its roots and expanded to help developing economies enrich themselves, stabilise and sustain growth.

The country had a proper fiscal management system and carried it out with considerable ease which also withstood minor domestic and external shocks. With a numerous pile of forex reserves, investments made in different commercial and financial ventures, created a strong middle class willing to spend and keeping growth on a positive. Finally, the global economy grew at an average rate of about 5.0 percent during the past five years, prior to the commencement of the global crises which positively impacted the growth rate of many developing countries including Pakistan. The cumulative effect of these entire factors reduced the necessity for IMF support.

Some of the countries facing a financial crunch including Pakistan preferred to generate capital from the international financial market, instruments like GDR’s, privatization proceeds and other methods were used, this was because there was enough liquidity in the international financial market to meet the requirements. In fact, during the period of stable growth for the economy the free market and the United States model of capitalism were at their best, this further reduced the need of any bail out from the IMF.

The global financial crisis has all of a sudden changed the liquidity situation in the global market, it has aggravated it to the hilt and made it extremely scarce. Wealthy countries have landed in serious problems, mainly because of the loss in trillions of dollars from the stock markets, steep fall in the prices of houses which led to the sub-prime mortgage crises and the bankruptcy of large investment banks in the US including some in the European countries. Banks in developing countries like India and Pakistan also came under pressure where central banks had to inject liquidity worth billions of rupees to maintain depositor’s confidence and pre-empt the collapse of banks.

According to S&P, world markets lost about $16.22 trillion during the last ten months. Some of the global investors were hit the worst.

It is being anticipated that they might not recover from the losses and the lack of depth in the financial markets might keep individual investors on the sidelines for quite sometime.

Oil rich countries and countries such as China, Japan and South Korea that registered huge trade surpluses with the US and helped it by borrowing US securities to the tune of billions with twin objectives, keeping the American spirit to spend alive, and their export-led growth intact, are currently the only countries with a surplus liquidity. However, they too might face a decline because of global recession in general and because of the US in particular. They may have to be innovative for giving momentum to domestic consumption in order to avoid recession in their economies.

The conditionalities that the IMF are well known for giving is such as reducing fiscal deficit by reducing government expenditure, opening up of borders for the inflow and outflow of capital and domestic markets, reducing import tariffs, increasing interest rates, privatisation of public assets, floating currencies in the open market and so on. There is a strong belief that the fund has a straight- jacket solution for all distressed countries seeking credit whether it suits their peculiar fiscal and monetary conditions or not.

It’s emphasis on having a balanced budget constraints economic growth and reduces job opportunities particularly among developing countries such as Pakistan; it negatively effects domestic industrial growth and poverty alleviation. A number of countries in Latin America, Africa and Asia could not do well to sustain high growth subsequent to completion of bail out periods or during the bail out programmes because of the structural reforms demanded by the fund were too harsh to implement. Their impact on alleviating poverty was not a positive one either and Pakistan is one the countries that would not be able to sustain high economic growth. Implementation of IMF conditions during the 90’s neither were public friendly nor government friendly.



The IMF is stepping back in, during a challenging time not only across the world but in many distressed countries seeking its lending. It has a challenging task of helping them despite constraints of its own. It must endeavor to help them with a supportive hand so that the citizens of these countries can see the impact of its efforts.


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