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Essay on
How to deal with the economic woes of Pakistan and
the IMF conditionalities?
Outline:

1. Introduction
2. The present state of the economy
3. What is Pakistan’s economic potential?
4. Why couldn’t we realize it up till now?
5. Pakistan approaches IMF to augment its foreign exchange reserves.
6. Why conditionalities are attached to IMF loans?
7. Is GDP an appropriate measure to judge the economic wellbeing of people?
8. Population dynamics and the role of young working force in the growth of the economy.
9. The underutilized potential of the tourism industry.
10. Unpromising performance of Agriculture sector.
11. Apathy towards the development of the IT sector.
12. How can we make Pakistan a fast-growing economy?
13. Foreign Investment as a recipe to address economic woes.
14. Prerequisites of both foreign and local investment
15. World Bank recommendation for Pakistan

Thesis Statement: Pakistan’s economic woes could be dealt with through foreign investment
by creating ease of doing business in the country inter-alia improving the law and order situation,
and adopting certain austerity measures.
Basically economy is to create such a socio-political environment by the governments in
which people can earn their livelihood and satisfy their wants and needs by making use of their
abilities. It is generally measured in terms of goods and services produced in a country in a year
known as GDP (Gross Domestic Product). All government revenues and public welfare programs
are dependent on the level of its GDP. By looking at the various indicators of Pakistan’s economy,
reasons of its poor performance, and the methodologies adopted by the emerging economies of the
world we would be able to devise a recipe for Pakistan to move forward.
When we look at Pakistan’s economic condition, we see that our GDP at present is $ 313
Billion Nominal bases, ranking 41st on in the world. According to Asian Development Bank,
Pakistan GDP growth rate remained around 5.6% during 2018 against India’s 7.3, and Bangladesh
7. This is being considered quite satisfactory on account of inflow of foreign investment from
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CPEC. However, it came down to even less than 4 during 2018-19. The inflation rate in Pakistan
at present is around 10%. GDP per capita is above $1600 when measured on the basis of population
220 million. Population wise Pakistan is a 6th largest country in the world. The share of different
sectors in GDP is; Agriculture19%, Industry 21%, and services 60%. Whereas labor engagement
is 42% in Agriculture, 35% in Services, and 23% in Industry. Around 30% of people live below
the poverty line meaning thereby that there is a lot of rich-poor gaps. Unemployment is estimated
at about 6%. Exports are $25 billion mainly Textiles, leather goods, sports goods, carpets, and
surgical instruments. Main export partners are the USA, UK, China, UAE, and Afghanistan.
Imports are $56 billion. Main imports are Petroleum, Agriculture and other chemicals, machinery,
food, transport, metals, and textile. Main import partners are China, UAE. Public debt is 67% of
GDP. Overseas Pakistanis remittances stand at $19.3 billion during 2017. Revenues are 15.2% of
GDP, and expenses 21.8% of GDP. Foreign reserves as per SBP are $10.15 billion and with
scheduled banks $6.56 billion making total $16.7 billion which are considered quite insufficient
to run the business of the country. (Source: CIA World Fact Book, and Wikipedia).
Important factors that kept telling upon the economy of Pakistan remained energy shortage,
unsatisfactory law and order situation, bad governance and rampant corruption in all walks of life.
Widespread tax evasion continuously kept the government revenues scanty. This all reflected in
the form of the high unemployment rate, decreasing exports, increasing imports res
On account of its depleted foreign exchange reserves, Pakistan invited a team of IMF experts
to visit the country as its economy faced a balance-of-payments crisis. Pakistan has decided to
engage with the IMF after an in-house assessment found that the benefits of getting a bailout
program outweigh the cost that the country may have to pay, including some compromises on
economic sovereignty. A fresh assessment by the State Bank of Pakistan (SBP) and the Finance
Ministry showed that Pakistan needed USD 11.7 billion to service its external debt in the current
fiscal year 2018-19.
The International Monetary Fund (IMF) has assessed Pakistan’s gross external financing
needs at a record $27 billion for the next fiscal year. In its monitoring report, the IMF also forecast
that due to additional borrowings, Pakistan’s external debt would jump to $103.4 billion by June
2019.
As per the report of the State Bank of Pakistan, Pakistan’s external debt and liabilities have
soared to a record $91.8 billion. The maximum chunk of this debt was added during former Prime
Minister Nawaz Sharif’s government, i.e., $35 billion during his four-year tenure to repay maturing
debt and keep official foreign currency reserves at a level which could give a sense of economic
stability to investors. The unfortunate chapter of this mammoth addition to the national debt is that
it could not put the country’s economy on self-sustaining grounds, and Pakistan immediately had
to knock at the door of IMF. That means the expense of the loans taken was not a judicious one or
there was an element of misappropriation.
US Secretary of State has also warned in July 2018 that Washington had serious reservations
about the IMF giving money to Pakistan due to concerns Islamabad would use the cash to repay
Chinese loans.
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As regards why Pakistan had to approach IMF and to what extent our resentment against its
conditionality is justified we have to first understand the constitution of IMF and the reason of
conditionalities attached to its loans.
The International Monetary Fund (IMF) was founded in 1945 to help member countries
to have enough foreign exchange to continue to do business with the rest of the world. Its
Headquarter is in Washington, D.C., consisting of 189 countries working to foster global monetary
cooperation, secure financial stability, and facilitate international trade. It plays a vital role in the
management of balance of payments difficulties of the counties who approach it. Countries
contribute funds to a pool through a quota system from which countries experiencing balance of
payments problems can borrow money. Each member of the IMF is assigned a quota, based
broadly on its relative size in the world economy. As agreed in 2016 the United States' financial
commitment to the IMF was approximately $164 billion that is the maximum amount that the IMF
can draw from the United States to make loans to other IMF members. The United States being
the largest contributor has the highest number of votes and therefore wields the most influence in
IMF. At present, the total worth of IMF is about US$1trillion.
The IMF negotiates conditions on lending money under its policy of conditionality.
However, low income can borrow on concessional terms, which means there is a period with no
interest rates, through the Extended Credit Facility. The IMF also provides emergency assistance
via the Rapid Financing Instrument to members facing urgent balance-of-payments needs. It is
mandated to oversee the international monetary and financial system and monitor the economic
and financial policies of its member countries. This activity is known as surveillance.
IMF conditionality is a set of policies or conditions that the IMF requires in exchange for
financial resources. The IMF does require collateral (something pledged as security for
repayment of a loan, to be forfeited in the event of a default) from countries for loans but also
requires the government seeking assistance to correct its macroeconomic imbalances in the form
of policy reform. If the conditions are not met, the funds are withheld.
Structural adjustment conditions include:
 Cutting expenditures, or adopting austerity measures.
 Devaluation of currencies,
 Trade liberalization, or lifting import and export restrictions,
 Increasing the stability of investment (by supplementing foreign direct investment with
the opening of domestic stock markets),
 Balancing budgets and not overspending,
 Removing price controls and state subsidies,
 Privatization, of all or part of state-owned enterprises,
 Enhancing the rights of foreign investors vis-a-vis national laws,
 Improving governance and fighting corruption.
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These loan conditions are to ensure that the borrowing country will be able to repay the
IMF. Moreover, the borrower will not solve its balance-of-payment problems in a way that
would negatively impact the international economy. However, there is a criticism on IMF that
developed countries of the fund were observed having a dominant role and control over less
developed countries (LDCs). The IMF has been criticized for being "out of touch" with local
economic conditions, cultures, and environments in the countries they require policy reform. The
recipient countries have also to sacrifice policy autonomy in exchange for funds, which generally
lead to public resentment, for instance via IMF advocated ‘austerity programs,’ cutting of public
spending and increased taxes even when the economy is weak, to bring budgets closer to a
balance to reduce the budget deficits.
In view of the aforesaid, it appears that the conditions imposed by IMF will include the
close monitoring, reduction of government spending, revision in tax collection policies to make
sure that funds granted are utilized optimally. The IMF loans thus will significantly impact the
economic indicators and bring change in the regulatory framework which has both positive and
negative impacts on the country.
There is everywhere a general resentment in the borrowing countries against IMF that its
conditionality often results in the raising of tax rates, tariffs like that of electricity, resulting in
financial pressures on the public. The borrowing governments try to shift the onus of these
financial difficulties on the IMF. We know that IMF is concerned about the getting back of its lent
money from a country which is already constrained and helpless to wisely manage its financial
system. It, therefore, advises those reliable measures to generate the financial resources in the
borrower country which could ensure the return of its money. That is the cost which ultimately
had to pay by the masses in the form of increased tariffs for the unwise financial management of
those who have been at the helm of affairs. There is a universal financial norm that borrower can’t
dictate the terms of the loan. It is the lender who has this prerogative. Hence, there is no point to
object IMF for the harsh conditionality.
No doubt GDP is a measure of economic growth and development, i.e., measuring the
goods and services produced in a country, but it is not an appropriate measure of people’s well-
being as well. Because it does not speak for the equitable distribution of the dividends of the
economic growth to the common man affecting its quality of life. It is through bridging the gap
between income inequalities we can extend quality education and health cover, and equal
opportunities for employment to the masses. This is possible only through sustainable economic
development in which government has to perform a significant role.
It is in line with the Sustainable Economic Development model that most of the European
countries which are not at the top GDP wise at the world level but they are the best performers as
regards the well-being of their citizens. They are Norway, Denmark, Finland, Switzerland,
Sweden, Germany, and the Netherlands, and are ahead of USA, and China (largest economies of
the world) in the Human development index. Most of the Asian economies have failed to achieve
that standard wellbeing of their people up till now including India though it has made significant
progress in adding to their GDPs. The tragic part of the story is that the rich and poor gap has
widened in these emerging economies with the passage of time.
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Population dynamics and trends play a vital role in the development of a country.
According to Economic Survey of Pakistan total fertility rate of Pakistan is around three whereas
ideal for a country is 2.1 to create a balance in the young vs. the old aged people. Life expectancy
ranges from 65 to 67 for male and female respectively. Population is growing @ 1.93%. The other
most important demographic characteristic of a population is its age structure, i.e. children, young
and old aged people ratio.
The young population is crucial for the economic development of a country being part of
the working force. In Pakistan, 33 percent population is under the age group of 15 years, and 7
percent population is in the age group of 60 years and above. This shows that Pakistan has a
remarkable working-age population, i.e. 60% that is 15-59 years. This dynamic group can add
significantly to the country’s productivity subject to only one condition that it is adequately
developed, educated, and trained, and of course, provided with job opportunities when properly
skilled.
Pakistan has a lot of potentials to benefit from its tourism industry, but the same could not
be tapped due to poor law and order situation and insecurity of the foreigners. Pakistan has a lot
of attraction points for the world foreign tourist like ruins of Mohenjo-Daro, Harappa and Taxila
civilizations, Himalayan peaks over 7000 meters especially K2, and Nanga Parbat a source of
attraction for adventurers and mountaineers. But terror threat happened to be the primary cause for
not exploiting its full potential from the tourism industry.
The Low per acre yield has remained a big problem in the agriculture sector. There have been
many reasons for that. These are; scarcity of irrigation water, Salinity, and Sodicity of soils,
insufficient and improper use of fertilizers, use of non-certified seeds, use of inadequate and
substandard insecticides, and unstable market prices for the produce.
We have the well-established Agriculture research setups but still, are underutilized. By
developing the same, we can reduce our dependence on import of edible oil which consumes our
substantial foreign exchange at the moment. We have yet to build a lot of dams to save the Sea
moving water during the monsoon rainy season which presently is causing devastation in the form
of floods in the plains of Punjab and Sindh.
We may address the concerns of our textile industry the largest export segment of Pakistan
which has gone down during the last few years, as it is becoming lesser competitive Vis a Vis its
competitors viz: India, Bangladesh, Siri Lanka, and Vietnam.
Pakistan may also embark upon education industry as is being done by many developed
countries to cater the requirements of Afro-Asian nations more cost-effectively by raising the
education standard like those of developed world or in collaboration of the world-renowned
universities like Oxford, Harvard, MIT, Stanford, etc.
At present software exports of Pakistan are around $700 million as per the State Bank of
Pakistan report. Pakistan’s total IT industry is worth $3.5 bn. As regards its scope and potential of
expansion it would not be out of place to mention here that India’s existing IT market size is $150
billion against Pakistan’s $3.5bn. Almost all big IT companies including Google, IBM, and
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Microsoft, have their local offices in India, promoting the country’s industry through research and
development. Pakistan up till now has failed in producing the requisite number of IT graduates
and creating IT conducive environment to attract the foreign investment in this highly progressing
sector. It is believed that the next wave of jobs will be coming in the fields of robotics, Artificial
Intelligence (AI), Synthetic biotechnology, genetic engineering, 3D printing, and auto-driven
vehicles, all involving IT. Hence, Pakistan will need more IT graduates in years to come along
with graduates in the STEM (Science, Technology, Engineering, and Mathematics).
Pakistan may go for creation of IT parks or mini silicone valleys as created by India and China
inviting Pakistani diaspora in the USA to invest mainly in the opening of software houses in
Lahore, Islamabad, and Karachi.
To increase our petroleum and natural gas production, we can go for offshore drilling where
we have much potential. As regards energy shortage we have yet to exploit our vast potential of
renewable resources like wind and solar energy. The Thar coal deposits having over 175 billion
tons of reserves could not attract the government’s proper attention to make use of the same, and
Sendek Copper and Gold mines in Baluchistan altogether.
Foreign Investment has been established as the sole factor and predominant source of
economic growth in the world economies. That happened in China, India, and ASEAN, and that
would be the sole factor in Pakistan as well. It is a well-known fact that the main instrument to
attract the global investment by China and India was reducing the import tariffs and taxes, and
deregulating the markets. Cheap labor in both the countries was, of course, the other significant
factor in attracting the foreign investment. Ultimately it is the investment which became the critical
source of job creation in these countries and also a vital source of revenue generation for the
government on account of the increased number of taxable incomes.
In line with that, the strategy adopted by China, India, and ASEAN can also be adopted by
Pakistan. For that, we have to develop our Human Resource, create investment-conducive
environment giving due importance to law and order situation, improving the necessary socio-
physical infrastructure, and providing a smooth and corruption-free institutional setup for the
investors. Further, the government would require inputting major effort to reform its tax system
and address competitiveness challenges.
As per the World Bank, Pakistan would need to focus on lowering the cost of doing business
and increasing productivity to achieve higher and sustainable export growth. In an, another report
World Bank recommended that energy reforms should be a top priority for Pakistan as it can yield
huge economic gains toward a more sustainable future.
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