The International Monetary Fund (IMF) and the World Bank (WB) were created in 1944 under the Bretton Woods agreement as institutions to promote economic and financial cooperation among member countries. These sister organizations perform different functions. The IMF is concerned with macroeconomic issues like balance of payment adjustments and poverty. It has a competent and experienced cadre of economists, a wealth of international and country-specific knowledge acquired over time, and research capability to advise on macroeconomic policies. The World Bank is concerned with structural reforms, reconstruction, and development programs in WB member countries. It focuses on issues such as privatization, governance, civil service, the financial sector, and human development, and—similar to the IMF—has "intensive country specific knowledge and continuous presence in the country." [60]

The experience of developing countries with IMF and World Bank involvement in their economies has shown mixed results. The proponents of these institutions argue that IMF and World Bank assistance is necessary in solving the economic problems of the member countries. They assert that a country unable to solve its own economic problems requires external involvement in order to keep its economy afloat. But opponents of the IMF and World Bank roles in the economies of developing countries make a case that these institutions have created more problems for the member countries than they solve, condemning their failure to alleviate poverty. They argue that these institutions are politicized and in turn make decisions based on political considerations, rather than on the economic conditions of particular member countries. [61] They especially criticize the "conditionalities" that these institutions attach to loans to debtor countries. [62] To them, these conditionalities are a major impediment to human development in the member countries, because they emphasize large-scale cuts in such expenditures. They argue that conditionalities are often self-contradictory and complicate the economic environment of member countries. Pakistan is a case in point. "On the one hand, the IMF and the World Bank expect Pakistan to do much for the alleviation of the poverty, whose one manifestation is a high rate of unemployment, and are ready to fund such efforts, and on the other, they insist on downsizing and rapid privatization of public sector enterprises along with deep cuts in public spending." [63] Furthermore, opponents criticize the IMF and World Bank for pushing Pakistan to adopt the "Washington Consensus" agenda that emphasizes economic liberalization and deregulation of the economy, compounding its economic problems.

Multilateral lending institutions have played a major role in providing both financial and policy advice to Pakistan over the last half-century. Pakistan resorted to IMF- and World Bank-led programs to cope with the debt crisis of the 1980s. There was heavy involvement by the IMF and World Bank in the design of economic reforms and adjustment programs undertaken after 1988.

In the 51 years since 1952, the International Bank for Reconstruction and Development and the International Development Agency, both World Bank agencies, have approved 84 loans and 119 credits for Pakistan amounting to $6.97 billion and $7.71 billion respectively. The World Bank has funded another $1.23 billion in 15 main projects, of which $416 million remains to be disbursed. [64]

 These programs have so far fallen short of resolving Pakistan's economic problems. Poverty has increased in Pakistan, rather than declined. External debt has increased since the IMF and World Bank became involved in Pakistan. Unemployment increased in the country as a result of a downsizing policy adopted by the government under the guidelines of these institutions. This part is divided into two sections, which examine the role of the IMF and the World Bank, respectively, in Pakistan's economic development.

Pakistan and the IMF

The IMF, directly and indirectly, has played a crucial role in the macroeconomic stability of Pakistan since 1988. On the one hand, it has provided direct bilateral support to Pakistan in order to cope with its macroeconomic imbalances like balance of payment deficits. On the other hand, the IMF has indirect influence on lending by other donor agencies. This is evident from the fact that whenever Pakistan enjoyed good relations with the IMF, other lending agencies also provided money to Pakistan and vice versa. The IMF credit rating of a borrowing country is taken very seriously by other donor agencies. The IMF also influences policies of lending countries to a great extent. According to Dr. Ishrat Husain:

The IMF enjoys excessive concentration of power and has a virtual monopoly of knowledge and ideas in prescribing as to what are the right policies a country ought to follow. It has disproportionately large influence on financing provided by other players—development banks, fund managers, debt relief by Paris and London Clubs and syndicate lending by commercial banksÉA negative assessment by the IMF or even a failure to complete on time places the reputational capital of the borrowing country at great risk, erodes its credibility in the financial markets and reduces financial flows into the country. There are instances where this created a snowball effect amplifying the disequilibrium in macroeconomic balances as the IMF and other financiers collectively withheld their assistance. [65]

Since 1988, Pakistan has not enjoyed smooth relations with the IMF, because of the latter's dissatisfaction with the economic performance of Pakistan. Pakistan signed several agreements with the IMF, but due to a variety of factors most of them remained incomplete, with the IMF refusing to lend the full amounts to Pakistan. It must be remembered that in the 1990s, the nation suffered many losses on the economic front and the era is thus considered a "lost decade" for the economy of Pakistan. All macroeconomic indicators showed poor performance, bringing Pakistan to the brink of default. Moreover, the IMF's relations with Pakistan were further strained by 1997 due to the policies of former Prime Minister Benazir Bhutto. Large-scale corruption by her People's Party and its resistance to structural reforms irritated the IMF and World Bank.

The Sharif Government

When the new government of Nawaz Sharif took office in 1997, positive relations were somewhat revived between the IMF and the government of Pakistan. As a result of previous negotiations, the IMF had already resumed its assistance to Pakistan, agreeing to restore a stand-by loan program in December 1996 after a six-month halt. It also increased the total of these loans to $831 million from the original $600 million. [66] However, the resumption of IMF lending brought new conditionalities and forced large-scale budget cuts of PRs 45 billion ($1.13 billion) between October 1996 and January 1997. Almost 90 percent of these cuts were in the annual development budget, which affected economic performance in the short run. In March 1997, relations with the IMF again worsened. The breakdown in the relations stemmed from IMF concern over Pakistan's economic performance. The IMF was particularly concerned with "the large increase in official rupee borrowings from domestic banks during the current fiscal year (July 1996-June 1997), which rose to PRs 73 billion ($1.8 billion) by end-March 1997, up from a target of PRs 44 billion ($1 billion) for the whole fiscal year, and the burgeoning budget deficit, which was expected to reach 6 percent of GDP at the end of the fiscal year ending in June 1997, against an earlier target of 4 percent." [67]

The relationship between the IMF and government of Pakistan brightened when Sharif promised to introduce economic reforms to the country. The reforms included "cuts in the top rate of import tariffs by 20 percent, bringing them down to a maximum of 45 percent. He also lowered personal income tax rates across the board. Corporate tax rates for publicly listed companies were lowered to 30 percent, down from 33 percent, rates for non-listed companies to 35 percent from 43 percent and for banks to 55 percent from 58 percent." [68] Furthermore, the reforms emphasized a reduction in the general sales tax to a maximum rate of 12.5 percent from 18 percent and 3 percent tax on retail units. The purpose of these reforms was to improve tax collection and reduce the budget deficit to meet the 4 percent of GDP target in the fiscal year 1997-98, compared with the unfavorably viewed 6 percent deficit in fiscal year 1996-97. The IMF appreciated the reforms, but concluded that only after successful implementation of reform measures and accompanying macroeconomic improvements would the fund consider renewing its concessional Enhanced Structural Adjustment Facility (ESAF) and Extended Fund Facility (EFF) with Pakistan. [69]

On October 20, 1997, Pakistan reached an agreement with the IMF for a three-year, $1.6 billion Structural Adjustment Loan (SAL) package. About $935 million was committed to an ESAF, a concessional loan bearing interest of only one-half percent aimed at supporting a medium-term reform program. The first disbursement worth $208 million occurred in October 1997. [70] This loan package also provided crucial balance of payment support at a time when export growth was lackluster, foreign exchange reserves were below $1.3 billion, and external debt was high.

At the beginning of 1998, the IMF agreed to give Pakistan the second disbursement (worth another $208 million) of the $1.6 billion SAL agreed to the previous October. This was made possible by hard negotiations and last-minute pledges by the government to adhere to the tough conditionalities attached to the loan. These included, among many others, an emphasis on reduction of the budget deficit, improving access of foreign investors to the oil and gas sector, and the imposition of a Goods and Services Tax (GST), and the privatization of public sector organizations.

However, the government failed to impose the 3 percent sales tax on selected retail trade that continued to figure high on the IMF's list of conditionalities, which created resentment among IMF officials. At the beginning of 1999, the IMF agreed on the renewal of its lending program, paving the way for short-term stabilization with a Balance of Payments (BOP) loan. Under the new package, Special Drawing Rights (SDR) of $575 million were immediately disbursed. This included a $37.9 million SDR installment under the concessional ESAF, an $18.97 million SDR extended arrangement under EFF, and a $352.7 million SDR under the Compensatory Contingency Finance Facility (CCFF). [71] The ESAF/EFF loans were made on comparatively soft terms as part of the restored $1.6 billion SAL program agreed to by Pakistan and the IMF in 1997. The CCFF was extended on commercial terms to compensate for shortfalls in export earnings in 1998. These packages constructed by the Fund were accompanied by tough economic performance targets for Pakistan for 1998-2001, including:

• Doubling of the GDP growth from the 3-4 percent range to 5-6 percent
• Halving of the current account deficit from 3 percent of the GDP in 1998-99 to less than 1.5 percent in 2001-02
• Reducing inflation from about 9 percent to 6 percent in 2001-02
• Increasing the rate of domestic savings from 12 percent of GDP to 16 percent
• Stabilizing the ratio of public debt to GDP [72]

The IMF, in pursuance of the above-mentioned targets, asked Pakistan to tackle several long-standing structural problems as well as rescind some recent policy changes. The immediate policy requirements included:

• Further phased reduction in electricity rates
• Unification and devaluation of the exchange rate
• Imposition of a Goods and Services Tax (GST) on services, petroleum, electricity, and agricultural inputs
• Broadening of the tax base
• Restructuring of public sector enterprises in preparation for privatization
• Reduction of the government payroll through massive staff reduction [73]

In May 1999, relations between the IMF and Pakistan again soured. The IMF sent a five-member commission to Islamabad to review the economic performance of the country. The commission reported that the government of Pakistan had failed to meet several IMF conditionalities. Disputes over the pricing of electricity were complicated by continuing conflict over how to resolve charges of past corruption and rate-gouging during the Bhutto government. The government pledged that it would apply a flat-rate GST before March 31, 1999 in order to boost revenue and reduce the fiscal deficit; instead, it abandoned plans to impose a GST on retail trade. Furthermore, Pakistan also delayed settling its dispute with the Independent Power Producers (IPP). [74] Consequently, the IMF postponed the release of a $280 million disbursement to Pakistan, which was due in July 1999, because of noncompliance by the government with IMF conditionalities.

Sharif's government failed to meet IMF conditionalities throughout its tenure (1997-99). Negative international reaction to the 1998 nuclear tests only aggravated an already difficult financial situation. The growth rate of the economy remained below the target. Pakistan's fiscal deficit also remained above the target, as the government was unable to control non-developmental expenditures. Despite the budget deficit remaining high, the government was unable to implement the 15 percent GST on all goods, including agriculture. Furthermore, privatization and deregulation of the economy remained an unfulfilled dream given Sharif's earlier support for privatization, as most of the public sector remained under the control of government. As a result, the relationship between the IMF and Pakistan remained tense.

The Musharraf Government

After the October 12, 1999 military coup, Pakistan's economy continued in crisis. In the initial days of General Pervez Musharraf's government, the international community suspended assistance to Pakistan and imposed coup-related sanctions on the country. The IMF was no exception, likewise suspending aid to Pakistan. The restoration of economic assistance was made conditional on the restoration of democracy in the country. However, this public stance soon changed. As a result of a meeting between General Musharraf and the US ambassador to Pakistan, William Milam, the United States indicated it would likely support further IMF aid, if General Musharraf continued to recognize certain elements of democracy, such as human rights and press freedom. [75] The Musharraf government, from the beginning, appealed to the IMF for restoration of economic assistance and showed its willingness to meet the associated conditionalities.

The IMF responded by noting a number of key conditionalities it required of Pakistan in order for the new government to demonstrate good faith. Even if these actions were taken, IMF management only recommended a ten-month Stand By Agreement (SBA) for Pakistan and the resumption of the medium term ESAF/EFF program.

Around a year after the military government of General Musharraf took power in Pakistan, the Executive Board of the IMF approved a Stand-by-Credit of $596 million. The program was to run until the end of September 2001, supporting the government's economic program for 2000-01. The SBA was focused on moving Pakistan to high, sustainable growth by strengthening its balance of payments position, building reserves, and reducing public sector indebtedness. [76]

At this critical period in the economy of the country, Pakistan was left with very few options, as default on its external debt appeared quite imminent. Thus, an agreement with the IMF was essential in order to obtain rescheduling of Pakistan's Paris Club debt. The government paid a heavy price for reestablishing the country's lost credibility and was forced to take some immediate and very tough measures. Fulfillment of these requirements triggered approval of the SBA by the IMF board. Subsequently, the government implemented an equally tough set of additional measures to meet the performance criteria and structural benchmarks during the next ten months.

IMF conditionalities for Pakistan under the SBA included:

The number of tariff steps was to be reduced from 5 to 4 in July 2001, to 3 in January 2002, and the maximum import tariff from 35 percent to 30 percent by June 2001, and to 25 percent by June 2002

The SBA was fully implemented and all the allotted funds were disbursed. Pakistan addressed most of the conditionalities and met the IMF targets. As a result, relations between the IMF and government of Pakistan improved and the IMF approved a three-year Poverty Reduction and Growth Facility (PRGF) loan to Pakistan in December 2001 to help fight poverty. The PRGF is a package initially valued at $1.3 billion. So far, this program is going well and, as of September 2003, Pakistan had received six (totaling $738 million) out of a scheduled twelve disbursements. [77]

Elected civilian governments in Pakistan since 1988 had resisted IMF conditionalities and reforms. This was one of the main reasons behind the lack of a cordial relationship with the IMF. According to Dr. Ishrat Husain, the military government of General Musharraf implemented unpopular reforms because:

The reforms suggested by the IMF during the Musharraf government revolve around correcting the arrears of fiscal prudence; reducing indebtedness; competitively pricing outputs, inputs, and public utilities; widening and strengthening tax administration; removing concessions, exemptions, and privileges; extending a level playing field to all economic agents; instituting greater reliance on market mechanisms, rather than administrative discretion, in allocation of resources; and privatizing state-owned banks, energy companies, and other large enterprises.

A summary of IMF assistance to Pakistan during the period 1997-2003 is given below in Table 2.1.

Table 2.1: Pakistan and the IMF, 1997-2003

Sources: Ishrat Husain, "Pakistan and the IMF: 1988-2002," http://www.sbp.org.pk/about/speech/2002/2-Jul-02.pdf; IMF, "IMF Completes Fourth Review of Pakistan's PRGF-Supported Program, Approves US$118 Million Disbursement to Pakistan," http://www.imf.org/external/np/sec/pr/2003/pr0326.htm.

As shown by Table 2.1, Pakistan entered into a number of different agreements with the IMF. Except for the Musharraf government's Stand-by Agreement (SBA), these were not fully implemented and consequently almost half of the agreed amount remained undrawn. There are many reasons for this. First, the IMF's dissatisfaction over the economic performance of Pakistan in the 1990s and the unwillingness on the part of civilian governments to implement the conditionalities was the major cause of undrawn funding. Second, political instability in the country in the 1990s was an important cause of the breakdown in the relationship between the IMF and Pakistan, leading to disruption in the continuity of economic policies. Third, efforts to correct economic mismanagement and political corruption in Pakistan were seen with skepticism in IMF circles. As explained in Part One of this paper, the elected civilian governments were involved in corruption and failed in all areas of economic management. The fourth hypothesis can be termed what Dr. Ishrat Husain called the "Blame the IMF syndrome." According to Dr. Husain:

The proponents of this hypothesis argue that the diagnosis of the economic problems carried out by the IMF staff is partial and incomplete. As they do not have any grounding in the specific political realities or awareness of the institutional capacity, their technical analysis is sound but does not capture the full feasibility of implementation of reforms. More damaging is the indictment that the design of the program is driven too much by dogmatic and ideological agenda of the Washington Consensus, i.e., liberalization, privatization, and deregulation. The IMF holds a uniform set of universal economic precepts to be valid across countries and the initial conditions, market imperfections, structural rigidities, immobility of factors, and other peculiar features of developing economies do not seem to figure in the design and formulation of the programs. [79]

Indeed, the critics of IMF-led programs in the member countries argue that this institution adopts a uniform set of policies across the countries irrespective of the diverse economic conditions of countries across the globe. "The conditionalities enforced on countries as diverse as Rwanda and the Philippines are broadly similar, regardless of particular specificity or local conditions," asserts one journalist. [80] Opponents of IMF involvement in Pakistan argue that the "one size fits all" formula of the IMF has complicated economic problems of the debtor countries, instead of solving them.

The question that comes to mind is why did successive governments in Pakistan opt for the IMF programs? The reasons, in the opinion of Dr. Ishrat Husain, are as follows:

It can be concluded that political instability, economic corruption, large-scale budget deficits, balance of payment deficits, and increasing debt led to Pakistan's engagement with the IMF after 1988. The IMF provided different loans to Pakistan, all of which were accompanied by conditionalities. Most of the time, civilian governments resisted these conditionalities, causing a souring of Pakistan's relationship with the IMF. The relationship between Pakistan and the IMF improved after the 1999 coup, when General Musharraf took over the government. The main reason for this improved relationship was the military government's willingness to implement the IMF-imposed reforms.

Pakistan and the World Bank

Unlike the IMF, which provides only temporary balance of payments support, the World Bank (WB) provides long-term development assistance. While the IMF focuses on fiscal adjustments and macroeconomic framework, the WB concerns itself with issues such as trade policy, energy pricing, agriculture pricing, agricultural commodity prices, and cost recovery in agriculture. It works closely with the government on reform of the financial and banking sectors, privatization, and public sector expenditure priorities and it supports large social action programs. [82] The major functions of the Bank are to assist in reconstruction and development programs of the member countries; to promote private foreign investment by means of guarantees or participation in loans and other investments made by private investors; to promote the balanced growth of international trade; and to maintain an equilibrium in the balance of payments of member countries. [83]

The World Bank has been the largest provider of development assistance finance to Pakistan since 1952. The WB financed around 15 percent of the public investment program in this fifty-year partnership. During this period, the WB approved 242 loans, amounting to $13 billion, of which 146 are interest-free International Development Assistance (IDA) credits, i.e., they carry only a service charge of less than 1 percent with maturity in thirty-five years. These loans account for around 20 percent of Pakistan's total external public debt. Over 85 percent of WB funds have been used for expanding and rehabilitating physical infrastructure in the areas of transportation; Indus Basin irrigation and drainage system; the Pakistan Water and Power Development Authority (WAPDA) and the telecommunications network; primary education and health facilities; improving the national highway system and provincial roads; water and sanitation in major cities, towns, and rural areas; improvements to the port of Karachi; gas production, transmission, and distribution; and oil production and refining. The remaining 15 percent of the loans have been in the form of balance of payment adjustment loans in support of structural reform in the following areas: the banking system; the energy sector; fiscal and financial management; and public sector management. [84] The World Bank has remained actively involved in Pakistan in recent years. In 1997, the World Bank provided a loan of $250 million, for undertaking reforms in the banking sector. The goal of the World Bank is to encourage high quality loans and to make nationalized commercial banks more efficient and profitable. [85]

In June 1999, the World Bank approved a $90 million credit to support the Pakistan Poverty Alleviation Fund (PPAF). Its aim is to empower the urban and rural poor by providing them access to resources and services, such as micro-credits and grants for community-oriented infrastructure and capacity-building. [86] This WB-financed program is considered a success and was followed with an additional pledge of a further $368 million program announced in December 2003. [87] Furthermore, the WB is also assisting Pakistan in improving literacy and health facilities.

However, when General Musharraf came to power in October 1999, Pakistan's relationship with the World Bank, like that with the IMF, was also strained in the initial days. The WB initially showed reluctance to provide assistance to Pakistan. But when the military government restored some elements of democracy, the World Bank, like the IMF, likewise restored assistance to Pakistan.

The WB's assistance was on two levels. First, at the federal level, the WB aimed to support the homegrown structural reforms introduced by the military government. In June 2001, it provided a loan of $350 million to support the government's efforts to improve the tax system and repair battered investor confidence. [88] This amount was delivered as a Structural Adjustment Credit (SAC). After the successful completion of SAC-I, the World Bank approved SAC-II in 2002, which also focused on supporting government efforts for structural reforms. However, the SAC programs imposed additional conditionalities on the government of Pakistan, emphasizing:

Like the IMF, the World Bank also has a list of conditionalities attached to the lending. In the case of Pakistan, the World Bank conditionalities emphasized financial sector reforms and restructuring of the government. [89] If one analyzes the conditionalities imposed by the World Bank, it becomes clear that the WB, like the IMF, has emphasized financial discipline, "right-sizing" the government, tax reform, and privatization of public sector enterprises. The results of WB conditionalities are mixed. For example, in the power sector, the two big organizations, WAPDA and KESC, are still controlled by the government and are still operating at a deficit. In the financial sector, the WB has been more successful in imposing its conditionalities. For example, the banking sector conditionality has helped Pakistan privatize its nationalized banks.

In addition to the assistance at the federal level, the World Bank also encouraged reform of the provincial government sector. In July 2002, the World Bank approved SACs for two provinces (Sindh and North West Frontier Province) totaling $190 million. This credit was extended to support the provincial governments in their efforts for fiscal transparency, resource management, and provision of public services by local governments and communities. [90] Furthermore, at the provincial level, the WB assists Pakistan in community development through empowering people at the grass-roots level under a political devolution plan.

The World Bank has increased its influence in Pakistan as its assistance has increased. The WB disbursed $1.226 billion in fiscal year 2003—the highest level ever disbursed in the history of Pakistan. [91] The WB's Country Assistance Strategy (CAS) for fiscal years 2003-05 focuses on supporting Pakistan's homegrown reforms through a program comprised of advisory and analytical services; institutional capacity building; and demand-driven lending. [92] Presently, the World Bank is supporting Pakistan in the areas of macroeconomic stability, improving the investment climate, and poverty alleviation. Details of World Bank support to Pakistan are provided in Table 2.2.

Table 2.2: Current World Bank Lending to Pakistan (US$ million)
Active Loans/Credits total $1.226 billion as of June 2003

Source: World Bank, Pakistan Country Brief (June 2003), http://lnweb18.worldbank.org/sar/sa.nsf/ 083c4661ad49652f852567d7005d85b8/e446d9087f72838e85256b02006cbff4?OpenDocument.

As demonstrated by Table 2.2, the major portion of World Bank support goes to the financial sector. This covers lending for banking sector reforms, accounting and auditing reform, and reform of the Central Board of Revenue (CBR). The basic purpose for such assistance is to improve the financial system in Pakistan to bring about macroeconomic stability. The WB also provides assistance in the poverty alleviation sector, which is aimed at improving the level of human development in the country. In addition, the WB has especially emphasized improved governance.

Most of the recent lending by the World Bank is meant to carry out structural reforms and institutional development in Pakistan, improving the economic environment. The financial, structural, administrative, capital market, and tax reforms undertaken in the last three years have enabled Pakistan to absorb economic shocks. According to WB Vice-President Mieko Nishimizu, "Had these reforms not been pursued, Pakistan today would have seen a higher unemployment, higher poverty and higher inflation which in turn would have impaired not only the government and its economy, but the poor man, too." [93] Yet, these reforms have so far been unable to reduce poverty and generate employment in the country. These daunting tasks still remain.

A thorough and in-depth analysis of World Bank- and IMF-supported programs in Pakistan reveals mixed results. On the one hand, these programs have been helpful in bringing about macroeconomic stability in the country. WB-supported programs in Pakistan emphasize financial discipline, reduction in budget deficits, and poverty alleviation, and education and health improvements. Furthermore, the structural reforms introduced by the government under these programs have improved the governance level in the country. On the other hand, IMF- and WB-led programs have also created many economic problems for Pakistan. Critics argue that although WB- and IMF-supported programs are designed to alleviate poverty, they have in fact been exacerbating the problem because fiscal discipline has reduced government spending on social development and "right-sizing" in public sector institutions has increased unemployment. IMF and World Bank conditionalities are sometimes harsh for member countries. But as far as Pakistan is concerned, the IMF and the World Bank have been quite helpful in supporting government efforts to bring about macroeconomic stability in the country in the 1990s. The IMF and World Bank reforms after 1999 were major factors in strengthening Pakistan's economic environment.