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G. Srinivasan

The lesson the Fund should draw is that it should refrain from providing resources in support of a programme that is not genuinely owned by the authorities and when there is not a strong commitment to a core set of necessary adjustment and reform measures. This bears testimony to the limited effectiveness of the IMF-supported programme in Pakistan.

NEW DELHI, May 27

THE Independent Evaluation Office (IEO) of the International Monetary Fund (IMF), established in July 2001 with India's former Finance Secretary, Dr Montek Singh Ahulwalia, as its Director, has come out with its first annual report, highlighting the results of the prolonged use of fund resources (UFR).

Pakistan is one of the case studies with the IEO pronouncing that Islamabad's prolonged UFR points to "a limited effectiveness of its IMF- supported programmes".

Separating Pakistan's economic history over the last three decades in two periods, IEO noted that from 1970 to the late 1980s, Pakistan enjoyed an impressive growth performance (6-7 per cent a year on average). Fiscal and external imbalances were large during most of that span, but unlike in many other developing countries, they did not lead to hyperinflation or to a debt crisis, which led Pakistan to be sometimes adverted to as a "development puzzle".

But the scenario worsened distinctly from the late 1980s onward, as growth faltered and the continued failure to rein in the fiscal and current account deficits led the debt to become unsustainable. While Pakistan made an intensive use of IMF resources during both periods, it became continuously dependent upon IMF-supported programmes only in the second one.

Pakistan had four one-year Stand-By Arrangements (SBAs) with the IMF between 1972 and 1977. They were followed by a three-year extended arrangement in 1980, which was to provide close to SDR 1.3 billion over three years.

The GDP growth fell to a little under four per cent a year over 1988-2000, compared to almost six per cent in the two previous decades, with a sharp slowdown in capital formation. Export growth slowed to fewer than three per cent a year, against over 10 per cent in the 1970s and 1980s. Poverty rose steadily, according to most measures, after two decades of decline, and by the end of the 1990s close to 30 per cent of the population lived below the poverty line, against less than 20 per cent a decade earlier. Only a modest correction of financial imbalances was scored over the period.

Inflation was halved to four per cent by 2000, but the fiscal deficit declined only from 7.7 per cent of GDP in 1989 to 5.2 per cent in 2000. The current account deficit fluctuated around four per cent of GDP. Gross international reserves fell as a share of imports over the period to fewer than one month in June 2000, the symbolic threshold of three-month import coverage was reached only once; the coverage of effective short-term debt by official reserves averaged just over 15 per cent over 1991-2000.

Stating that economic institutions do not seem to have benefited from prolonged UFR, the IEO said the 1990s had been characterised as an era of "institutional decay" in Pakistan; this was manifested through increased political interference in the management of public enterprises.

Hence, there is ample recognition — both in the IMF and in Pakistan — that IMF- supported programmes should have put much stronger emphasis on institutional reforms, particularly in tax administration, the banking sector and public enterprises, all of which have only begun to be addressed recently.

IEO appraisal speaks of how some of the policy prescriptions embedded in IMF-supported programmes turned out, owing to implementation difficulties, to have unintended side-effects. Thus attempts to meet the fiscal deficit targets led to the frequent adoption of ad hoc tax increases and expenditure cuts in the course of the programme.

"Given the inflexible structure of expenditure (due to the large share of military spending and the weight of interest expenditure) cuts inevitably fell on development and social spending, which resulted in a marked decline in public investment from about 10 per cent of GDP in 1992 to 4.25 per cent in 2000", IEO said.

In sum, the IEO contends that programme design was affected by pressures to over promise and downplays risks with the programmes not always focussing on the right issues. The lesson the Fund should draw is that it should refrain from providing resources in support of a programme that is not genuinely owned by the authorities and when there is not a strong commitment to a core set of necessary adjustment and reform measures. Perhaps this bears testimony to the limited effectiveness of the IMF-supported programme in Pakistan.

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