By Syed Fahad Hassan
When it comes to payment of International debt or warding off foreign exchange risk, Countries tend to take debt/ loan from IMF through the use of interest bearing International Reserve Asset called Special Drawing Rights (SDR). It acts as a unit of account for IMF and other institution as it is used by IMF to prepare its financial statement denominated in SDR and used in financial arrangements involving International Loans.
SDR basically supplements its member countries official reserves and thus boosts liquidity. The total SDR allocation by IMF currently as of year 2016 stands at 204.1 Billion SDRs which is equivalent to US $285 Billion. The growth in the allocation of SDR from 1970 to 1979 was 130%, however from 1979 to 2016 the growth is 854%, which is indeed a major leap in response to the rising global need for international reserves in the wake of Global Financial Crisis 2007-2008, therefore such need was met through new allocation of SDRs which provides access to freely usable currency, which is in turn used by countries to meet their BOP needs and adjust their Foreign Reserve composition Therefore, it is safe to say that SDR is neither a currency nor a claim on the IMF but is rather a potential claim on freely usable currency.
On September 1st, 2013 the Government gave 4,393 million SDRs and received $6.75 billion for a period of three years under the extended fund facility, as result when $6.75 billion were injected into the country in the form of IMF loan for a period of 3 years the situation of the country’s Foreign reserves improved over the period of 3 years and reached an all-time high of 23.619 USD Billion as depicted by the graph above. Although borrowing to get back on the track is one thing, but borrowing to pay back debt is a mistake, which is evident in case of Pakistan; it’s like taking debt over debt, in this process one is not getting rid of debt but taking on more debt according to statistics; Pakistan has taken on Debt from IMF 12 times since 1988 while other countries in the region pale in comparison, take a look at the graph below to get an idea: –
All the 12 facilities signed by Pakistani Government with IMF had two objectives, firstly that the country is to improve its Fiscal position by levying taxes to promote documentation of the Economy and Enhance the Revenue base. Secondly to increase Foreign Exchange reserves in order to render exports more competitive and eliminate political influence over the Currency.
The borrowing trend as depicted above over the years show that Government borrowing policy is too liberal to the extent that it is rendering every individual of the nation a debtor to the creditor (IMF-USA).
Typical IMF conditions comprise of contract based macroeconomic policies, Inflation targeting policies, Financial deregulation and Increased openness to international capital flows, Trade liberalization and Privatization of public-sector enterprises (e.g. to Sell off the Government operated institutions so that Foreign Corporation could gain sustainable ground in the Country, What East India Company did is something not Disremembered).
Therefore, the IMF do not promote self-reliance, Increases the fragility of the economy thus leading to short-term stabilization; as prerogative of where to cut spending is generally considered a better and longer lasting route to fiscal adjustment than raising taxes. Finally, Premature termination of the Arrangement due to non-compliance on Pakistan’s leads to serious issues namely economic instability, loss of credibility, flight of capital, reverse flow of resources and even deferment of in-pipeline assistance. A point to ponder even after signing loan contract with IMF 12 times still the country has issues of compliance? Is the Funds being utilized optimally or is devoured by Corruption?