Question 20N.2.SL.TZ0.3a.ii

Pakistan and the International Monetary Fund

1. Pakistan is a low-income country with a rapidly growing population and widespread poverty. As of 2019, it has a large budget deficit due to high levels of military spending and high costs of debt servicing (35 % of the deficit is interest payments). It is also experiencing a widening current account deficit and is heavily dependent on foreign aid.
   
   
2. Pakistan’s government is negotiating a loan from the International Monetary Fund (IMF). Amongst its conditions, the IMF has said that the government must decrease private-sector regulation such as regulations on financial institutions. The government must also sell state-owned enterprises and government revenue must be raised by increasing indirect taxes and improving tax collection systems. Furthermore, the IMF insists that the government cuts its spending further.
   
   
3. The government has stated that the IMF loan is essential to restore confidence in Pakistan’s economy. This would help to attract foreign direct investment (FDI) to encourage economic growth and help break out of the poverty cycle. High debt levels and slowing economic growth in 2018 discouraged FDI. The IMF loan is also needed to help persuade other multilateral lenders such as the World Bank and the Asian Development Bank to provide and extend loans.
   
   
4. In the past, Pakistan has had 21 agreements with the IMF with limited success—any balance of payments or external debt improvement has been temporary. The IMF states that this is because Pakistan has not always met the conditions of the loans, while other stakeholders argue it was the lack of support given to Pakistan to implement the conditions and to allocate the loan funds appropriately.
   
   
5. Economists say that there needs to be a focus on improving human capital to provide the large number of young people entering the labour force with the skills to grow businesses. The quality of education needs to improve and to be combined with an effort to provide girls with greater access to education—female participation in the labour force is the lowest in the region.
   
   
6. The World Bank has financed education and infrastructure, such as renewable energy projects, in poor regions of Pakistan. However, critics of the World Bank argue that the projects are not making a significant difference and the construction of hydroelectric dams leads to environmental damage.
   
   
7. The government believes that the macroeconomic concerns of the IMF should be addressed first, and poverty issues in Pakistan can be dealt with later.

[Source: © International Baccalaureate Organization 2020.]