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The impact of IMF Credit on the economic growth of Pakistan

Akademische Arbeit 2019 21 Seiten

BWL - Investition und Finanzierung

Leseprobe

TABLE OF CONTENT

1. INTRODUCTION
1.1 Background
1.2 Problem statement
1.3 Research question
1.4 Research objective
1.5 Hypothesis
1.6 Significance
1.7 Limitations
1.8 Research framework

2. LITERATURE REVIEW
2.1. Foundation of IMF
2.2. The contribution of members in IMF
2.3. Effects of IMF programs
2.4. Conditionality of IMF and its impact
2.5. Consequences of IMF programs on economic growth
2.6. IMF decisions
2.7. Role of IMF
2.8. IMF controversy with economic growth
2.9. Negative and positive effects of IMF on GDP
2.10. IMF lending practices

3. METHODOLOGY
3.1. Research design
3.2. Sample design
3.3. Technique

4. MODEL

5. ANALYSIS AND FINDINGS

6. RECOMMENDATIONS

7. CONCLUSION

8. REFERENCES

9. APPENDIX

Abstract

This empirical study was conducted to find the impact of IMF credit on the economy of Pakistan. Amid of 2018, Pakistan, being a developing nation is facing the critical situation for which it is left with no option other than knocking the door of IMF for borrowing credit in order to reform the up speculated economic crises. However, the studies have shown the controversial effects of IMF credit and its programs on the economies. Many critics believed that the programs of IMF exert significant effects on the economy, though this study was conducted to find the impact of IMF credit programs on the economy of Pakistan. The results depicted that the acceptance of the null hypothesis and rejection of the alternative hypothesis. Thus, the finding is that there is no impact of IMF credit programs on economic growth (GDP) of Pakistan since 1971. This proves that Pakistan can invest their borrowed loan in profitable projects to prosper the economic growth.

Keywords: GDP, economic growth, IMF credit, IMF programs, conditionality, effects

1. INTRODUCTION

Developing countries like Pakistan face the severe need of funds in order to support its weak economy. The current weak economy of the country is forcing Pakistan to seek a further loan from the IMF. However, this action would tend Pakistan to buy the equipment for its defense, also to invest in profitable projects in order to upgrade the economy. This is the scenario that depicts why Pakistan seek financial support from the international monetary fund. Contrary to the support, the conditions and after effects of IMF credit can be both negative and positive. Hence, many researchers from all over the world conducted the credit impact on the economy and claimed these effects as controversial. Thus. The research under consideration aims to find out the significant impact of IMF credit on the economy of Pakistan.

Pakistan, being a developing nation is facing the critical situation for which it is left with no option other than knocking the door of IMF for borrowing credit in order to reform the up speculated economic crises. Before approving the loan the government of Pakistan must convince the IMF for less harsh conditionality against the additional fund than its quota. However, it would be a challenging task to reach IMF to demand 300% more than its quota. So, it is significant to know that whether the government is consuming that loan in fruitful projects so that enough turnover would generate from the economy to pay back the acquired loan. Unfortunately, despite of the global growth objective of IMF, around 11 major conditions imposed by IMF including: excise duty on service as well as agricultural sector, less expenditure in development programs of public sectors, currency devaluation, ceasing gas and electricity subsidy, uniformity in the rates of dollar exchange rate and interbank, ceasing of financial intervention in stock market of Pakistan, raise markup rate on bank and bank transactions, ceasing of non- development expenditure under budget of defense, non-allowance of supplementary grants to the government sectors, reduction in the non-developing expenses of ministries.

1.1 Background

IMF is an international organization which gives financial aid and advice to its member countries. IMF was established after the end of World War II. IMF has become an essential entity to the growth of developing countries and to the establishment of financial markets across the world. IMF was established after the need arose to mitigate the economy from depressions and crises. World Bank is considered as the sister organization of IMF, though IMF is the largest funding lender in the world which is run by 186 member countries. IMF is a specialized funding agency of UN (United Nations). Thus, this membership can be given to any country who agrees on its foreign policy and its statuses.

IMF also has an essential role to create and maintain the international monetary system. Thus, it is striving to establish a system for international and foreign exchange transaction for the purpose to promote and flourish economic trade globally.

According to the viewpoint of Chapman, Fang, & Stone, (2017), the aim of imposing such strict conditions on borrower was to increase its economic growth and revenue. Additionally, there is both direct and indirect impact of IMF credit depending upon certain variables. However, macro-economic variables tend to increase the economic growth while the strict restrictions often lead to control of certain variables of economy aforementioned.

1.2 Problem statement

According to previous literature, the effects of IMF remain controversial (Przeworski and Vreeland, 2000). However, previous literature provided evidence that economies that adopt certain funds from IMF often seem in crises beforehand (Killick, Malik, Manuel, 1992). So, it is critical to research the after effects of adopting these funds on their economies as these effects are uncertain which is unsatisfactory. Many critics believed that the programs of IMF exert significant effects on the economy, though it is not explored yet whether these effects are fully favorable or harmful (Killick, Malik, Manuel, 1992). Thus, the research under consideration will enable the researcher to find out the nature of the impact of IMF credit on the economy of Pakistan along with the effective mitigation to diminish its effects.

1.3 Research question

The research question of the study under consideration is given below;

- What are the impacts of IMF credit on the economy of Pakistan?

1.4 Research objective

The research objectives of this empirical study are given beneath;

- To find out the positive impacts of IMF credit on the economy
- To find out the negative impacts of IMP credit on the economy
- To recommend constructive ways to mitigate the negative impact of IMF credit on the economy.

1.5 Hypothesis

- H1: There is a significant impact of IMF credit on the economic growth of Pakistan
- Ho: There is no significant impact of IMF credit on the economic growth of Pakistan

1.6 Significance

Pakistan has taken a lot of funding from IMF since last 50 years that has completely changed the cycle of economy' spending and savings because the government has to plan its economy by keeping the IMF loan return conditionality in concern. So, it is significant to know the impact of IMF credit and IMF program conditionality on the economy of Pakistan so that effective policies and ideas can be generated by the concerned individuals. It is essential to get awareness regarding the pressures and effects to exert on the economy because generally the credit loans are taken for the development of the economy often lead to the depreciation of the currency that can be led to inflation. Thus, the whole economic cycle is related to the credit.

On the other hand, this research will facilitate the students to pursue further research in the context of IMF credit. Also, it will be a great source of knowledge for the policymakers.

1.7 Limitations

There are certain limitations to the research under consideration. These limitations include the limited time span given by the supervisor. Furthermore, the access to the relevant information to the research is limited to the secondary data only. Lastly, the research under consideration will focus on the economic growth of Pakistan with respect to its GDP annually for 47 years.

1.8 Research framework

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2. LITERATURE REVIEW

The aim of this section is to illustrate the present literature supporting research under consideration entitled as “The impact of IMF credit on the Economic Growth of Pakistan”.

2.1. Foundation of IMF

In the early 1940s, an agreement named as Bretton Woods was signed by 44 countries which created the foundation of IMF in order to maintain the exchange rates for free trade worldwide. History revealed the incident of the collapse of the old exchange system. Thus, the new system was created with the purpose which included to provide the members to adjust their balance of payments without disturbing their national and international prosperity. Thus, this function led IMF to transform into an international organization from currency regulating authority. However, being an international organization IMF indulged in the national policies of third world countries since the substantial debt crises in the year 1982. Thus, in a decade only since 1974, the number of countries involved in IMF programs grew from 21 to 52. Now, there are approximately 182 members that can take out the debts from or eligible for repurchases from the established fund (Przeworski & Vreeland, 2000)

2.2. The contribution of members in IMF

According to Przeworski and Vreeland (2000), the member of IMF requires to contribute in the fund which is known as “Quota”. The size of the quota is directly related to the size of a country’s economy. Thus, the member country is eligible to draw from the fund up to 25% of its quota and if it requires to draw more than the 25% then the country has to make a special agreement from the IMF with which the IMF sets conditionality and specific policies that the member country has to fulfill in order to receive the credit installments. The author explained that these conditions more often contain the fiscal austerity i.e. to increase the taxes and reduce the government expenditures over a period of time, tightening of the monetary policy i.e. to raise the interest rates and offer fewer credits. Consequently, the study found that the IMF credit and its policies affect the economic growth either because of the desperateness of a country for foreign reserves or the country want to decrease the budget deficits through the use of IMF.

2.3. Effects of IMF programs

According to Przeworski and Vreeland (2000), programs of IMF are controversial. Most of the governments that seek the funding from IMF claim that these credit loans are for their betterment. On the other hand, some claim that these IMF programs are resistance towards economic growth. However, the fundamental goal of IMF institution is the stability of the balance of payments and exchange rate. Thus, the institution is concerned and concentrate on these two objectives. Studies have found that there is no effect of IMF programs on the inflation factor. However, some studies suggested the unclear effect of IMF program i.e. IMF credit programs reduce inflation.

The researcher explained that whether IMF programs affect the short-term goals or not, it affects the economic growth of developing countries. The managing director of the international monetary fund has set the economic growth as a primary objective. However, many researchers found that the effects of IMF programs on the economy are ambiguous. On the other hand, the researches of Killick (1995) and Conway (1994) have found that economic growth declines in the first year of the program but after that, the negative effects of the program start reducing gradually. The study of Conway (1994) suggested that the government should not enter into IMF program for experimenting with the results as it is an act of courage which is considered as a political will. However, some governments only go under the agreements of IMF when they recognize the conditions of their economy and have enough courage to swallow after effects of credit loan policies and conditionality.

2.4. Conditionality of IMF and its impact

According to Dreher et al. (2013), funding or bailouts are provided by the international monetary fund (IMF) is renowned for its conditions and policies. In return of the continues installment of borrowed loans from IMF, the government is obliged to comply with the policies and conditions; increase interest rates in the economy and closing deficits of the budget. Economist speculated that not all countries face same conditions and policies from IMF. Because, countries who appear to be advantageous and have closer connections to the main IMF shareholders, who dominate the IMF institution virtually, received lenient treatment as compared to those countries that are less beneficial and less important to them. These major shareholders are the United States, Japan, UK, Germany, and France. These shareholders pool off the cost and lend them to developing countries through IMF. However, the borrowing countries are more concerned towards the foreign exchange of these loans than any other crises that consider as important by these major shareholders.

Dreher, Axel, Eichenauer, and Gehring (2013) explains that the credit loan from IMF is not a prize. The loan is not provided in advance instead the government receives continue disbursement of loan and comply with the IMF policies and specific conditions against it, these policies continually reviewed on a quarter of the year. Thus, these compliance to the policies by the developing countries are the unfavorable decisions for the establishment or austerity of the economy. Amid of East Asian Financial Crises, in return of the continuous credit disbursement, IMF required contraction of fiscal and tight monetary policy from the borrowing developing countries. Hence, it has been said that the leaders of developing countries have complained about the conditionality of IMF for many decades. However, if the IMF credit would be given with such strict conditions then how come it be considered as the reward or premium by the member countries of United Nation Security Council. The researcher found that the political power is worth fighting for because the major shareholder has the authority to provide the favorable treatment to the developing countries that appear to be strategically significant for them (Dreher, Sturm, & Vreeland, 2015).

In the early 2000s, many studies have shown that the participation in the IMF program and lending of the IMF credit resulted in lower economic growth in the developing countries. However, some researchers also argued that despite any mechanism, IMF programs resulted in lower economic growth in the economies. This is due to the imposition of IMF conditionality which tends to increase the moral hazards. Also, countries who appear to be a temporary member of UNSC suffer the economic growth depending upon its certain level of confidentiality (Bueno de Mesquita and Smith 2010). According to the clarification of Bueno de Mesquita and Smith (2013) in their research, the main concern of the developing countries is not more money but they want easy to finance with less conditionality and return back policy. Moreover, according to Dreher, Eichenauer, and Gehring (2013), the aid from the UNSC member countries raise the bad policies and even the corrupt governments which ultimately reduce the economic growth of the country.

2.5. Consequences of IMF programs on economic growth

According to the viewpoint of Barro and Lee (2005), it is essential to know the results and consequences of IMF credit programs on economic growth and economic performance of developing countries. The credit made to developing countries by IMF in response to economic crises of that country. However, the researcher explained that it would also be unjustified to blame IMF credit programs for nonadjustable crises of the economy. Hence, in order to assess the impact and effects of IMF credit and its program, it is necessary to distinguish the cause and direction of the economic issues caused by the credit loan from effects of economic crises. Furthermore, when the borrowing countries are influential and beneficial for IMF, there is a greater possibility for the loan to be approved and to be larger. This is also affected by the size of the quota the country has contributed to IMF. Thus, the study found that countries with larger quotas get larger loans, more nationals' participation opportunity in IMF, and this greater loans ultimately exert a negative impact on the growth of the economy. Also, these larger loans affect the laws and democratic rules negatively. Thus, IMF credit programs reduce economic growth.

2.6. IMF decisions

The decision making the power of IMF has given to the executive board constitute of 24 number of directors by the IMF’s board of Governors. While, eight of them are elected by the major shareholders: United States, United Kingdom, Japan, France, China, Saudi Arabia, and Russia. Moreover, the other members by the groups of other remaining shareholders. Stone (2002) stated that the major shareholders have a significant influence on decision making of IMF. This decision making requires in every important related policy which needs 85% voting of the majorities. Thus, the United States and three major European countries have decisional and veto power. Also, among all the major shareholders, the United States has the strongest voice which sometimes also used to influence the decisions at IMF.

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Details

Seiten
21
Jahr
2019
ISBN (eBook)
9783346262707
ISBN (Buch)
9783346262714
Sprache
Englisch
Katalognummer
v933736
Institution / Hochschule
GC University
Note
95.0
Schlagworte
credit pakistan

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Titel: The impact of IMF Credit on the economic growth of Pakistan