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Monday, October 3, 2022

Why is Pakistan always going to IMF?

The International Monetary Fund (IMF) was founded in 1944 in the aftermath of the Great Depression of the 1930s. The goal of the 44 founding members was to create a framework for worldwide economic cooperation. It now has a membership of 190 countries, with workers from 150 of them.

The 190 countries that make up the IMF’s near-global membership govern and hold it accountable. The Board of Governors sits at the apex of the organization’s hierarchy. The IMF’s day-to-day operations are managed by a 24-member Executive Board that represents the whole membership and is assisted by IMF personnel.

The Managing Director is the IMF’s chief of staff and the Executive Board’s chairman. Four Deputy Managing Directors work alongside him.

Who finances IMF?

The money that countries pay as capital subscriptions (quotas) when they join the IMF is the IMF’s major source of funding. Each IMF member is given a quota that is based on its relative role in the global economy. When countries get into financial difficulties, they can borrow from this pool.

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How IMF works?

The IMF provides loans to member nations that are experiencing or may be facing balance of payments challenges, including emergency loans. The goal is to assist them in rebuilding their international reserves, stabilizing their currencies, continuing to pay imports, and restoring conditions conducive to strong economic growth while addressing underlying issues.

The International Monetary Fund (IMF) keeps a close eye on the international monetary system and global economic trends in order to identify risks and make policy recommendations for growth and financial stability. The Fund also conducts a regular health check of its 190 member countries’ economic and financial policies. In addition, the IMF identifies potential threats to its member countries’ economic stability and advises their governments on potential policy changes.

Governments, including central banks, finance ministries, revenue administrations, and financial sector supervisory agencies, receive technical assistance and training from the IMF. These capacity-building initiatives are focused on the IMF’s core areas of competence, which range from taxation to central bank operations to macroeconomic data reporting. Cross-cutting concerns such as income inequality, gender equality, corruption, and climate change are also addressed through such training.

Why Shehbaz government is failing Pakistan on both internal and external fronts

Pakistan needs IMF bailout today:

It cannot be overstated how important the IMF program is for Pakistan to reverse its economic decline and remain viable. Pakistan will need at least $37 billion to cover its debt and other obligations next year.

As things stand, Pakistan’s inordinate delay in finalizing a new staff-level agreement with the IMF has already shut down global bond markets and other sources of funding — bilateral, multilateral, and commercial — while the latter’s depleting foreign exchange stock is wreaking havoc on the exchange rate, with the rupee falling to 210 to the dollar on Monday.

As the IMF’s largest shareholder, the United States wields considerable power over the organization, and its backing might be beneficial to Pakistan. Official confirmation is still pending, though the finance minister sounded optimistic yesterday when he suggested an agreement might be reached in a matter of days.

Pakistan’s credit rating outlook has been reduced from stable to negative by Moody’s Investors Service. The IMF is the only way out of the current economic catastrophe.

The new coalition government led by Shehbaz Sharif wants the Fund to not only resume payouts, but also to enhance the size and duration of the package.

Despite the PTI’s mass protests, the coalition administration has made a few difficult decisions, such as hiking fuel and power rates, though with a delay of many weeks and huge losses. Nonetheless, it has failed to persuade the Fund of its next fiscal year’s budget, owing to exaggerated revenues and understated expenditure estimates that cast doubt on the achievement of the targeted primary surplus (or savings from revenues after meeting all expenses for the year, excluding interest payments) of Rs152 billion.

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If the government’s financial team finds itself in a tough place now, or in the future, it has only itself to blame for the budget’s long-term viability.

According to reports, the administration must approve its budget through parliament before or on June 28 in order for it to take effect on July 1 as mandated by the Constitution. This necessitates the government reaching a definitive agreement with the IMF as soon as possible so that the agreed-upon measures can be protected in the updated budget and the expected financing from the IMF can be shown in the documents.

While the government must reassess its budget in order to demonstrate to international creditors that it has what it takes to get its fiscal house in shape, the IMF must recognize that delaying the signing of the agreement isn’t benefiting anyone. The longer it takes, the more out of control the economy will become.

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