IMF mission teams bring together economists and other specialist staff from different departments throughout the organization. Each team member specializes in one or more aspects of the work related to a particular visit to the country. In the fall of 2008, a team of staff came together to help Pakistan be better able to deal with the adverse economic conditions it was facing.

Pakistan had exited from Fund-supported programs in 2004, but the country’s macroeconomic situation deteriorated significantly in 2007 and 2008, when it was hit by both domestic and external shocks. “Adverse security developments, high oil and food prices, and global financial turmoil all buffeted the economy,” explains Hanan Morsy, former desk economist for Pakistan.

“These shocks, combined with policy inaction during the political transition and large central bank financing of the growing fiscal deficit led to slower growth, higher inflation, and a sharp deterioration of the country’s external position.”

Pakistan’s monetary and fiscal authorities were initially reluctant to request an IMF program, even after having implemented difficult policy reforms, including the elimination of fuel subsides. “They had publicly announced that they had graduated from Fund programs in 2004, and were counting on donor support that did not materialize,” notes Morsy. “Also, the public perception of the Fund in Pakistan was not positive at the time because conditionality under the previous Fund program was regarded as too harsh.”

A new Fund program

When the situation came to a head in the fall of 2008, a program was negotiated in about two weeks, under extreme time pressure. “Negotiations were difficult and intense,” Morsy recalls. “The Pakistani authorities are highly competent and sophisticated counterparts who have a vast experience negotiating Fund programs. Moreover, there were intense internal discussions within the Fund on the parameters of the program and the appropriate level of financing that would safeguard Fund resources. The team had to work around the clock to complete the negotiations quickly. Developments were followed very closely by media representatives, who were stationed outside the meeting room used for the discussions to inquire about the status of the negotiations.”

Shortly after the approval of the program, the Director of the IMF’s Middle East and Central Asia department, Masood Ahmed, stressed the urgency of the situation in an op-ed, noting that “Pakistan’s economy is at a critical juncture. Inflation has doubled and is now running at 25 per cent, the value of the rupee has fallen by a third since March [2008], and foreign exchange reserves are down to worrying levels." Overcoming these difficulties against the backdrop of the worst international economic crisis in sixty years “will require hard choices,” he added. But “while the key to success lies in the hands of the government and people of Pakistan,…the financing from the IMF will help to ease the path of adjustment.”

Ownership and “social conditionality”

The concern with ensuring an easier path of adjustment was central in the program negotiations. “The program has good ownership because it is based on homegrown policies, and the Fund has been responsive to the needs and concerns of the population, which has been hit by economic pressures, security concerns, and political uncertainties,” notes Paul Ross, the IMF’s Resident Representative for Pakistan at the time.

The program’s conditionality is limited to those areas that are “macro critical” (fiscal, monetary, and financial sector issues), but it places a strong emphasis on strengthening the social safety net—what Managing Director Strauss Kahn has called social conditionality. “The most tangible part of ‘social conditionality’ is that the fiscal program provides room for an increase in social safety net spending of 0.6 percent of GDP in 2008/09,” explains Udo Kock, desk economist for Pakistan. “The Pakistani government has also made ambitious plans to expand the social safety net further in the future, and flexibility has been built into the program’s targets to accommodate further capital and social spending if Pakistan can secure additional donor assistance. Another important objective of the program is to improve the targeting of existing social programs to vulnerable groups. The government and Fund staff have greatly benefited from the assistance of World Bank staff in this area.”

“This is a key component and an integral part of the program because garnering domestic political support is crucial to help minimize resistance to the economic adjustment effort, which unfortunately is unavoidable,” says Kock. The objectives of the program were well-framed by Ahmed in his interview when he said that the program aims to restore economic stability but do so in a manner “that ensures social stability and adequate support for the poor during the adjustment process.”

Prospects for recovery: “Easier said than done”

“Obviously, this is easier said than done,” continues Kock. “We are off to a good start as the Pakistani authorities have shown remarkable commitment to the program. The tighter fiscal and monetary policies have helped restore confidence: reserves have risen more than expected, the government has been able to obtain domestic financing from commercial banks instead of relying on the State Bank of Pakistan (SBP), and there are signs that inflation is slowing. But much remains to be done, and under the current circumstances it is not going to be an easy ride. Exports and growth will slow during 2009, and like other emerging markets, Pakistan could find it difficult to attract foreign investment. The country is also vulnerable to the economic slowdown in the Gulf region, where many Pakistani workers are employed in construction and tourism. But if the government remains committed to the program, we believe that the country will be able to weather the storm.”

“It is critical for us to effectively communicate the objectives of the program and explain them to the broad public through all available means, including the internet,” says Jaroslaw Wieczorek, who is also on the Pakistan desk. “The idea behind the visit of the Fund’s Middle East and Central Asia Department Director, Masood Ahmed, to Pakistan after the program was approved and the podcasts in English and Urdu featuring some of the team members was exactly that. The media noted the prominent role that the development of the social safety net plays in the program. This was seen as a noticeable change in the Fund's philosophy and as proof of its ability to adapt according to the circumstances.”