IMF programs:Who is chosen and what are the effects?

Introduction The article is written by Robert J Barro and jhong- wah lee in that article shows what is the purpose of IMF ?which country is the member of IMF ?characteristic of IMF ? What is IMF loan program? How country gets the loan and under what condition loan is given? The major influence to determine the effect of IMF loan on the economic development of the country. Do countries benefit from accessing the IMF loan or would countries be better off if this programs did not exist? The problem is that to differentiate the effect of IMF loan from the existing economic condition of the countries. The results provide instrumental variables for estimating the effects of IMF loan programs on economic growth. This instrumental estimation allows us to differentiate the economic effects of the loan programs from the responses of IMF lending to economic conditions. The estimation also shows that greater the IMF loan reduce the economic growth. In fact IMF does not have direct and significant effect to reduces the economic growth because the inflation ,government consumption does not change with IMF loan .IMF have significant effects on bureaucratic law and rule which create the circumstances that decrease the economic growth .IMF gives the loan with string that string have adverse effect on economic growth. The important question is that which countries gets the loan from IMF .Almost all developing countries get the loan once since 1970 except Botswana, Iraq, Malaysia, and Kuwait .IMF gives the loan to country on its quota in IMF.Loan is large and given to be more frequently if country have biggest quota and more national staff working in IMF or have good economically and politically relation with united state and European countries .the reason is that USA and European countries has largest quota and largest national staff at IMF and have greater power to influence the decision of IMF. Developed countries get loan to meet its short term financial deficit but most poor countries get loan to overcome long term financial problem. Developing countries get loan to support the economic growth but the IMF loan have negative effect on countries economic growth. Characteristics of the IMF IMF has the following characteristics IMF is the universal financial institution which gives loan to the country. Its membership rises from 44 states in 1946 to 188 at present. Member dont have equal voice ,member contribute a quota subscription on the basis of credit union deposit to the IMF For joining the IMF country pays 25% of its quota in the form of international currencies and remaining 75% in its own currencies Quota determine the voting power of the country ,more quota more the voting power

Each member have 250 basic votes plus one additional vote for each SDR 100000 of quota The initial quotas of the original members were determined at the Breton Woods Conference in 1944. The allocations were based mainly on economic size, as measured by national income and external trade volume. Quotas of new members also have been determined by similar principles. IMF exective boards have 24 director most of the power is given to the exective board. The IMFs Board of Governors delegates most decision-making power to the Executive Board, which has 24 directors. Eight directors are appointed by the largest eight shareholder which are the following largest share holder United States (37,149 million SDRs or 17.5% of the total IMF quotas),Japan (6.3%), Germany (6.1%), France (5.1%), the United Kingdom (5.1%), Saudi Arabia (3.3%), China (3.0%), and Russia (2.8%). The others are elected by 16 groupings of the remaining countries. The major shareholders have strong influences on the IMFs decisions. Many important decisions require special voting majorities of 85%. The United States alone and a group of three major Western European countries have veto power. Managing director traditionally a European but USA has the strongest power to use this power influence the decision of IMF On December 31 2002 IMF has 2681 staff member in which 763 assistant and other 1918 are professional, Two- Third of staff is economist. IMF basic role to in promote the exchange stability and provide short term loan to deal with current account deficit in advance country. The IMF has now evolved into the crisis manager and development financier for developing countries. IMF is to provide credits to member countries in balance-of payments the credit is provided in relation to a countrys quota the 1st loan is 25% of the quota .

Types of loan and mod of payment IMF provide loan to its member country which is based on the quota the country have .the 1 st loan amount is the 25% of the quota it is condition free loan ,after the 1st loan every other loan require a settlement between the IMF and country the reason is that IMF work on condition so the loan is given with some condition.the loan is given in insatalment which is released quarterly subject to policy and performance criteria. Stand-by Arrangements (SBA) SAB is the main IMF program to provide balance of payment to the member countries The typical Stand-By Arrangement covers a period of 12 years . Stand by arangement loan issue 522 times from 1970 to 2000 Payment of loan Stand by arrangement (SBA) loan are repaid between 3 1/4 to 5 years from the date of the borrowing.

Extended Fund Facility program (EFF) The extended fund facility program was started in 1997 to provide some large term loan for some long period .The EFF arrangement cover the period of 3 year. Extend fund facility loan issue 72 times from 1970 to 2000 Payment of EFF loan EFF loan payment cover the period 4 to 10 years Structure adjustment loan Both SAB and EFF did not cover very low income countries so IMF introduced new type of loan for poor countries on subsidized interst rate The Structure adjustment facility introduced in 1986 and Enhanced structure adjustment facility introduce in 1987 with the interest rate of 0.5% and repayment period over 5 to 10 year with 5 year grace period in grace period country does not pay instalment.In 1999 the enhanced structure adjustment replace with poverty reduction and growth facility Probably these activities should be viewed more as foreign aid, rather than lending or adjustment programs. The structure adjustment facility loan issue 38 times and enhanced structured adjustment facility issue 93 times from 1970 to 2000. REGRESSIONS FOR PER CAPITA GDP GROWTH The table 6 represents the data from different dimensions for economic growth; two variables i.e. independent and dependent are used. The dependent variable is based on 5 years growth rate of per capita GDP for several years. Whereas the independent variables are; Log of per capita GDP Measure of human capital Ratio of investment to GDP and the fertility rate Change in term of trade Institutional and policy variable

The sample is taken from 86 different countries and 391 observations are considered. The major aim is to study two measures IMF loan-GDP ratio IMF loan-participation ratio

The finding of the table 6 shows that the increase in the loan taken from IMF by 1% of the GDP would cause the economic growth to go down by 0.32% / year and in long term the effect would although be relatively less but it would still be there.

Whereas in case of loan-participation ratio the impact of IMF would still be negative such that the increase in participation of IMF program by 0.3% would cause a decrease in growth by 0.38% / year. Determination of IMF loan programs For economic detrminent of imf lending number of variable are used wich are viws as Effects on the imf willingness to supply loan Influence on a country demand for loan

Independent variable for the modle are Level of international reserve in relation to input Percapta GDP Total GDP Legged growth rate of per capita GDP OECD membership (dummy variable)

Depended variable for the modle are 1. Country share of IMF quota (It measure a country voting power at IMF) Hypothesis For a given economic condition higher quotas raise the probability and size of an IMF loan OLS (ordinary least sequre )is a method for estimation the unknown perametre in a linear regression modle. We ran OLS regression of IMF quota share in 2000 on the level of and per capita GDP in 1995 Results showed countries most over weighted on quotas were UK ,France ,Russia and Venezuela and countries most under weighted were on quotas China ,South corea ,Hongkong and Taiwan. Second institutional variable is 2. Share of countries nationals among IMF staff Hypothesis For a given economic condition a larger the national staff at the IMF raises the probability of IMF loan Another OLS regression was run this time for IMF staff share in 2000 on level of total and per capita GDP in 1995

Results Countries that were more weighted at IMF staff were UK ,France ,India,Canda and peru and under weighted were china ,Japan , Indonisha ,Taiwan and Hongkong . Our third point that countries which have high economic and trade relation with USA are more favorable to get loan For example :in cold war the IMF support the countries important to USA for foreign policy reasons which was exemplary in case of Mexico crises ,south Korea crises Hypothesis Greater political proximity to the US and major western countries raises the probability and size of IMF loan program We measured the economic proximity to the US by the the ratio of country biletral trade with the US to the country GDP. Hence apllied probit model since program approval is a binary choice variable and then used tobit modle to explain IMF program participation

Hence from the above research it was found true that only those countries can get IMF assistance which fall into the criteria described in the beginning i.e. firstly country should have larger share of quota secondly have more representation of national staff at IMF and thirdly have economical and political relations with United States and European countries. IMF implications on Pakistan To determine the effects of IMF loans on Pakistani economy, it is important to analyze the history of IMF loans to Pakistan briefly. Since 1988 when Pakistan became member of IMF, almost eleven loan arrangements (including the recent IMF loan of $7.6 billion in 2008) have taken place under various IMF facilities.Almost six loan arrangements were made during the regime of Benazir Bhutto including standby arrangement, Structural Adjustment Programs (SAP), Poverty reduction and Growth Facility (PRGF) and Extended SAP. Two IMF loan arrangements were made during Nawaz Sharif regime and two standby agreement and PRGF under Musharraf regime to stabilize the economy.

In spite of effective policy actions taken by State Bank of Pakistan, issues such as sharp depreciation of exchange rate, depletion of foreign exchange reserves of $5 billion till November 2008, inflation rate of more than 25%, and increase in import bill by 35.2% created immense challenges for the government and State Bank of Pakistan. Finally, the IMF loan of $7.6 billion was approved to help Pakistan come out of the liquidity and financial crisis with certain IMF conditions. The conditions posed by IMF mostly include the close monitoring, reduction of government spending, revision in tax collection policies, change in policy discount rate etc. to make sure that funds granted to the borrower country are utilized in optimal manner. For conformance to IMF conditions, the government is taking fiscal measures such as increase in general sales tax by 1%, increase in efforts in tax collection, removal of subsidies on domestic petroleum products, higher electricity tariffs and effective measures to solve the issue of circular debt. The IMF loans greatly impact the economic indicators and bring change in the regulatory framework which has negative impact on economy. IMF loans show immediate decline in GDP growth rate, increased tax revenues to GDP ratio, increased CPI, increased debt on the country and then restoration of the conditions back to their previous states because of the cancellation of loans in the later years. The cancellation of IMF loan agreements in the previous regimes along with the initial IMF loan effects created quite negative impacts on the economy as a whole which shows IMF loan have adverse effect on countries economy