Why in the News?
India stresses the need for stringent monitoring during a recent review of the loan to Pakistan when the new PM Shehbaz Sharif seeking additional funding support from the IMF.
Background:
- Taking a tough stance, India has batted for “stringent monitoring” of any emergency funds provided by the International Monetary Fund (IMF) to Pakistan, stressing that such funds must not be redeployed towards defense bills or repayment of loans from other countries.
- India’s position was put across to the IMF’s executive board during a recent review of an ongoing $3 billion short-term Stand-By Arrangement (SBA) granted to Pakistan by the Fund.
About International Monetary Fund (IMF):
- The IMF works to achieve sustainable growth and prosperity for all of its 190 member countries.
- It does so by supporting economic policies that promote financial stability and monetary cooperation, which are essential to increase productivity, job creation, and economic well-being.
- The IMF is governed by and accountable to its member countries.
Aims and Objectives:
- Furthering international monetary cooperation;
- Encouraging the expansion of trade and economic growth;
- Discouraging policies that would harm prosperity.
Functions of IMF:
- Policy Advice: As part of this process, which takes place at the global and regional levels, the IMF identifies potential risks and recommends appropriate policy adjustments to sustain economic growth and promote financial stability.
- Financial Advice: The IMF provides financial support to countries hit by crises to create breathing room as they implement policies that restore economic stability and growth. It also provides precautionary financing to help prevent crises. IMF lending is continuously refined to meet countries’ changing needs. The causes of crises can be domestic, external, or both.
- Domestic factors include inappropriate fiscal and monetary policies, which can lead to large current account and fiscal deficits and high public debt levels; an exchange rate fixed at an inappropriate level, which can erode competitiveness and result in the loss of official reserves, and a weak financial system. Political instability and weak institutions also can trigger crises.
- External factors include shocks ranging from natural disasters to large swings in commodity prices. With globalization, sudden changes in market sentiment can result in capital flow volatility. Both are common causes of crises, especially for low-income countries.
Significance of IMF monitoring:
- Essential in identifying risks that may require remedial policy adjustments.
- International cooperation on these efforts is critical in today’s globally integrated economy, in which the problems or policies of one country can affect many others.
- Focuses on individual countries or bilateral surveillance, and the global economy or multilateral surveillance.
Conclusion: There is uncertainty around Pakistan’s ability to quickly negotiate a new IMF program after the current one expires in April 2024 remains very high. Pakistan’s government liquidity and external vulnerability risks will remain very high until there is clarity on a credible longer-term financing plan
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