Impact of IMF Funding on Pakistans economy

Impact of IMF Funding on Pakistans thriftinessIntroductionThe support by International Monetary Fund (IMF) to developing countries has al personal manners raised a debate on its positive and negative mends on the economy of the creditor country. Pakistan has an wholly-inclusive history of funding from IMF starting from 1958 to 2004 in various time spans and now the stream arranging from 2008. This study analyzes the electric shock of IMF funding on Pakistan. Although there has been admonition regarding both issues of policies and the funding impact entirely the focus of this inquiry is to study the impacts and not to discuss or criticize the policies of IMF.The IMF works to foster global step-up and economical stability. It pop the questions form _or_ system of government advice and financing to members in economic difficulties and also works with developing nations to help them achieve macroeconomic stability and flash back poverty. It is working to foster global fis cal cooperation, secure financial stability, facilitate international trade, promote high handicraft and sustainable economic harvest, and reduce poverty around the world.Although monetary fund provides financial assistance to the developing countries but its role in economic prosperity has been highly criticized from the last a few(prenominal) years due to its relent slight policies and restrictions imposed on the borrower country. Under current agreement, IMF imposes 11 main conditions on Pakistan which includes introduction of the Central Excise Duty on service and agricultural sector, decrease in the expenditures on Public Sector Development Program, devaluation of rupee, freezing of non-development expenditure under the defense budget, non-provision of supplementary grants to government departments, ending subsidy on suck and electricity, reduction in non-development expenditure of civil departments and federal ministries, affix in markup charge per unit of banks and on inter-bank transactions, uniformity in the inter-bank and open market dollar deepen rate and stoppage of government financial intervention in stock markets.The main aim of IMF behind imposition of policies is to subjoin the revenues of the borrower country. But some studies separate that it affects the economy both conditionly and indirectly. Directly it imposes impact in the sense of control of certain variants on which it put restrictions and indirectly with regard to the consanguinity of these variables with former(a) macroeconomic driving variables that drives the economic growth.The matter here is not the IMF funding but the policy impositions that could impact the economic growth. IMF provides funds for the three major(ip) knowledge bases, to reduce deficit of fiscal account and current account and to gain the revenues. The question here arises that whether the increase in taxes, elimination of subsidies and development projects exit help rising slope the economy or causes the real gross domestic product to fall from the expected value through with(predicate) increased inflation.An extensive research has been done to address the issue of IMF policies and impact on economy of the borrower country but there ar conflicting imports derived by different researchers due to particular conditions related to that country, the researches that tried to study all countries under IMF program also reveals contradicting returns. This study focuses specifically on Pakistan so that particular returns could be revealed that IMF funding is pouring on Pakistans economy.Problem debateThe problem statement of research is Impact of IMF funding on Pakistans economy. Major variables that are used in this study include IMF funds and macro economic variables that are the indicators of an economy i.e. real GDP, employment rate, current account balance, balance of stipends and FDI.ObjectivesThe objectives of our study areTo study how IMF funding is putting its effe ct on economy of Pakistan.To reveal that whether there is any prodigious relationship between IMF funding and economic growth and if there is a relationship then whether it is positive or negative.To draw conclusion and make recommendations through analysis that whether Pakistan should borrow from IMF or seek other ways of borrowingSignifi backceAlthough a number of studies establish addresses the stated issue but these researches mostly carried out aggregate affect taking into account all the countries under IMF program. The Research that we are going to guide on will try to find out impact of IMF funding on economic growth in particular scenario of Pakistan.DelimitationOur scope of study will be limited to the impacts on Pakistan economy. More over the variable that we will use for analysis of economic growth will be only major macroeconomic variables which are majorly contributing towards the growth factor. In our study we are not considering the political instability and inco nsistency in the prevailing policies and other cordial environmental issues that could impact economic growth side by side.Chapter 2Review of Related LiteratureThis chapter includes the work done in the very(prenominal) area by other researchers. It put a glance on studies of some of the researchers along with their proposed conclusionsLiterature reviewIMF funding has been one of the most debated issues from the last few years in terms of its policies, restrictions and its impact on the economy of countries under IMF programs. A number of studies have been done in this regard. However the results of these studies are contradicting make this issue still deba carry over. Recent studies have produced mixed and sometimes puzzling results regarding the impact of IMF programs on a nations balance of payments, current account balance, foreign direct investment, real GDP, per capita income and long-run economic growth.Martin Feldstein (1998) argues that the IMF required excessively larg e reductions in government deficits and restrictions on monetary policy. These restrictions resulted in substantial increases in tax rates, lodge in rates and increase in current account deficit. Feldstein argues that Asian economies have experienced a recession that worsened their economic problems as a result of these policy changes. Feldstein argues that many of the mandated reforms involve unjustified interference with national autonomy and have little or no relationship to the goal of resolving the payment problem. He notes that it would have been better to allow more time for negotiations between borrowers and lenders before providing IMF loans to a country experiencing payment problems.Ho in that location is no hearty Impact on the current account deficit by increase presidency economic consumption through IMF Funding.H5 There is probatory Impact on the current account deficit by change magnitude governing body Expenditure through IMF Funding.Doug Bandow (1999) argues that the existence of IMF bailouts creates a object lesson hazard problem that encourages countries to not solve their sound problems. He suggests that all nations would benefit if healthy economies quarantined sick economies instead of providing economic assistance. Bandow argues that IMF assistance programs increase risk for healthy economies and do not provide long-term benefits for troubled economies. He notes that most IMF borrowers have received aid for a decade or more.Jensen (2004) suggests that international capital markets perceive IMF intervention as a negative development. Regardless of factors driving their decisions, Jensens research provides strong evidence that developing countries pay a serious price when they take advantage of IMF assistance. His research strongly reveals a negative relationship between IMF funding and foreign direct investment in the country. According to him investors dont perceive this funding in a positive way that why reducing net investmen t train in the country and as a result hindering economic growth. For impact of IMF on FDI following supposition is developedHo There is no evidential Impact on the FDI by increasing governing Expenditure through IMF Funding.H1 There is significant Impact on the FDI by increasing politics Expenditure through IMF Funding.On the other hand there are a number of researchers like Dicks Mireaux (2000), who have found strongly positive economic growth effects of IMF funding. These researches found that there is appositive impact of IMF funding on the economy. While there are also studies which concluded that are no significant effects of IMF on the economy of a country under IMF agreement like, Hardoy(2003) and Hutchison (2004), who argue that IMF funding does not pour any significant impact on the economy of the borrower country. Mireaux argue that economy grows due to the increased tax revenues. succeeding(a) hypothesis has been developed between tax revenue and IMF funding.Ho The re is no significant Impact on the Tax Revenue by increasing Government Expenditure through IMF Funding.H3 There is significant Impact on the Tax Revenue by increasing Government Expenditure through IMF Funding.Nunnenkamp(1999) in his article discussed that IMF is under serious attack as critics blame that IMF bestow lead to financial crisis and suggests to stop IMF funding also the researcher discussed the consequences of ending the lending ODriscoll (1997) in his article has conducted the descriptive research about the IMF policies towards developing countries by keeping the focus on USA economy. The Policy making of IMF for the developing countries are without any backing of historical decisions taken by the developing countries in past. Thus the financial crises and current account deficit crises is mainly attributed to such policy making. The researcher has give example of Asia in which case the above discussion is particularly true which roots in 1995. The IMFs handling of th e Mexico crisis firmly established moral hazard in international lending and sowed the seeds for the Asian crisis. Thus far, IMF policy in Asia largely repeats the policy mistakes in Mexico.Gina (2007) indicates in his article that the reforms enacted by coition in USA are an important counterbalance step toward reforming the IMF. Even more important than the reforms, however, was the congressional debate over IMF funding. That debate focused direction on the process and Substance of IMF policymaking and even questioned the need for that organization in the post-Bretton Woods world.Przeworski and Vreeland (2000) Using a bivariate, dynamic version of the Heckman selection model, we figure the effect of participation in International Monetary Fund IMF programs on economic growth. We find evidence that governments enter into agreements with the IMF under the pressures of a foreign reserves crisis but they also bring in the Fund to shield themselves from the political costs of adjus tment policies. Program participation lowers growth rates for as long as countries remain under a program. Once countries leave the program, they grow faster than if they had remained, but not faster than they would have without participation. So for the relation between IMF and GDP following hypothesis are developedHo There is no significant Impact on the GDP by increasing Government Expenditure through IMF Funding.H1 There is significant Impact on the GDP by increasing Government Expenditure through IMF Funding.The work outs of Barroa Lee (2005) shows that a higher IMF loan-participation rate reduces economic growth. IMF lending does not have significant effects on investment, inflation, employment, government consumption, and international openness. However, IMF loan participation has small negative effects on democracy and the rule of law.Ho There is no significant Impact on the Employment by increasing Government Expenditure through IMF Funding.H2 There is significant Impact on the Employment by increasing Government Expenditure through IMF Funding.Chapter 3Research MethodologyThis chapter includes the theoretical model, data assembling technique and methodology approach used for the analysisTheoretical modelEconomicGrowthReal GDPIMF FundingEmploymentFDI RRevenueCurrent grade BalanceData collectionSecondary source for the data collection has been used in this research. For this purpose most of the data will be store from the Economic Survey of Pakistan, international monetary fund web site and state bank of Pakistan website.The dependant variables that have been used to analyze the economic growth include balance of payment, current account balance, real GDP, rate of employment and foreign direct investment. These are the major variables that are the determinants of economic growth of a country. The independent variable is the amount of funding by IMF.Data analysisRegression analysis is used for analyzing the impact of IMF funding on Pakistans econom y. Data is canvas using SPSS. Data for the IMF funding in Pakistan is in detail belowYEARSIMF FUNDING1973-19745271974-7519901975-7619871976-7724971977-782321978-7934061979-806441980-8137891981-8260791982-8372661983-8428122000-01354002001-0265460Chapter 4Data Presentation and FindingsThis chapter includes the data which has been used for the analysis, canvas results and the findings that follow through the analysisData presentation and findingsFollowing is the detailed data used for the analysis and the findings of the regression analysis. The data is presented separately for each variable used as the measure of economic growth of the country.IMF funding and GDPData Analysis for First guessHo There is no significant Impact on the GDP by increasing Government Expenditure through IMF Funding.H1 There is significant Impact on the GDP by increasing Government Expenditure through IMF Funding.IMF FUNDINGGDP1974527384391974-751990399301975-761987412291976-772497424011977-78232456791978-7 93406482041979-80644517361980-813789550481981-826079590121982-837266629751983-842812659682000-01354001805002001-0265460212200FindingsTo test the hypothesis, linear regression analysis used. The results of regression of One independent variable (IMF Funding) against GDP (dependent variable) can be seen in the following output. sit around thickModelRR SquareAdjusted R SquareStd. Error of the Estimate1.971.943.93714025.2195a Predictors (Constant), IMF FUNDINGanalysis of varianceModel tot of Squaresdf spurious SquareFSig.1Regression35481741865.974135481741865.974180.379.000Residual2163774597.71811196706781.611Total37645516463.69212a Predictors (Constant), IMF FUNDINGb aquiline inconstant GDPCoefficientsUn standardize Coefficients regulationized CoefficientstSig.ModelBStd. ErrorBeta1(Constant)43492.6014451.5639.770.000IMF2.861.213.97113.431.000a low-level protean GDPInterpretation of analysisThe analysis of variance table shows that the F value of 180.379 is significant at the .00 0 aims. Degree of Freedom column in the table, the first number represent the number of free-living Variable (1) the endorsement number (13) is the data collected for total number of years (N), minus the number of Independent Variable (K) minus 1 or 11=(N-K-1) or (13-1-1)= 12. The F statistics produce (F= 180.379) is significant at the .000 levels. Which shows that Model validity is significant at 0.000 level of significance.What the result mean is that 94.3 per centum of variance (R square) in increase in GDP has been significantly explained by increasing Government Expenditure by way of IMF Funding (Independent variable) with standard error of estimate of 14025.2195. Standard error of estimate shows amount falls outside the regression line or shows standard aberrancy from mean. There is .000 pct or less dislodge of this is not memory true. There is correlativity of 0.971 (denoted as r=0.971) between IMF Funding (Independent variable) and GDP (dependent variable) with level of significance 0.000. so there is positive relationship between the two variables and luck of this is not true is zero percent or less. That is 100 percent of time we would expect that this correlation to exist. There is a beta value of 0.971, which shows that 97.1 percent chance of making TYPE II error if null hypothesis is accepted when it is false. At the same time Un standardized coefficient B= 2.861 indicates that the value of GDP increase by 2.861 unit for a one unit increase in Government Expenditure by IMF Funding. What the result mean is that t value 13.431 significant at 0.000. Thus hypothesis 1 is substantiated.IMF funding and employment rateData Analysis for Second HypothesisHo There is no significant Impact on the Employment by increasing Government Expenditure through IMF Funding.H2 There is significant Impact on the Employment by increasing Government Expenditure through IMF Funding.YEARSIMF FUNDING transaction1973-197452719.761974-75199020.31975-76198721.081976-7724 9721.891977-7823222.731978-79340623.621979-8064424.151980-81378924.71981-82607925.271982-83726625.851983-84281226.42000-013540037.512001-026546038.29FindingsTo test the hypothesis, linear regression analysis used. The results of regression of One independent Variable (IMF Funding) against Employment (dependent variable) can be seen in the following output.Model SummaryModelRR SquareAdjusted R SquareStd. Error of the Estimate1.912.832.8172.5175a Predictors (Constant), IMF Fundinganalysis of varianceModelSum of SquaresdfMean SquareFSig.1Regression345.3181345.31854.485.000Residual69.717116.338Total415.03512a Predictors (Constant), IMF Fundingb Dependent Variable EMPLOYMENTCoefficientsUnstandardized CoefficientsStandardized CoefficientstSig.ModelBStd. ErrorBeta1(Constant)22.636.79928.328.000IMF2.823E-04.000.9127.381.000a Dependent Variable EMPLOYMENTInterpretation of analysisThe ANOVA table shows that the F value of 54.485 is significant at the .000 levels. Degree of Freedom column in t he table, the first number represent the number of Independent Variable (1) the second number (13) is the data collected for total number of years (N), minus the number of Independent Variable (K) minus 1 or 11=(N-K-1) or (13-1-1)= 12. The F statistics produce (F= 54.485) is significant at the .000 levels. Which shows that Model validity is significant at 0.000 level of significance.What the result mean is that 83.2 percent of variance (R square) in increase in Employment has been significantly explained by increasing Government Expenditure by way of IMF Funding (Independent variable) with standard error of estimate of 2.5175. Standard error of estimate shows amount falls outside the regression line or shows standard deviation from mean. There is .000 percent or less chance of this is not holding true. There is correlation of 0.912 (denoted as r=0.912) between IMF Funding (Independent variable) and Employment (dependent variable) with level of significance 0.000. So there is positiv e relationship between the two variables and probability of this is not true is zero percent or less. That is 100 percent of time we would expect that this correlation to exist. There is a beta value of 0.912, which shows that 91.2 percent chance of making TYPE II error if null hypothesis is accepted when it is false. At the same time Un standardized coefficient B= 0.00283 indicates that the value of Employment increase by 0.00283 unit for a one unit increase in Government Expenditure by IMF Funding.What the result mean is that t value 7.381 significant at 0.000. Thus hypothesis 2 is substantiated.IMF funding and tax revenueData Analysis for Third HypothesisHo There is no significant Impact on the Tax Revenue by increasing Government Expenditure through IMF Funding.H3 There is significant Impact on the Tax Revenue by increasing Government Expenditure through IMF Funding.YEARSIMF FUNDINGTAX taxation1973-19745279,444.001974-75199011,428.701975-76198713,914.801976-77249716,112.501977- 7823220,041.101978-79340623,475.701979-8064430,720.401980-81378936,509.301981-82607940,367.601982-83726646,475.001983-84281255,360.002000-0135400444,800.002001-0265460486,000.00Findings To test the hypothesis, linear regression analysis used. The results of regression of One independent Variable (IMF Funding) against Tax Revenue (dependent variable) can be seen in the following output.Model SummaryModelRR SquareAdjusted R SquareStd. Error of the Estimate1.958.917.91049565.7061a Predictors (Constant), IMF FUNDINGANOVAModelSum of SquaresdfMean SquareFSig.1Regression300517013184.6651300517013184.665122.323.000Residual27024351475.824112456759225.075Total327541364660.48912a Predictors (Constant), IMFb Dependent Variable TAX REVENUECoefficientsUnstandardized CoefficientsStandardized CoefficientstSig.ModelBStd. ErrorBeta1(Constant)10370.08615732.008.659.523IMF8.326.753.95811.060.000a Dependent Variable TAX REVENUEInterpretation of analysisThe ANOVA table shows that the F value of 122.323 i s significant at the .000 levels. Degree of Freedom column in the table, the first number represent the number of Independent Variable (1) the second number (13) is the data collected for total number of years (N), minus the number of Independent Variable (K) minus 1 or 11=(N-K-1) or (13-1-1)= 12. The F statistics produce (F= 122.323) is significant at the .000 levels. Which shows that Model validity is significant at 0.000 level of significance.What the result mean is that 91.7 percent of variance (R square) in increase in Tax Revenue has been significantly explained by increasing Government Expenditure by way of IMF Funding (Independent variable) with standard error of estimate of 49565.7061. Standard error of estimate shows amount falls outside the regression line or shows standard deviation from mean. There is .000 percent or less chance of this is not holding true. There is correlation of 0.958 (denoted as r=0.958) between IMF Funding (Independent variable) and Tax Revenue (dep endent variable) with level of significance 0.000. So there is positive relationship between the two variables and probability of this is not true is zero percent or less. That is 100 percent of time we would expect that this correlation to exist. There is a beta value of .958, which shows that 95.8 percent chance of making TYPE II error if null hypothesis is accepted when it is false. At the same time Un standardized coefficient B= 8.362 indicates that the value of Tax Revenue increase by 8.326 unit for a one unit increase in Government Expenditure by IMF Funding.What the result mean is that t value 11.060 significant at 0.000. Thus hypothesis 3 is substantiated.IMF funding and FDIHo There is no significant Impact on the FDI by increasing Government Expenditure through IMF Funding.H1 There is significant Impact on the FDI by increasing Government Expenditure through IMF Funding.YEARSIMF FUNDINGFDI1973-1974527-1891974-7519904471975-7619876751976-7724973211977-7823210651978-793406108 01979-806448401980-81378912251981-82607934301982-8372661473.51983-84281216802000-0135400199952001-026546030051.4Findings To test the hypothesis, linear regression analysis used. The results of regression of One independent Variable (IMF Funding) against FDI (dependent variable) can be seen in the following output.Model SummaryModelRR SquareAdjusted R SquareStd. Error of the Estimate1.991.982.9811290.1947a Predictors (Constant), IMFANOVAModelSum of SquaresdfMean SquareFSig.1Regression1010046942.20011010046942.200606.780.000Residual18310625.532111664602.321Total1028357567.73212a Predictors (Constant), IMFb Dependent Variable FDICoefficientsUnstandardized CoefficientsStandardized CoefficientstSig.ModelBStd. ErrorBeta1(Constant)-128.350409.504-.313.760IMF.483.020.99124.633.000a Dependent Variable FDIInterpretation of analysisThe ANOVA table shows that the F value of 606.780 is significant at the .000 levels. Degree of Freedom column in the table, the first number represent the number of Independent Variable (1) the second number (13) is the data collected for total number of years (N), minus the number of Independent Variable (K) minus 1 or 11=(N-K-1) or (13-1-1)= 12. The F statistics produce (F= 606.780) is significant at the .000 levels. Which shows that Model validity is significant at 0.000 level of significance.What the result mean is that 98.2 percent of variance (R square) in increase in FDI has been significantly explained by increasing Government Expenditure by way of IMF Funding (Independent variable) with standard error of estimate of 1290.1947. Standard error of estimate shows amount falls outside the regression line or shows standard deviation from mean. There is .000 percent or less chance of this is not holding true. There is correlation of 0.991 (denoted as r=0.991) between IMF Funding (Independent variable) and FDI (dependent variable) with level of significance 0.000. So there is positive relationship between the two variables and probability of this is not true is zero percent or less. That is 100 percent of time we would expect that this correlation to exist. There is a beta value of 0.991, which shows that 99.1 percent chance of making TYPE II error if null hypothesis is accepted when it is false. At the same time Un standardized coefficient B= .483 indicates that the value of FDI increase by .483 unit for a one unit increase in Government Expenditure by IMF Funding.What the result mean is that t value 24.633 significant at 0.000. Thus hypothesis 4 is substantiated.IMF funding and current account deficitData Analysis for Fifth HypothesisHo There is no significant Impact on the FDI by increasing Government Expenditure through IMF Funding.H5 There is significant Impact on the FDI by increasing Government Expenditure through IMF Funding.YEARSIMF FUNDINGCURRENT ACCOUNT DEFICIT1973-197452733181974-751990106391975-76198792121976-772497117181977-78232148351978-79