Syllabus: GS2/ International Institutions
In News
- The Executive Board of the International Monetary Fund (IMF) decided to allow for “an immediate disbursement” of $1 billion (around Rs 8,500 crore) to Pakistan.
- This disbursal was done as part of IMF’s Extended Fund Facility (EFF) to Pakistan.
What is the Extended Fund Facility (EFF)?
- The Extended Fund Facility is a loan-based support mechanism provided by the IMF to countries that suffer from medium-term balance of payments problems, particularly due to structural deficiencies in their economies.
- Unlike short-term bailouts, the EFF is designed to assist countries in implementing structural reforms that take time to yield results.
- According to the IMF, EFF loans:
- Offer longer repayment periods
- Support reforms in fiscal governance, banking, taxation, etc.
- Target countries with long-standing issues such as poor infrastructure, financial instability, or chronic budget deficits
- It is not financial aid or a grant—countries are expected to repay these funds along with agreed interest.
Resilience and Sustainability Facility (RSF)
- It provides affordable, long-term financing to support low- and vulnerable middle-income countries in implementing macro-critical reforms to address balance of payments risks, particularly those related to climate change and pandemic preparedness.
- It aims to strengthen macroeconomic resilience by supporting policy reforms that reduce these risks and enhance financial buffers.
Why does the IMF consider Pakistan for EFF Assistance?
- Despite its strategic ambitions, Pakistan’s economic fundamentals have steadily deteriorated over the past two decades.
- Stagnant GDP: Pakistan’s GDP in 2023 stood at $338 billion, lower than in 2017.
- Rising Inflation: Double-digit inflation for five consecutive years—culminating in 23.4% in 2024.
- Debt Dependence: Pakistan has availed 28 IMF loans in 35 years and borrowed from China, UAE, Saudi Arabia, Paris Club, Islamic Development Bank, and others.
- Weak Fundamentals: Low savings and investment, poor infrastructure, limited female workforce participation, and consistent fiscal mismanagement.
- According to the IMF, Pakistan’s recent efforts under the EFF have shown signs of progress:
- Inflation dropped significantly to 0.3% in April 2025
- Increase in foreign exchange reserves
- Structural reforms like the Agricultural Income Tax and improved fiscal controls.
India’s Dissent: Strategic and Security Concerns
- India formally conveyed its strong objections to the IMF Board regarding the disbursement, highlighting two major concerns:
- Track Record of Misuse: India pointed to Pakistan’s poor utilization of previous IMF loans, often failing to implement promised reforms or misallocating funds.
- National Security Threats: Citing state-sponsored cross-border terrorism, India warned that the debt financing might be indirectly used to fund military or terror activities against India.
- While the IMF Executive Board does not allow member countries to vote “against” such proposals, India abstained from the decision as a diplomatic expression of protest.
| About International Monetary Fund (IMF) – Introduction: 1. The IMF is a specialised agency of the United Nations, founded in 1944 at the Bretton Woods Conference. 2. It was created to ensure global monetary stability after the disruptions caused by the Great Depression and World War II. – Objectives: 1. Promote international monetary cooperation. 2. Ensure exchange rate stability and orderly currency arrangements. 3. Facilitate balanced growth of international trade. – Functions: 1. Economic Surveillance: Monitors global and country-specific economic trends and provides policy advice. 2. Financial Assistance: Offers loans to countries with balance of payments problems. 3. Technical Assistance and Capacity Development: Provides training and expertise in public finance, monetary policy, statistics, etc. 4. Conditionality: Loans are tied to economic reform programmes to ensure fiscal discipline and long-term stability. – Membership and Voting Power: 1. It comprises 190 member countries. Each member contributes a quota (based on GDP and economic indicators), which determines: (a). Voting power (formula: 1 vote per 100,000 SDRs + basic votes). (US has the highest share) (b). Access to financial resources. 2. SDRs (Special Drawing Rights): An international reserve asset created by the IMF. Not a currency but can be exchanged for freely usable currencies like USD, EUR, JPY, GBP, and CNY. – Organisational Structure: 1. Board of Governors: Highest decision-making body; usually finance ministers or central bank governors of member countries. 2. Executive Board: 24-member board handling day-to-day operations. |
Source: IE
Previous article
Total Fertility Rate Remains Constant at 2.0 in 2021
Next article
Why Farmers Prefer Growing Rice and Wheat
