The Role of the IMF in Pakistan's Economy: Long-Term Analysis and Policy Implications

Abstract

The investigation into the role of the International Monetary Fund in the economy of Pakistan from 1974 to 2015 is a crucial endeavor aimed at understanding the impact of IMF interventions on Pakistan's economic performance and stability. Through the utilization of the auto-regressive distributed lag model, this study seeks to assess the long-term relationships and co-movements among various economic variables affected by IMF actions. The combination of these econometric techniques offers a comprehensive framework for understanding the role of the IMF in Pakistan's economic landscape. The findings derived from this study can provide valuable insights for policymakers, researchers, and stakeholders, aiding in the formulation of effective economic policies and strategies for sustainable development. The long-run analysis of the relationship between government borrowing and various economic factors reveals several important findings. Firstly, the coefficient of GDP and political instability exhibits a negative and statistically insignificant relationship with government borrowing. This suggests that, in the long run, changes in GDP and political stability do not significantly affect the level of government borrowing. Secondly, there is a negative and significant relationship between IMF charges and government borrowing. This implies that higher IMF charges, which may include interest payments on loans or other financial obligations to the IMF, are associated with lower levels of government borrowing. This could indicate that reliance on IMF financing may reduce the need for additional borrowing from other sources. Thirdly, the exchange rate demonstrates a positive and significant relationship with government borrowing. This suggests that fluctuations in the exchange rate, particularly depreciation of the domestic currency, lead to increased government borrowing in the long run. This could be attributed to the higher costs of servicing foreign currency-denominated debt or the need to borrow more to finance imports in a depreciated currency environment. Furthermore, political instability, treated as a dummy variable in the model, does not show a significant relationship with government borrowing in the long run. This implies that, over the period examined, political instability does not exert a persistent impact on the level of government borrowing. These long-run results provide insights into the factors influencing government borrowing in Pakistan over the study period and highlight the importance of considering variables such as IMF charges and exchange rate dynamics in understanding borrowing behavior.