Pakistan has agreed with the International Monetary Fund on a $7.6 billion emergency loan to stave off a balance of payments crisis and pave the way for a broader economic rescue plan.
The IMF said on Saturday its executive board was expected to meet shortly on the 23-month standby credit, after IMF staff and Pakistan agreed on a reform program. “This support is part of a broader package that includes financing from other multilateral institutions and regional development banks,” IMF Managing Director Dominique Strauss-Kahn said in a statement.
The international community is concerned that an economic meltdown in the nuclear-armed state could play into the hands of al Qaeda and allied Islamist militant groups seeking to destabilize the Muslim nation of 170 million. The eight-month-old civilian government is banking on good will towards Pakistan during its transition to democracy after more than eight years under former army chief Pervez Musharraf, who quit as president in August to avoid impeachment.
World leaders were meeting in Washington at the weekend to discuss the worst global economic turmoil since the 1930s and consider reforms to world financial institutions such as the IMF. Shaukat Tarin, the recently appointed adviser to the prime minister, said the formalities should be concluded next week. “We are expecting it this month,” he told a news conference in Karachi when asked when the first tranche might arrive. “We have requested IMF to give as much as they can.”
The interest rate on the credit facility would vary between 3.51 and 4.51% with changes according to market conditions, and would be payable between fiscal 2011/12 and 2015/16, Tarin said. The IMF did not disclose details. But it said the credit under its emergency funding facility would be tied to Pakistani economic reforms, including higher official interest rates and tighter fiscal policies, plus a well-funded social safety net to protect the poor.
Pakistan expects the World Bank and other lenders to step forward with several billion dollars of additional loans, and steadfast ally China to pitch in with $500 million. But other multilateral lenders and friendly governments were waiting for the IMF accord before acting, in order to bring some discipline to Pakistan’s economic management, analysts said. Other potential donors are gathering in Abu Dhabi on Monday for a “Friends of Pakistan” conference.
State Bank of Pakistan Governor Shamshad Akhtar said the IMF money would be used to build up the central bank’s foreign currency reserves, which Tarin said should be equivalent to more than three months import cover. The central bank’s reserves stood at $3.5 billion on Nov. 8, equivalent to just nine weeks worth of imports, and Pakistan faced defaulting on international debt obligations in February next year unless it received a multi-billion dollar infusion.
The rupee has lost 23% in value against the dollar since the start of the year, and foreign investors have fled a stock market which is down around 35%. Stocks would have fallen further but for an artificial floor authorities placed under the Karachi market’s benchmark index at the end of August, and almost certainly will fall further once the floor is removed.
FRIENDS IN THE WINGS
Tarin said the IMF had endorsed Pakistan’s own strategy to bring about structural adjustments needed to correct unsustainable current account and fiscal deficits. The strategy included reducing excessive government borrowing from the central bank to zero, and boosting the tax base, but did not involve a cut in defense spending, one of the heaviest items on the budget, Tarin said. The only point of difference with the IMF, according to Tarin, was the fund’s desire to see higher interest rates.
But a 200 basis point hike in State Bank’s policy discount rate to 15% announced on Wednesday partially met those concerns. With headline inflation running above 25% and core inflation at 18.3%, real interest rates are still in negative territory. Tarin’s statement came a day after Standard & Poor’s cut its ratings on the nation’s sovereign debt deeper into junk bond territory, eight rungs below investment grade.
S&P highlighted Pakistan’s tardiness in raising funds it badly needs to avoid defaulting on its debt liabilities. Pakistan had been in talks with the IMF for months, but officials had been coy about admitting they were seeking an IMF package, because of the harsh conditions the fund often imposes. (Reuters)