IMF approves $7.6 bn loan aid for Pakistan

IMF approves $7.6 bn loan aid for Pakistan

Karachi: Pakistan won final approval for an emergency $7.6 billion International Monetary Fund loan on Monday to avert a balance-of-payments crisis in the strategically vital country.

Pakistan will immediately access $3.1 billion under the 23-month facility with the rest phased in subject to quarterly review, the fund said.

The programme has twin goals: to steady the economy and restore confidence by tightening macroeconomic policy, and to ensure social stability and support for the poor and vulnerable, the fund said.

Why does Pakistan need an IMF package?

Foreign exchange reserves from fell $100 million to $6.64 billion in the week that ended on 15 November, or just enough to cover nine weeks of imports. The central bank’s own reserves fell to $3.46 billion from $3.50 billion a week earlier.

Imports for October totalled $3.46 billion, while exports were worth $1.52 billion.

- he current account deficit almost doubled in the first four months of the 2008/09 fiscal year that began on 1 July from the same period a year earlier. The deficit stood at $5.9 million in the four months to the end of October, compared with $3 billion in the same period last year.

Pakistan has a $500 million bond due to mature in February. The market had priced in the risk of a default but the IMF loan removes that risk.

What will package involve?

The fiscal deficit, excluding grants, will be brought down to 4.2% of gross domestic product (GDP) in the 2008/09 (July-June) fiscal year, and then 3.3% in the 2009/10 fiscal year, compared with 7.4 percent of GDP in the fiscal year to June 2008.

Inflation, at 25% will be brought down to an average of 13% in the 2009/10 fiscal year and to 6% by the end of the next year through tighter monetary policy.

There will be an end to central bank financing of the government. According to bank data, the government borrowed $2.48 billion from 1 July to 8 November.

Expenditure on a social safety net will be increased to protect the poor through cash transfers and targetted electricity subsidies.

Analysts say Pakistan needs serious structural reforms. Otherwise its balance of payments will remain stressed.

The most difficult task for the government will be to bring net borrowing from the State Bank to zero, they say.

The IMF said “the programme also envisages a tightening of monetary policy to bring down inflation". This may be criticised by industrialists and members of capital markets as an increase in interest rates typically slows down growth.