QUETTA, Pakistan - With approval last week of an additional loan of US$3.2
billion, the total International Monetary Fund (IMF) loan to Pakistan has
increased from $7.6 billion to $11.3 billion, or 6.3% of the country's gross
domestic product (GDP).
Last week, the IMF approved an extension of the loan to the end of 2010, an
additional three months, and gave the go-ahead for $1.20 billion to be released
to the country, bringing the total disbursement under the program to $5.32
billion.
IMF executive directors have allowed the strife-torn south Asian country to use
a portion of the increased loan to finance priority spending, including
expenditures to help internally displaced people in the northwest of the
country whose numbers surged
following the recent government attack on the Taliban in that area.
The fund's executive board has lowered the gross domestic product (GDP) target
to 3% from 3.3% for the current financial year, which ends next June 30. Local
experts believe that additional IMF loan will bring merely temporary relief and
will have little impact on the economic problems facing the country. The loan
has to be returned within two years, the experts say, while the economy needs
at least 10 years to achieve stability.
Islamabad had requested about $4 billion in additional financing from the IMF
as "insurance" against the economic crisis. IMF executive directors' meeting in
Washington on August 7 completed their second review of the country's economic
performance and observed that the country's growth has been anemic and the
near-term outlook for economic activity, especially manufacturing, remains weak
due to a volatile political and security situation.
The fund increased the country's Special Drawing Rights (SDR) to push up the
total assistance to $11.3 billion. The additional loan would provide support to
the country's external accounts, which has come under pressure due to a
slowdown in exports and foreign investment.
"The extra funds for the loan program will help the country address increased
balance of payment needs and weather the global economic crisis," the IMF said
in a statement.
The cash-strapped country was forced to turn to the IMF last November for a
$7.6 billion emergency loan, as it grappled with a 30-year high inflation rate
and fast-depleting reserves that were barely enough to cover nine weeks of
import bills. The fund has already disbursed $4 billion under the 23-month-long
stand-by-arrangement program, which has been now extended to the end of 2010.
Strings attached to the IMF help have been criticized as exacerbating the
country's problems. By forcing the government to withdraw subsidies for
utilities, the IMF's loan risked creating new challenges and political unrest,
reported The News, citing economist Rauf Nizamani. "Islamabad will find itself
sandwiched between its people and the IMF if it withdraws subsidies on oil, gas
and power as per the IMF's guidelines," Nizamani was quoted as saying.
The IMF reduction in the GDP target to 3% mirrors a similar target reduction
for the fiscal year that ended on June, with an initial 5.6% goal later lowered
to 2.5%. In the event, the economy grew less than 2%, as high interest rates
and tight monetary policy held back expansion. Local analysts believe that high
interest rates are the main reason behind disappointing industrial output.
Critics say that additional IMF loans of $3.2 billion will not only further
increase the country's debt-servicing obligations, but also squeeze resources
meant for development projects. It will be difficult for the country to repay
the massive external debt with the current GDP growth, the slowest in 10 years
and a current account deficit that has yet to be cut to a sustainable level.
The central bank cut the discount rate by 100 basis points (or 1 percentage
point) to 14% in its last quarterly statement, yet this is not enough to reduce
the bank's lending rate and to stimulate economy.
Some analysts forecast that the country's $146 billion economy will expand by
as little as 0.8% in the current fiscal year, the slowest pace since 1952, due
to the worst contraction in global trade since World War II. Local exporters
are still struggling to find buyers for the country's textiles, a key earner,
and other products after exports declined to $17.8 billion in 2008-09 from
$19.1 billion year earlier.
Some analysts believe disbursement of the $4 billion in additional IMF funding
may lead to an upgrade in the country's sovereign rating by one notch in the
next six months. Ratings company Standard & Poor's (S&P), which rates
Pakistan's foreign-currency debt at CCC+, or seven levels below investment
grade, had downgraded it in November 2008 to CCC, the lowest in 10 years, as
the country's foreign exchange reserves had shrunk to $3.45 billion.
Continuous depreciation of the local currency against the US dollar has pushed
up the country's debt by over 200 billion rupees (US$2.4 billion) during the
past seven months. This year, the rupee has declined 5.1% against the US dollar
after loosing 23% of its value last year. The rupee is at present being traded
in the inter-bank market at over 83 per dollar.
The rupee is likely to depreciate further amid increasing dollar demand by the
private sector, which has taken the responsibility to pay 50% of the country's
oil import bill from August 1.
Under an agreement with the IMF, the central bank is gradually shifting the
responsibility of oil import bill payment to private sector. The country meets
80% of its fuel requirements through oil imports, with a demand of about $5
billion from the private sector, while the forex reserves held by commercial
banks stand at $3.42 billion, according to the local dealers.
"There is no doubt that the market will see aggressive dollar buying during the
current year and that will escalate the price of the US currency," the Dawn
newspaper reported, citing currency dealer Atif Ahmed. "The dollar buying will
surely involve speculative forces. which would create some destabilization but
it could be checked with higher inflows."
The rupee may decline to 86 to the US dollar by June 2010, driven by higher
commodity prices and exchange rate reforms, The News reported, citing Sayem
Ali, an economist at Standard Chartered in Karachi.
The exchange rate may stabilize if remittances from overseas remain on the high
side and inflows from the IMF continue to the local market, analysts said.
The Washington-based IMF also approved Islamabad's request for waivers for
failing to meet its criteria for budget deficit, which is 0.9% of economic
output, banking supervision and tax policy.
"The macroeconomic outlook for 2009-10 remains difficult, and the external
position is subject to considerable downside risks," said Murilo Portugal, IMF
deputy managing director, in the statement.
Syed Fazl-e-Haider, sfazlehaider05@yahoo.com, is a Quetta-based
development analyst in Pakistan. He is the author of six books, including The
Economic Development of Balochistan, published in May 2004.
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