IMF
raises stakes for Pakistan
loans By Syed Fazl-e-Haider
KARACHI - The International Monetary Fund
(IMF), expressing "no confidence" in Pakistan's
finance managers, has put forward a novel
condition for signing any new bailout program with
the country. The Washington-based lender wants
Pakistan's president to sign the letter of intent
(LOI) for any future arrangement - normally the
LOI is signed by a recipient country's finance
minister on behalf of the government and the
central bank's governor.
Critics say the
condition set by IMF for new loan program is an
insult to the country and the office of the
president, but it also reflects that the IMF has
no confidence in the finance minister and his
ability to deliver.
Though Pakistan has
yet formally to request another IMF bailout
but local analysts
believe it may have to negotiate a loan program
with the Fund in the next fiscal year, which will
start from July 2013, to ensure smooth repayment
to the IMF of the remaining installments of an
earlier rescue.
In its post-evaluation
draft report for Pakistan's US$11.3 billion
bailout program, the IMF asked Pakistan that any
future loan be co-signed by the country's
president in a bid to seek guarantees for
implementing reforms at the highest level after
the finance minister failed to honor commitments.
Pakistani officials say that the unusual
condition reflects the Fund's lack of
understanding of the country's political system in
which president's consent is always taken on
important policy matters but the finance minister
takes decisions under guidelines given by the
cabinet, prime minister and the president.
"The Fund is of the view that President of
Pakistan takes every decision, thus, it would be
appropriate to seek guarantees from the highest
level," The Express Tribune reported a senior
finance ministry official as saying.
In
2008, the country had agreed to the $11.3 billion
IMF loan to avert a balance of payment crisis. It
received $7.6 billion before failing to get the
remaining $3.7 billion due to slippages in
performance criteria, leading to suspension of the
program in May 2010. The programme was extended in
December 2010 for nine months, but disbursements
were not resumed owing to the government's failure
to take fiscal measures as demanded by the Fund.
In its post-evaluation draft report, the
IMF has clarified that it will not sign any new
short-term loan program with the country.
IMF outlined three main reasons for the
failure of the last program, according to The
Express Tribune. First, the country could not
honor its commitments due to lack of political
support. Second, the deterioration in the security
situation put an extra burden on finances. Third,
the global economic crisis adversely affected the
bailout program.
The country's foreign
exchange reserves stood at $15.54 billion level in
the week ending August 9. The reserves rose
following the receipt of $1.18 billion from the
Coalition Support Fund (CSF) from the US. The
country repaid $1.2 billion to IMF in the fiscal
year that ended on June 30, out of the total loan
of around $8 billion.
The country received
some fiscal space to repay IMF loan in monthly
installments after the release of CSF payment,
which was previously withheld by the US, linking
it to resumption of supplies for the North
Atlantic Treaty Organization (NATO) that were
blocked following a cross-border NATO attack on a
Pakistan army post last November.
The
government plans to repay $2.9 billion to the IMF
in the 12 months to next June, in 12 monthly
installments of $241 million each.
"We
will not have any problem in repaying the IMF for
the bailout package of over $7.5 billion that was
ended un-ceremonially due to failure of the
country to comply with the agreed performance
criteria," Daily Times reported a finance ministry
official as saying. Pakistan's economic
performance in the fiscal year that ended on June
30 shows a worsening economy with widening fiscal
and trade deficits and falling foreign investments
in the country. A ratings downgrade by Moody's
Investors Service to junk status may also have
serious implications, increasing the cost of
borrowing. Last month's downgrade from B3 to Caa1
highlighted weak government finances, structural
inflationary pressures and domestic political
uncertainties. Moody's has said it has no
intention of revising Pakistan's rating upwards
any time soon.
Dwindling exports and a
growing trade imbalance led to a $4.51 billion
current account deficit in the fiscal year
2011-12, compared with $214 million surplus the
previous year.
The trade gap grew 36% in
the year to June 30 to $21.27 billion from $15.6
billion, according to the Pakistan Bureau of
Statistics. Particularly alarming was the
double-digit growth in imports, increasing 11.13%
to $44.9 billion, while exports declined 4.71%, to
just above $23.6 billion.
A 50% fall in
FDI to $812 million in the last financial year was
attributed to political uncertainty, the country's
energy crisis and poor law and order.
A
recent Dawn editorial said, "the possibility of
Pakistan defaulting on its foreign debt repayments
over the next couple of years cannot be ruled out
with the large $6.3bn in principal and interest
falling due because of the IMF between 2013 and
2015. With foreign private capital moving into
safer assets due to the eurozone debt crisis,
Islamabad can avoid a repeat of the 2008 crisis
only with the help of official bilateral and
multilateral creditors and donors like the IMF and
the World Bank."
Syed
Fazl-e-Haider
(http://www.syedfazlehaider.com) is a
development analyst in Pakistan. He is the author
of many books, including The Economic
Development of Balochistan (2004). He can be
contacted at sfazlehaider05@yahoo.com.
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