IMF approves $6.6 billion lifeline for Pakistan
By Syed Fazl-e-Haider
KARACHI - The International Monetary Fund (IMF) on Wednesday approved a US$6.6 billion lifeline for the cash-strapped Pakistan in a move to stave off a balance of payments crisis.
Under the three-year loan program authorized by the IMF executive board in Washington, Pakistan will immediately receive $540 million of the total amount, while the remaining amount will be disbursed after regular reviews of the program on quarterly basis. The total amount agreed tops up an early agreement reached in July for a loan worth $5.3 billion, but remains less than the $7.2 billion Pakistan had sought.
''Despite the challenges it faces, Pakistan is a country with abundant potential, given its geographical location and its rich
human and natural resources,'' the IMF said in a statement. ''The authorities' program is expected to help the economy rebound, forestall a balance of payments crisis and rebuild reserves, reduce the fiscal deficit, and undertake comprehensive structural reforms to boost investment and growth.'' The IMF also said that it hoped the approval of the loan would encourage other international donors to extend loans to Pakistan.
As of last month, the country's central bank had only about $5 billion left in foreign exchange reserves, enough to cover an import bill for one month.
The agreement with the IMF comes after Nawaz Sharif took over as prime minister in June this year through a general election, replacing Raja Pervaiz Ashraf, who, with his predecessor Syed Yousuf Raza Gillani was considered to have dragged their feet on implementing reforms tied to a 2008 IMF bailout loan.
The IMF board approved the latest loan after the government completed all prior actions to qualify for a fresh loan program. These included imposition of more taxes and withdrawal of tax exemptions, increasing power and gas tariffs, elimination of power tariff subsidies and privatization or re-structuring of public sector enterprises. In July and August, the government has sent notices to 21,000 non-taxpayers, approved the withdrawal of power subsidies (limiting them in future to consumers of up to 200 units), while provinces have shown a willingness to help reduce the overall fiscal deficit and have formed a committee to withdraw tax exemptions.
The implementation of tough fiscal and monetary policies by the new government under the IMF program may hurt growth prospects, according to a report published in The Express Tribune.
The central bank is likely to increase interest rates, while the government is likely to announce a plan to restructure 65 state-owned enterprises. The restructuring of 30 firms will be announced before end of September and rest before end December, with the government assuring the IMF that ''non-viable firms” will be closed down.
Successful implementation of these conditions is likely to make Islamabad eligible for second and third loan tranches from the IMF and support important structural reform in the economy.
In 2008, the country secured an $11 billion loan from the IMF to avert a balance of payments crisis. The program was suspended two years ago after the country missed economic and reform targets demanded by IMF and $4 billion in debt remains outstanding.
This time, Pakistan is obtaining the funds through an Extended Fund Facility (EFF) loan, which is provided by the IMF to help a country facing serious balance-of-payments problems because of structural weakness that require time to address. An EFF loan is repaid in a maximum period of 10 years.
The fresh loan will be used to repay the previous loan to the IMF. For example, the country is expected to receive $2.2 billion from the IMF during the current fiscal year ending in June 2014, while it would have to repay over $3 billion to IMF within the same year.
Critics say that the present government led by Prime Minister Nawaz Sharif is following the footsteps of the former Pakistan People's Party-led government that obtained foreign loans amounting to over $14.55 billion.
Finance Minister Ishaq Dar hopes to secure $12 billion from foreign lenders over the next three years. In the current fiscal year, the country is expected to receive $1.5 billion from the World Bank; $1 billion from the Asian Development Bank and 750 million euros (US$990 million) from the Islamic Development Bank.
Some analysts in the country had already anticipated smooth approval of the latest IMF program, linking it to the US withdrawal from Afghanistan.
''The US troops will be back at home with fewer casualties than the current apprehension and the Fund staff which designed this program will get their customary promotions as well as accumulate a tidy sum of frequent-flyer points from their regular visits to Pakistan. We couldn't hope for a more perfect confluence of interests of all potential stakeholders,'' former State Bank of Pakistan governor Shahid Kardar wrote in a September 3 article in the Pakistan Herald.
Last month, Dar said the fresh loans would protect the government against international debt obligations for three years and claimed that they would not increase the overall debt stock. The minister indicated his plan to launch ''infrastructure sovereign bonds'' to raise money for large development projects.
Critics say that fresh loan will increase the country's burden of foreign debt. Pakistan's foreign currency debt in dollar terms stood at $49.1 billion as of March 2013, according to the Economic Survey of Pakistan. The country's debt-to-gross domestic product ratio has already crossed 63%, which is far above the legally permissible limit of 60% of GDP.
Pakistan's economy grew only 3.6% in the fiscal year that ended in June, miss the 4.3% target. The budget deficit, at 1.835 trillion rupees (US$27 billion), was 8% of GDP against the 4.7% target for the fiscal year.
Last month, the international rating agency Standard & Poor's affirmed its B- long-term and B short-term sovereign credit ratings on Pakistan. The outlook on the long-term rating is stable. A credit rating of ''B'' means an economy is ''more vulnerable to adverse business, financial and economic conditions but currently has the capacity to meet financial commitments''.
In view of the new government's effort to cut its fiscal deficit, S&P's projected the country's net general government debt-to-GDP ratio to decline to 54% by the end of fiscal year to June 2016, from the estimate of 58% by June 2014. It projected the interest expense on this debt was likely to decline to 30% of general government revenue on average over fiscal 2014-2016 from 34% in fiscal 2013.
''Pakistan's high public indebtedness stems from chronically low revenue generation and expenditure-side rigidities,” said S&P's credit analyst Agost Benard in a press release. ''Weak fiscal discipline routinely results in deficits exceeding targets by a wide margin.”
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 email@example.com.
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