Pakistan and the International Monetary Fund agreed on a $5.3 billion loan to boost the nation’s depleted currency reserves, as Prime Minister Nawaz Sharif tries to stabilize a struggling economy.
The government presented a “very robust reform” agenda to secure the assistance, Finance Minister Ishaq Dar said at a joint briefing with the IMF in Islamabad today. The program of credit needs final approval from the lender’s board, its Pakistan mission head Jeffrey Franks said.
A plunge of about 40 percent in the reserves in the past year to $6 billion has left Pakistan with enough to cover only about two months of imports, central bank data shows. The slide has weighed on the rupee and adds to other challenges facing Sharif, which include energy shortages and a Taliban insurgency in the northwest. The currency touched a record low this week.
“The overall focus of the program is to boost economic growth,” Franks said after talks between the two sides concluded. “There may be difficult decisions to get there but these will necessary to achieve a stable economy.”
Dar said while $5.3 billion is the minimum agreed, the government wants $7.3 billion and that request is still pending with the IMF. The 36-month arrangement will carry a floating interest rate of 3 percent and will be considered by the board in early September, “subject to the timely completion of prior actions to be taken by the authorities,” the lender said.
The rupee strengthened 0.1 percent to 100.075 per dollar today. The currency’s 31 percent decline in the past five years is among the worst in Asia, according to data compiled by Bloomberg.
Avoiding Default
“Pakistan has to avoid committing default on foreign loans,” Dar said. “That’s the only reason we are going to IMF with a homegrown reform program.”
The IMF has asked Pakistan to ensure policy changes are under way when the board considers the program to help convince it the nation is “committed,” Franks said.
Those actions include energy reforms, some measures by the State Bank of Pakistan and achieving consensus among the provinces, Franks said.
The IMF agreement comes after Sharif returned to power in a May 11 general election, more than 13 years after his second period as premier was cut short by a 1999 army coup.
An earlier, partially disbursed $11.3 billion IMF program expired in September 2011 after Pakistan failed to meet the conditions attached to it.
Repayments of that assistance and a widening trade deficit have pressured the South Asian nation’s reserves. At the same time, the prospect of reduced U.S. monetary stimulus has disrupted capital inflows into emerging markets.
Averting ‘Panic’
A drop in reserves to less than $6 billion would have risked “panic” in the currency marketswithout the backstop of an IMF bailout, according to Muhammad Azfer Naseem, research head at Elixir Securities Pakistan Pvt. Ltd. in Karachi.
An IMF program will “open the door for further lending from the World Bank and the Asian Development Bank,” Ashfaque Hasan Khan, a former adviser in the Finance Ministry, said in a telephone interview from Islamabad.
The IMF won’t offer new aid without a “deep and clear” commitment on a set of policy changes to curb the fiscal deficit, Franks said in January. A low tax-to-gross domestic product ratio is “at the core of the problem,” he said at the time.
Dar in his June 12 budget speech pledged to narrow the widest fiscal deficit in over two decades and to spur expansion in an economy he said was “shattered.”
The budget-gap target for the year that began July 1 is 6.3 percent of GDP, from a shortfall of 8.8 percent in 2012-2013.
Dar also plans to clear money owed to power companies from unpaid bills. The dues have choked power generation.
Sharif is aiming for 4.4 percent economic expansion and to keep inflation in single digits this fiscal year. Consumer-price growth accelerated to a three-month high of 5.85 percent in June.
http://www.bloomberg.com/news/2013-07-04/pakistan-imf-agree-on-5-3-billion-loan-after-slide-in-reserves.html
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