Nov. 15 (Bloomberg) — Pakistan agreed to a $7.6 billion loan package with the International Monetary Fund, to help the south Asian country avert defaulting on its debt with the first such program in four years.
The loan “will be used for the balance of payments and to build our foreign reserves,” Shaukat Tarin, the finance adviser to the prime minister, said today at a televised news conference in Karachi. The IMF will give the loan in installments over 23 months at interest rate of 3.5 percent to 4.5 percent, he said.
Pakistan has been forced to seek funds from the IMF after its foreign-exchange reserves shrank 75 percent in the past year to $3.5 billion last week, the equivalent of one month’s imports, and a group of donor nations declined to provide funds.
“The IMF loan will help in stabilizing the economy only if the government shows the political will to implement the Fund’s program,” said Samiullah Tariq, head of research at InvestCapital & Securities Ltd. in Karachi. Pakistan’s civilian governments from 1988 to 1999 did not complete seven separate IMF loan programs because of “tough” IMF conditions, he said.
“The IMF didn’t give us any condition different from our economic stabilization program,” Tarin said. “The IMF counseled us to increase the key interest rate to curb inflation,” he said.
The State Bank of Pakistan, the nation’s central bank, increased its benchmark interest rate by 2 percentage points, the most in more than a decade, to 15 percent on Nov. 12, citing inflation that reached a 30-year high in October.
Balance of Payments
The full conditions attached to an IMF loan are generally released when it’s approved by the Fund’s board.
Pakistan last completed the IMF loan program in 2004 during the military government of former President Pervez Musharraf.
Pakistan’s economic crisis mounted after the Pakistan Peoples Party-led government, which came to power in March, was paralyzed for almost six months because of political wrangling. The rupee in October plunged to an all-time low and the balance of payments deficit in the three months of the fiscal year started July 1 widened to $3.95 billion, from $2.27 billion a year earlier. The deficit reached a record $14 billion last year.
Standard & Poor’s yesterday cut Pakistan’s debt rating to CCC from CCC+, the lowest level in 10 years, citing the risk of a default on external debt payments of $3 billion due in the next 12 months.
Pakistan’s economy has “deteriorated significantly” and growth may slow to a six-year low, the IMF said in an Oct. 20 report. Growth is likely to weaken to 3.5 percent in the fiscal year to June 30 from 5.8 percent last year, the IMF said. The government forecasts Pakistan’s economy will expand 5.5 percent in the fiscal year.
Pakistan expects to get the “maximum” amount of funds upfront from the IMF to meet $3.5 billion to $4.5 billion of needs this fiscal year, Tarin said. The country may receive the first IMF installment this month, he said.
The IMF loan “will give confidence to investors, and it will help us in seeking more aid from friendly countries and other lenders” such as the World Bank and Asian Development Bank, he said. “The `Friends of Pakistan’ group wanted us to get IMF endorsement for our economic program.”
Pakistan is also likely to seek financial support from the `Friends of Pakistan’ group, which is due to meet on Nov. 17 in the United Arab Emirates. The group, which was established last month to help Pakistan stabilize its economy, includes the U.S., U.K., China and Saudi Arabia.
Last Updated: November 15, 2008 10:29 EST
By Khalid Qayum