Pakistan negotiates US$7.6b IMF loan to pay foreign debt

By Khalid Qayum  |   2008-11-17  |     NEWSPAPER EDITION

PAKISTAN reached an agreement in principle with the International Monetary Fund on a US$7.6-billion loan package aimed at preventing the nation from defaulting on foreign debt and restoring investor confidence, Bloomberg News reported.

The loan "will be used for the balance of payments and to build our foreign reserves," Shaukat Tarin, the de facto finance minister, said Saturday at a televised news conference in Karachi.

Pakistan, a center in the war on terrorism, has been forced to seek IMF assistance after its foreign exchange reserves shrank 75 percent in the past year to US$3.5 billion last week, the equivalent of one month's imports, and a group of donor nations declined to provide funds. Hungary, Iceland and Ukraine also have negotiated IMF packages in recent weeks as the global economic crisis has radiated beyond the financial sector.

"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 its "tough" conditions, he said.

"The IMF didn't give us any conditions different from our economic stabilization program," Tarin said. "The IMF counseled us to increase the key interest rate to curb inflation."

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 last Wednesday.

The government of President Asif Ali Zardari aims to reduce the budget deficit to 4.3 percent of gross domestic product in the fiscal year that ends June 30, 2009, from 7.4 percent last year. It also has pledged there will be no net borrowing by the central bank in the fiscal year.