IMF-franked Pakistan returns to 'Friends' By Syed Fazl-e-Haider
QUETTA, Pakistan - Pakistan, having reluctantly secured a US$7.6 billion loan
package with the International Monetary Fund (IMF), turns this week to the
"Friends of Pakistan" group of nations to strengthen the bailout of its deeply
embattled economy.
The first IMF tranche of $4 billion, designed to remove the prospect of the
country defaulting on its overseas debt, will be released this year under terms
of a deal reached at the weekend. The tranche is part of the 23-month loan
package under standby credit limits at interest rates of between 3.51% and
4.51%, with repayment to be made in five years beginning from 2011.
Pakistani officials were to meet counterparts in Abu Dhabi in the
United Arab Emirates on Monday to renew a request for billions of dollars from
Britain and 11 other "Friends of Democratic Pakistan". Pakistan hopes the
informal group will reverse its decision of last September when it withheld
assistance on concerns any funds might be misused without an IMF program in
place to hike taxes and rein in government spending.
President Asif Ali Zardari and his advisors hope that the "Friends" - the
United States, Britain, China, Saudi Arabia, Japan, France, Germany, Italy,
Australia, Turkey, the United Arab Emirates, the United Nations and the
European Union - will now come up with the rest of the $15 billion they
estimate Pakistan may need over the next two years to service foreign debt, pay
for imports, especially oil, and continue its campaign against militants within
the country.
"The IMF has accepted Pakistan's formal request for funding, and an agreement
with the fund has been reached on a rescue package to overcome the country's
economic crisis," Shaukat Tareen, advisor to prime minister on finance, said at
a press conference on Saturday.
The IMF said Pakistan's program was aimed at restoring the confidence of
domestic and external investors by addressing macroeconomic imbalances through
a tightening of fiscal and monetary policies, protecting the poor and
preserving social stability through a well-targeted and adequately funded
social safety net.
The 23-month standby arrangement is subject to approval by the IMF executive
board, which is expected to meet this week to discuss the program.
Pakistan had been reluctant to swallow the bitter pill of an IMF loan, but the
country's rapidly depleting foreign-exchange reserves, which shrank 75% in the
past year to $3.5 billion on November 8, the equivalent of little more than one
month's imports, and the country's failure to obtain a timely cash support from
friendly states, forced the government's hand.
Opposition to seeking IMF aid has been based on concerns over conditions that
might come attached. Details of these are yet to emerge, but local industries,
particularly those involved in infrastructure, fear a cut of as much as 50% in
the development budget, according to a Khaleej Times report.
Other critics say the government should have gone to the IMF much earlier,
before the economy had deteriorated to such a critical level.
"The IMF approach should have been made four to six months ago when Pakistan's
economy was in a healthier position," economist Pervez Tahir was quoted by the
Daily Post as saying. "Now, the delay means that the fund will dictate
conditions."
Nor is further aid from the "Friends" group assured.
"We still believe that friendly countries are ready to help Pakistan at this
critical time, but they are suspicious of the way we have behaved in the past
as after every five to 10 years we are knocking at their doors to help us
financially," the Daily Dawn reported, citing Pakistani economist Asad Saeed.
The delay in securing an IMF deal both increased the risk of a default on
external debt payments and the cost of debt, with Standard & Poor's last
week cutting Pakistan's credit rating to CCC from CCC+, the lowest level in 10
years. S&P said the sovereign rating may be raised one level if the
government obtained an IMF loan and implemented an IMF-endorsed economic
stabilization plan.
Pakistan's finances have "deteriorated significantly" due to recent political
instability, violence and high oil and food prices, according to an IMF report
released last month.
While the country has almost run out of foreign currency reserves to cover its
import bill, the rupee has lost 25% of its value this year and the stock market
has dropped 35%.
A rising trade deficit and inflation running at about 25% further increased
pressure on the government. The trade deficit rose to $7.52 billion in the
July-October period, an increase of 33% on a year earlier, according to the
Federal Bureau of Statistics (FBS).
The biggest challenge for the government is to stabilize prices and provide
relief to the poor. The consumer price index - inflation - increased to 24.6%
in the July to October period from 7.7% 12 months earlier, according to the
FBS. The government had projected a 12% inflation target for the current fiscal
year.
Pakistan re-enters an IMF program after a seven-year gap. No democratic
government during the 1990s could complete the two earlier standby agreements,
with the tough conditions dictated by the IMF contributing to recession, high
unemployment and rising inflation.
Former president Pervez Musharraf's government claimed that the country had
broken the begging bowl, as it did not take up the last two tranches of the
three-year Poverty Reduction and Growth Facility, which was signed with the IMF
in December 2001. Pakistan ended its last IMF program in 2004.
The IMF has reportedly prescribed curbs on development and defense
expenditures, devaluation of the local currency, tax increases, slower economic
growth and an increase in the benchmark discount rate.
The country's central bank last week increased its discount and interest rate
200 basis points to 15%. Local analysts say the increase was part of conditions
for an IMF loan, while the central bank argued that the 25% inflation rate had
forced it to make the increase.
Opposition senators criticized the central bank's decision to increase
discount, saying the government succumbed to IMF terms even before the release
of bailout funds.
The local business community had strongly opposed a further interest rate rise,
which followed the withdrawal of a government subsidy on gas. Three earlier
increases since January neither controlled inflation nor stabilized the
currency, said Anjum Ibrahim, president of the Karachi Chamber of Commerce and
Industry, according to a report in Dawn newspaper.
Analysts say the latest rate increase is likely to further hit prospects for
large employers, such as those in the textile sector, forcing companies to
consider reducing output due to the higher cost of borrowing, which come on top
of a general global slowdown.
The IMF is following the agenda of colonial forces as it tries to convert a
financial crisis in the recipient country into a political crisis, economist
Shahid Hasan Siddiqui said on Geo TV channel.
Murtaza Mughal of Pakistan Economy Watch said the country should have turned to
Pakistani businessmen rather than to the IMF or the Friends, The Times of
London reported. "I have never seen a developing country do well out of an IMF
loan," he said.
That view was reflected recently in a Wall Street Journal editorial. "IMF
prescriptions are exactly the beggar-thy-neighbor policies that sent Thailand,
South Korea and Indonesia reeling in 1997-98. Depreciating the rupee vis-a-vis
the dollar might benefit the country's crony capitalists who make money by
selling cheap exports, but it would hurt the vast middle class raising taxes in
the middle of the financial crisis," the editorial said.
Others saw benefits from the deal if the government pushed through with the IMF
program.
"The IMF loan will help stabilize 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, according to a Bloomberg report.
The IMF deal is the first between the organization and an Asian country since
the onset of financial woes triggered by the US subprime crisis.
Syed Fazl-e-Haider, sfazlehaider05@yahoo.com, is a Quetta-based
development analyst in Pakistan. He is the author of six books, including The
Economic Development of Balochistan, published in May 2004.
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