IMF Okays: $ 7.6 Bln package for Pakistan

KARACHI: Advisor to the Prime Minister on Finance, Shaukat Tareen on Saturday announced that International Monetary Fund (IMF) has okayed financial package for Pakistan with no condition but adjustment of interest rate to check the high inflation. It is for 23 months or 7 quarters.
The minimum amount is five times of our quota that comes to dollars 7.6 billion.The interest rate on the facility will vary from 3.51 % to 4.51 percent with some changes as per market conditions, the Advisor unveiled during a press conference here at the headquarters of State Bank of Pakistan (SBP).
Governor SBP, Dr Shamshad Akhtar also explained some points there. This facility will also give confidence not only to the markets and our investors, but also to other International Financial Institutions (IFls) and Friends of Pakistan.
Thus we believe that we can see commencement of a steady stream of inflows now on, he said. Defending the Government’s move, Tareen said against the past arrangements done with IMF, the present one would prove successful and very much in the interest of the country as there is no dictation, or IMF designed economic plan behind this financial agreement.
“It is our own program based on our annual budget targets,” he asserted adding that with endorsement of our economic program by IMF, the ‘Friends of Pakistan’ countries and our other trading partners would be satisfied to extend significant financial support to Pakistan. Such indications are already there.”
He said the government now would engage in negotiations with these countries. At the first, he was scheduled to meet with the Finance Minister of Saudi Arabia soon in pursuance of King of Saudi Arabia’s assurance that the Kingdom would extend financial support to Pakistan.
To a query , Advisor to the Prime Minister on Finance, Shaukat Tareen said first tranche from IMF was expected before end of this month. Explaining the background behind entering an arrangement with IMF, he said the Government contacted the multilateral agencies and all our friends and each one of them was appreciative of our program as well as the predicament that we faced in the form of financing gap.
They were all willing to give us a helping hand, but would like us to get the endorsement of our program from the IMF. Moreover, the timing was an issue for us as our foreign exchange reserves were depleting at a regular pace. Tareen said the IMF showed a very positive approach toward us while assessing our program.
In the process they also offered us to access their stand-by facility under exceptional provisions for an amount as much as 5 times of our quota, which meant a fast track processing of request.
They did not give us any conditions different than those already committed by us and explained above. They sat down with our team in Dubai and prepared a detailed quarterly plan based on our own home-grown agenda.
The only area where they counseled us, was to increase the interest rate to curtail the core inflation, though fundamentally correct, was negotiated. Overall they felt that by and large all our targets are reasonable , realistic and achievable provided we show discipline and determination, he said.
He said this financial arrangement will help build confidence not only in the markets and our investors, but also to other IFls and Friends of Pakistan. Thus, we believe that we can see commencement of a steady stream of inflows now on, thereby eliminating the air of unnecessary in the country.
He said the government was pursuing United States and European Union that instead of giving any loan/aid it would be better for Pakistan to provide her access to their markets.
“We are working to sign Free Trade Agreement (FTA) with the US,” he said adding that the US government would also be requested to implement bilateral trade agreement (BTA) at the earliest besides extension of Reconstruction Opportunity Zones (ROZs) to entire NWFP and Balochistan province.
The Advisor to Prime Minister on Finance said Pakistan is facing challenging economic conditions, which are brought about by a combination of global shocks ( prices of oil and fuel more than doubling) in action on the part of economic managers during transition to a democratic government and the on-going financial crisis hitting every part of the world.
The ultimate reflection of what has happened to Pakistan’s economy is the massive loss of reserves which have declined from a height of dollars 16.4 billion in October 2007 to less than dollars 7 billion at present.
Other indicators of economic weakening are the slow-down in growth (5.8% in 2007/08), rising inflation (25%), excessive expansion in monetary assets in recent past (21 % reserves money growth during 2007/08), rising fiscal deficit (7.4% of GDP in 2007/08), depreciating exchange rate (21.8% since March, 08) and massive decline in stock market valuation, which has lost almost half its value.
In the wake of above developments , he said, the country lost the support of some of its development partners as well as the confidence of the market and the rating agencies , which in turn made it impossible for the country to raise resources from the international capital market.
The loss of reserves is the mirror image of stagnant foreign exchange inflows. This had reached a point where country’s balance of payments position was becoming untenable, unless of course immediate resources were made available through our friends.
Defending the annual budget 2008-09 , the Government presented a sound economic program in the Budget 2008-09 , which addressed almost all concerns of our development partners.
He spoke of the salient features of the Budget:
“1. Fiscal Deficit: In the budget we have targeted fiscal deficit to be brought down from 7.4% of GDP to 4.3% of GDP. This target is ambitious but can be achieved with determination.
2. Zero Net Borrowing from State Bank : This is our commitment, which is made by any government for the first time. Also, it is a measure that has been most appreciated by our development partners, as it poses significant challenges to public financial managers.
3. Monetary Growth Slow-down : State Bank in its monetary policy statement of July 2008 had set a target of 14% in broad money (M2) significantly. This will be lower than expected nominal GDP growth this year.
4. Interest rate adjustment to fight core inflation: The rising headline inflation (including both food and energy) has now seeped into core inflation (non-food, non-energy), which has risen nearly to 18.3% by October 2008.
This is most hurting both for people as well as for businesses, as they will begin to lose their competitive advantage. In July 2008, SBP raised the policy discount rate by 100 bps, but continued pressure on core inflation clearly warranted that more action should be taken to bridle the galloping inflation.
It was in this backdrop that SBP raised the policy discount rate by another 200 bps a few days ago. This commitment to fight inflation by targeting positive real interest rate has been an important element of the program that the Central Bank is pursuing.
The Government recognizes and supports the monetary tightening stance of the Central Bank.
5. Exchange Rate Flexibility : Pakistan is supposed to have a flexible exchange rate regime. However, in the period 2004-07, there a deliberate effort to keep the exchange rate artificially around Rs 60 per US dollar.
This was made possible by liberal use of privatization proceeds as well as expensive borrowings from the international capital markets. Thanks to such resources , imports thrived, exports growth lagged and current account deficit galloped.
Now, the Government has changed this policy and presently the exchange rate is reflecting the real value of Pak Rupee vis-a-vis its trading partners , as determined by purchasing power parity by taking into account relative inflation rates among our trading partners.
Continued adherence to this policy is our commitment, which is appreciated and supported by our friends.
6. Tax/GDP Ratio : We have one of the lowest tax/GDP in the region. From less than 9.6% in 2007/08, we have planned to raise it to over 15% over the next 5-7 years. Undoubtedly, this is also lauded, but we need to deliver it to ensure that our fiscal system is sustainable.
7. Social Safety Net : We have a sound and adequately funded SSN program with the pioneer effort reflected in the new Benazir Income Support Program (BISP) which is being launched at a cost of Rs 35 billion.
Additionally , we will provide another amount of similar size to strengthen other existing SSN programs.”
Advisor to Prime Minister on Finance, Shaukat Tareen said the Government would have to take aggressive steps including drastic cut in its non-development expenditure to pursue its policy of zero borrowing from State Bank.
To a question, Tareen said there will be no cut in Pakistan’s defence budget. “No one will be allowed to manage our economic affairs,” he said.
This credit goes to the Government and IMF as well who has provided us free hand to execute our economic plan.
He said the Government wanted to deliver to its people and come up to their expectations. “Wait for six months.
Our actions will speak,” he responded to media. Governor SBP, Dr Shamshad Akhtar explained that the amount of 7.6 billion dollars only meant for strengthening Pakistan’s liquid foreign reserves.
She also defended her earlier steps for tightening monetary policy and said it worked well.