IMF Approves $7.6 Billion Bailout Loan to Pakistan

By Christopher Swann and Khalid Qayum

Nov. 24 (Bloomberg) -- The International Monetary Fund approved a $7.6 billion bailout package to help prevent Pakistan from defaulting on its debt.

Pakistan is counting on IMF financing to help rebuild its foreign-exchange reserves, which shrank 75 percent in a year to $3.5 billion, and to attract investment that will boost an economy predicted to grow at the slowest pace in seven years.

“The Pakistani economy was buffeted by large shocks during fiscal year 2007 and 2008, including adverse security developments, higher oil and food import prices and the global financial turmoil,” said Takatoshi Kato, deputy managing director of the IMF.

To secure the IMF financing, Pakistan agreed to a “significant tightening of fiscal policy,” higher interest rates and an end to central bank financing of the government. The IMF said the loan included provisions to protect the poor, with social spending to be increased by 0.6 percentage point of gross domestic product this year to 0.9 percent of GDP. Pakistan plans to reduce its fiscal deficit from 7.4 percent of GDP in the past financial year to 4.2 percent in 2009.

Pakistan expects the IMF loan will help it win additional aid from a group of other lenders and donor nations, including the U.S., U.K., China and Saudi Arabia. The group’s Nov. 17 meeting in Abu Dhabi adopted a “work plan” for financial help to Pakistan, the Foreign Ministry has said.

Cost of Insurance

The cost of insuring a $10 million Pakistani government bond against the risk of default has more than doubled since the end of September to $2.28 million a year from $987,000 a year, according to CMA Datavision.

Last week Pakistan’s government said the country’s $150 billion economy was expected to grow 4.3 percent in the fiscal year ending June 30, 2009.

Growth may slow after central bank Governor Shamshad Akhtar increased the benchmark interest rate to 15 percent from 13 percent earlier this month as part of IMF loan conditions to curb inflation. Inflation is expected to exceed the government’s previous target of 12 percent.

Pakistan completed its last IMF program in 2004 with a credit rating from Standard & Poor’s of B+, four levels below investment grade. S&P cut the nation’s rating to CCC on Nov. 14, one day before the latest IMF loan was announced, citing a risk of default on external debt payments.

To contact the reporters on this story: Christopher Swann in Washington at cswann1@bloomberg.net; Khalid Qayum in Islamabad at kqayum@bloomberg.net.