Pakistan Agrees to $7.6 Billion IMF Loan Program

By Khalid Qayum

Nov. 15 (Bloomberg) -- Pakistan reached an agreement in principle with the International Monetary Fund on a $7.6 billion loan package aimed at preventing the nation from defaulting on foreign debt and restoring investor confidence.

The loan ``will be used for the balance of payments and to build our foreign reserves,'' Shaukat Tarin, the de facto finance minister, said today 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 $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 ``tough'' IMF 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,'' he said.

No Net Borrowing

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 25 percent in October, a 30-year high.

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.

The IMF regards Pakistan's targets as ``realistic and achievable provided we show discipline and determination,'' Tarin said.

The Fund's board will vote on the loan program ``shortly,'' Managing Director Dominique Strauss-Kahn said today in an e- mailed statement in Washington.

The IMF funds would be available over 23 months and have an interest rate of 3.5 percent to 4.5 percent, Tarin said. They will have to be repaid by 2016.

Pakistan last completed an IMF loan program in 2004 during the military government of former President Pervez Musharraf.

Balance of Payments

Pakistan's economic crisis mounted after Zardari's Pakistan Peoples Party-led government, which came to power in March, was paralyzed for almost six months by political wrangling. The rupee in October plunged to an all-time low and the balance of payments deficit in the first 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 current fiscal year from 5.8 percent last year, the IMF said. The government forecasts the economy will expand 5.5 percent in the fiscal year.

`Give Confidence'

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 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, Tarin said.

Pakistan will 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.

``The `Friends of Pakistan' group wanted us to get an IMF endorsement for our economic program,'' Tarin said.

To contact the reporter on this story: Khalid Qayum in Islamabad at kqayum@bloomberg.net.