Pakistan IMF Bailout May Prompt Higher Credit Rating, ADB Says

By Khalid Qayum

Nov. 17 (Bloomberg) -- Pakistan's $7.6 billion rescue from the International Monetary Fund may help the nation overcome a ``crisis of confidence'' and improve its debt rating, according to the Asian Development Bank.

``There is no reason why it should not'' lead to an upgrade in Pakistan's credit rating, ADB Managing Director Rajat Nag said in an interview in New Delhi yesterday. ``The IMF program will bolster confidence and I am optimistic Pakistan will be able to undertake the reforms required for the bailout package.''

Pakistan was forced to seek assistance from the IMF after its foreign-exchange reserves shrank 75 percent in the past year to $3.5 billion, raising concern about its ability to repay debt. Ahead of the IMF loan, central bank Governor Shamshad Akhtar last week made the ``toughest decision'' of her life and increased the benchmark interest rate to 15 percent from 13 percent.

The IMF loan may help Pakistan win additional aid from a group of other lenders and donor nations, including the U.S., U.K., China and Saudi Arabia, due to meet today in Abu Dhabi.

``The `Friends of Pakistan' group wanted us to get an IMF endorsement for our economic program,'' Shaukat Tarin, the de facto finance minister, said in Karachi Nov. 15. The IMF loan ``will give confidence to investors, and it will help us in seeking more aid.''

Pakistan, a center in the war on terrorism, has been forced to seek IMF assistance after its foreign reserves dwindled to the equivalent of one month's imports. Hungary, Iceland and Ukraine also have negotiated IMF packages in recent weeks as the global economic crisis has radiated beyond the financial sector.

`Global Setting'

``It is important for the Pakistan economy to do well, not only for the region, but also in the current global setting,'' said the ADB's Nag.

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

Government debt from Pakistan is perceived by investors as the second-riskiest in the world after Argentina. Credit-default swaps on Pakistan's $2.7 billion of dollar-denominated bonds outstanding are trading at 2,521.5 basis points, according to CMA Datavision. That means it costs $2.5 million annually to protect $10 million of the country's debt from default for five years.

The State Bank of Pakistan increased its benchmark interest rate by 2 percentage points, the most in more than a decade, on Nov. 12, citing inflation that reached a 30-year high of 25 percent in October.

Budget Deficit

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

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 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 budget and borrowing 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 in an Nov. 15 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.

Political Turmoil

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.

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.

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.

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