Pakistan to Seek Additional $4.5 Billion IMF Loan

By Khaleeq Ahmed and Khalid Qayum

Feb. 16 (Bloomberg) -- Pakistan will seek a further $4.5 billion loan from the International Monetary Fund, warning that the country’s fight against terrorists is hurting the economy.

“We will ask the board of directors for the amount as the war on terror has caused serious economic problems,” Shaukat Tarin, the finance adviser to the prime minister, said yesterday in a telephone interview from Islamabad. The additional funds would boost the country’s total borrowing from the IMF to more than $12 billion, he said.

President Asif Ali Zardari is facing pressure from the U.S. to step up the fight against Taliban and al-Qaeda insurgents along the border with Afghanistan. The country has received about $10 billion in aid from the U.S. since 2001, when former president Pervez Musharraf became an ally in the global campaign against terrorism. Musharraf quit in August.

“The government should seek aid from the U.S. and not loan from the IMF as compensation for fighting terrorists,” said Muzzammil Aslam, an economist at KASB Securities Ltd. in Karachi. “The IMF loan can only be used for balance of payments and building foreign reserves. Before asking for more loans, the government needs to say how it will pay back.”

South Asia’s second-biggest economy got a $7.6 billion loan from the IMF in November, to be disbursed over 23 months, as it sought to avoid defaulting on its debt. The country got $3.1 billion as the first installment, boosting foreign-currency reserves held by the central bank to $6.9 billion in February from $3.45 billion four months ago.

Pakistan’s benchmark stock index rose 2.7 percent to 5776.73 today, posting the biggest two-day gain in six months.

Expanded Program

Pakistani and IMF officials began two weeks of talks in Dubai, United Arab Emirates, yesterday as part of a review for disbursing the second installment of the November loan program, Tarin said, without saying how much the country is spending on fighting militants.

Pakistan doesn’t want to negotiate new conditions with the IMF at the end of the 23 months for the additional funds it’s seeking, Tarin said. The country wants the new request to come under the existing program, he said.

“We have met all major conditions” set by the IMF, he said.

State Bank of Pakistan, the nation’s central bank, last month kept its benchmark interest rate unchanged at 15 percent as inflation in January slowed to an eight-month low of 20.52 percent. In November, the central bank had raised the key rate by two percentage points, the most in more than a decade, as part of conditions for the IMF loan.

‘Not the Time’

“It is not the time to borrow more,” KASB’s Muzzammil said. “It is time to consolidate the economy and adjust policies for pro-investment activities. The government needs to cut interest rates to boost businesses.”

Higher borrowing costs have dented growth in the $144 billion economy, which is predicted by the government to expand at the slowest pace in seven years after growing an average 6.8 percent in the past five years. Suicide attacks by militants in the past two years in reaction to the military operation in tribal regions has deterred foreign investment and hurt local companies including National Bank of Pakistan.

The government is targeting a budget deficit of 4.2 percent of gross domestic product this fiscal year ending June 30, from a decade-high of 7.4 percent last year. Pakistan’s rupee plunged 22 percent in 2008 against the dollar.

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 in December raised Pakistan’s rating one level to CCC+, or seven levels below investment grade, after the IMF loan.

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