Q+A: What does the $450 million IMF flood aid mean for Pakistan?

KARACHI Fri Sep 3, 2010 8:16am EDT

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KARACHI (Reuters) - The International Monetary Fund (IMF) said on Thursday it will give Pakistan $450 million in emergency flood aid and disburse the funds in September to help the country's economy cope with the disaster.

Severe flooding in Pakistan has destroyed cropland and livestock and displaced millions of people, causing damage the government has estimated at $43 billion, or almost one quarter of the South Asian nation's 2009/10 gross domestic product (GDP).

The IMF is also holding talks with a delegation led by Pakistan's Finance Minister Abdul Hafeez Shaikh on reorganizing the terms of an $11 billion IMF loan program, though it has stressed the need for the country's commitment to reforms.

Here are some questions and answers about the emergency aid, the existing IMF program and reforms in Pakistan:

IS THE EMERGENCY FLOOD AID ENOUGH?

In terms of the government's damage assessment, the $450 million figure looks small. However, the fact that the IMF is giving money to Pakistan sends positive signals to other international donors and countries.

Also, while the government has estimated flood losses at $43 billion, the World Bank and the Asian Development Bank have yet to complete their damage assessment, so it will be difficult to put the figure into perspective.

But for immediate relief, the aid seems enough as Pakistan is likely to go into another IMF program by the end of the year, which is likely to factor in the flood cost.

If indeed the government's assessment is correct, then the IMF aid is too small.

Nevertheless, the assistance does lend support to the credibility of the government, which has been criticized for its slow response to the disaster and for a perception that it failed to mobilize a sufficient response from donors.

The aid will make a difference because it is not part of the existing $11 billion IMF package. It is essential it arrives soon and that it is visible to a public which is getting increasingly angry with the government.

DOES THE AID MEAN THE IMF IS SATISFIED WITH PAKISTAN?

No. The emergency flood aid is not related to Pakistan's economic progress. But while the IMF is sure to push Pakistan for economic reforms, it has been generous and charitable, despite regular slippage on targets, mainly on the fiscal side.

A major reason for the IMF's generosity is that Pakistan is an ally the U.S. views as crucial in the fight against militancy.

Supporting Pakistan's economy is critical to avoiding social unrest that could lead to instability.

WHAT DOES THE IMF WANT FROM PAKISTAN?

Pakistan turned to the IMF for an emergency package of $7.6 billion in November 2008 to avert a balance of payments crisis and shore up reserves. The loan was increased to $11.3 billion in July last year, and the central bank received a fifth tranche of $1.13 billion in May. The sixth tranche is due soon.

Under the 2008 loan program, the government pledged to implement tax and energy sector reforms, show fiscal discipline, and give full autonomy to the State Bank of Pakistan. However, the country has been missing the IMF targets regularly.

Pakistan would have to implement a value added tax by October 1 and eliminate electricity tariffs to be eligible for the sixth tranche. It would also have to curtail its expenditure and try to bring down its fiscal deficit.

The budget deficit is expected to climb to 6-7 percent of GDP in the 2010/11 (July-June) fiscal year as a result of the floods, the prime minister said. That compared with a target of 4 percent of GDP.

CAN THE GOVERNMENT IMPLEMENT REFORMS?

Tough question. The government has been slow in implementing reforms because of a lack of focus and political bickering. Officials say it has no choice but to at least show a clear commitment to reforms and initiate the implementation.

Some analysts say any further financing from the IMF will be tough to get without action on reforms. Others feel that given the strategic importance of Pakistan, the IMF may still come to the rescue again on assurances and commitments to reforms.

(Editing by Michael Georgy)

(For more Reuters coverage of Afghanistan and Pakistan, see: here)

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