Pakistan asks for IMF bailout loan, Fund offers $5.3 billion

ISLAMABAD Thu Jul 4, 2013 11:14am EDT

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ISLAMABAD (Reuters) - Pakistan asked for a new bailout loan from the International Monetary Fund on Thursday to boost its ailing economy, settling on an initial package of $5.3 billion following weeks of talks with a visiting IMF delegation.

The request marks a step forward for Pakistan's new Prime Minister Nawaz Sharif as he tries to find ways to fix the country's finances and show his commitment to restructuring its moribund economy.

But it also highlights a sense of urgency for Pakistan where the central bank has only about $6.25 billion left in reserves, enough to cover less than six weeks of imports.

"This is a Pakistan-designed program. It includes bringing the fiscal deficit to a more sustainable level," Jeffrey Franks, the regional adviser to the Fund on Pakistan, told reporters.

"The overall focus of the program is to boost economic growth so there is a better life for vulnerable Pakistanis."

Lodging a loan request is the first step in a potentially long process that will involve Pakistan committing to reforms, particularly on broadening its narrow tax base and cutting subsidies, which lenders say benefit mainly the rich.

Pakistan had originally asked for a $7.2 billion program but settled on $5.3 billion after the talks. Speaking alongside Franks in Islamabad, Finance Minister Ishaq Dar said he hoped the IMF would raise its offer following further consultations with senior Fund officials in the United States.

The Asian Development Bank, one of Pakistan's major lenders, has estimated the country will need $6 billion to $9 billion to meet its obligations, including about $5 billion in outstanding debt on an earlier $11 billion IMF package suspended in 2011.

Franks said he expected Pakistan to reach a budget deficit target of 6 percent of gross domestic product as part of the proposed three-year bailout loan program, down from 8.8 percent of GDP in 2012-2013.

The country has already once averted a balance of payments crisis in 2008 after securing the $11 billion IMF loan package, which was suspended two years ago after economic and reform targets were missed.

Again, chronic gas and electricity shortages, violent crime and a Taliban insurgency have all hampered growth and contributed to falling foreign investment. The $230 billion economy grew 3.6 percent in the last fiscal year, below a target of 4.3 percent and well below growth rates of around 9 percent seen 10 years ago.

REFORM PATH

Renewed anxiety over the nuclear-armed nation's struggling economy is one of the many challenges facing its new government.

With reserves shrinking by around $500 million a month and many Pakistanis angry over unemployment as well as high food prices and crippling power cuts, Sharif is keen to be seen as decisive and capable of overhauling the economy.

Unemployment is officially at 6.3 percent but is probably much higher.

The new government has already made some steps towards reforms and has set an ambitious deficit target of 6.3 percent of GDP for its 2013/14 although some analysts say it might be hard to meet.

It also plans a new energy policy to tackle power cuts, which frequently last 12 hours a day and have devastated the economy and fuelled unrest in parts of the country.

"We think Pakistan is committed to fixing its economic problems," Franks said. "It is evident from the fact that policies are already under way."

Islamabad already has a punishing schedule of repayments to the IMF from its previous loan agreement, which have put pressure on the rupee and raised concerns of a full-scale balance of payments crisis.

Conditions attached to a new IMF reform package could also prove unpopular, adding to concerns over stability at a time when Pakistan is already under pressure to contain a growing Islamist insurgency.

As the IMF wrapped up its talks in Islamabad, a suicide bomber rammed an explosives-ridden vehicle into a checkpoint in the volatile North Waziristan tribal region near the Afghan border, wounding three members of Pakistan's security forces.

(Additional reporting by Syed Raza Hassan; Writing by Maria Golovnina; Editing by Susan Fenton)

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