UPDATE 1-IMF indicates Pakistan on track for $550 mln aid tranche

Sun Feb 9, 2014 8:27am EST

* IMF board to consider tranche in late March

* Raises GDP growth forecast to 3.1 pct in 2013/14

* Economic situation very difficult but sees improvement

* Says central bank needs to be vigilant on inflation

* Eurobond issue on track - Fin Min

* May be followed by sukuk, depending on demand (Adds quotes, details, background)

By Martin Dokoupil and Nadia Saleem

DUBAI, Feb 9 (Reuters) - Pakistan appears to be on track to receive a third loan tranche worth $550 million from the International Monetary Fund later this year as the country goes ahead with economic reforms, the IMF's mission chief to Islamabad said on Sunday.

"The IMF mission...is encouraged by the overall progress made in pushing ahead with policies to strengthen macroeconomic stability and reviving economic growth," Jeffrey Franks told a joint news conference with Pakistan's finance minister in Dubai.

He was speaking after consultations between the IMF and Pakistan. They took place in Dubai because of security concerns after 21 people, including the IMF's top representative in neighbouring Afghanistan, were killed in a Kabul suicide attack last month.

"The authorities' reform programme remains broadly on track with the government meeting all of the quantitative performance criteria by end-December 2013," Franks said.

He added that two exceptions were targets for the central bank's net swap/forward positions and the ceiling on government borrowing from the central bank, but that authorities had reaffirmed their commitment to adopt corrective action.

The IMF's executive board is tentatively scheduled to consider in late March whether Pakistan will obtain the third tranche of its IMF loan programme, Franks said.

Last September, the IMF saved Pakistan from possible default by agreeing to lend it $6.7 billion over three years. In return, Pakistan must make good on reforms such as a longstanding promise to privatise loss-making state companies. Franks said the IMF was not imposing privatisation on Pakistan but was very supportive of the process.

The IMF raised Pakistan's gross domestic product growth forecast to 3.1 percent for the fiscal year 2013/14, which started in July, from the previous prediction of 2.8 percent, because of better performance in services and manufacturing.

Franks said Pakistan was still in a very difficult economic situation but that the IMF saw signs of improvement as reforms in the electricity sector seem to be bearing fruit, with electricity shortages and unscheduled load-shedding declining.

Finance Minister Ishaq Dar described the country's economic growth as "encouraging", adding that tax collection had risen 26 percent in January and that the IMF seemed to be more or less satisfied with the central bank's net asset reserves.

Decisive efforts to broaden the tax net through elimination of tax exemptions and loopholes granted through statutory regulatory orders are critical to the future of Pakistan's economy, the IMF also said.

BOND ISSUE

The IMF and Pakistan differ on inflation expectations, with the Fund projecting a 10 percent rate in the current fiscal year. Dar said: "Based on the moderate rate of inflation of 7.9 percent during January 2014, we expect that inflation for the entire fiscal year would remain within a single digit."

The Washington-based body encouraged Pakistan's central bank to be vigilant in coming months to guard against a rebound of inflation. It would like to see price growth in a 6-7 percent range on a sustainable basis, Franks said.

Pakistan is "well on track" in the process of issuing a eurobond, and expects the process to be completed by the end of March, Dar said.

He told reporters that he did not expect the cost of the issue to be over 6 percent, and that it should be around the "usual" benchmark price.

"There is a huge demand for this bond and it may be followed by an Islamic bond or sukuk. I'm not sure because it depends on the interest - but so far we are very positive."

Bankers not involved in the transaction told IFR, a Thomson Reuters service, last month that Pakistan had mandated a U.S. dollar bond offer to take place sometime in the first quarter.

(Editing by Andrew Torchia)

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