Q+A: Pakistan refinancing risks after floods

KARACHI (Reuters) - The International Monetary Fund (IMF) is likely to continue supporting Pakistan despite fiscal slippages, but analysts said it could review some targets for coming quarters amid the devastation caused by the floods.

Pakistan’s worst flood in decades, which have killed up to 1,600 people and made two million homeless, will compound economic problems for the nuclear-armed U.S. ally.

The IMF and Pakistani authorities are due to meet on August 23 to review Pakistan’s performance and the release of the sixth tranche of an emergency finance package.

Here are some questions and answers about risks surrounding Pakistan’s refinancing:

WHAT REFINANCING PROGRAMME DOES PAKISTAN HAVE

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.

IS THE IMF PROGRAMME IN DANGER?

Unlikely. Pakistan is an ally the United States views as crucial in the fight against terrorism. Supporting Pakistan’s economy is critical to avoiding the sort of social unrest that could lead to instability -- especially now anger is rising over the government’s perceived inadequate response to the disaster.

IS OVERSHOOTING FISCAL DEFICIT TARGETS A RISK TO

REFINANCING?

The State Bank of Pakistan said last month that provisional figures indicate a revised 2009/10 fiscal deficit target of 5.1 percent has been missed, and could be higher than 6.0 percent.

The IMF is likely to grant a waiver to Pakistan for missing the target as the government needs to boost expenditure to provide relief, rehabilitation and reconstruction after the massive floods.

The government has targeted a deficit of 4 percent of GDP for fiscal year 2010/11, which analysts said will be hard to achieve. One analyst said he expected a deficit of 8 percent this year. Analysts said the IMF could review the target for fiscal deficit for 2010/11.

WHAT ABOUT DEVELOPMENT PROJECTS?

Development spending or public sector development spending -- which mainly includes spending on infrastructure and social programmes -- was budgeted at 663 billion rupees ($7.74 billion), but President Asif Ali Zardari has said development will be put on hold so that funds can be used for flood relief.

WHAT ABOUT INFLATION?

Analysts said the IMF would likely review the inflation target of 9.5 percent for 2010/11 fiscal year after the floods. The consumer price index came in at 12.34 year-on-year in July and will head higher.

Prices have been rising sharply in markets across the country, although they traditionally do in the run-up to the Muslim fasting month of Ramadan.

U.N. Food and Agriculture Organization (FAO) spokesman Ali Khan said Pakistan could face food shortages if its farmers miss the sowing season which is due to start next month.

WHAT ABOUT IMMEDIATE FUNDING NEEDS?

Nearly half of the $459 million aid needed for initial relief has been secured. The World Bank will release $900 million to help relief efforts.

ANOTHER IMF PROGRAMME?

Finance Minister Abdul Hafeez Shaikh said in May that Pakistan may need a follow-up IMF programme.

With the devastation the floods have caused, and Pakistan’s inability to mobilize its internal and external resources, analysts said it is quite certain that Pakistan will yet again turn toward the IMF when the current programme expires.

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

(E-mail: sahar.ahmed@thomsonreuters.com; Reuters Messaging: sahar.ahmed.reuters.com@reuters.net; Karachi newsroom: +92-21 3586 5192)