ISLAMABAD, Pakistan — The International Monetary Fund on Tuesday approved a $7.6 billion loan to Pakistan to prevent it from defaulting on its debt and to help stabilize its economy.
The loan, which has been in discussion for more than a month, initially met with strong resistance from the Pakistani government, which was seeking money on more generous terms from other countries.
But Pakistan’s main allies – the United States, China and Saudi Arabia – have insisted that it accept the IMF loan and terms before offering aid.
These donors, worried about the collapsing economy and the growing instability of the Taliban insurgents, have declined calls from senior Pakistani politicians, including President Asif Ali Zardari, for rapid injections of money without conditions.
Acceptance of the IMF loan will boost foreign and domestic investor confidence, and major donors are now expected to be reasonably generous, Pakistani economists have said.
In a sign of concern over the poor state of the economy at a time of mounting pressure from Taliban militants, the head of U.S. Central Command Gen. David H. Petraeus met with officials at the recent meeting IMF Annual Meeting in Washington.
Pakistan would have immediate access to around $3.1 billion, with the rest released based on quarterly reviews, the fund said in a statement.
Explaining the need for the loan, Takatoshi Kato, Deputy Managing Director and Acting Chairman of the Board of Directors which gave the formal approval, said: “Pakistan’s economy has been rocked by major shocks during the financial year 2007-08, including adverse security developments, rising oil and food import prices and global financial turmoil.
Mr Kato said the budget deficit had ballooned because the government delayed passing on higher prices to domestic consumers. He said central bank financing of the deficit has increased inflation and precipitously depleted hard currency reserves.
Reserves held by the central bank fell to $3.4 billion in the week ending November 15, a 75% drop in 12 months and barely enough to pay for a month’s worth of imports.
The fund said on Tuesday it expected Pakistan’s economic growth to slow to 3.4% in the current financial year, which started July 1, from 5.8% the previous year. . The fund said it expected the budget deficit to fall to 4.2% of gross domestic product in the current fiscal year from 7.4% the previous year.
“The reduction will be achieved primarily by phasing out energy subsidies, giving higher priority to development spending and implementing tax policy and tax administration reforms,” Kato said.
The State Bank of Pakistan raised its benchmark interest rate to 15% from 13% this month, and would “tighten monetary policy further if necessary”, the fund said.
Inflation has soared in recent months to 25%, leaving low-income and unemployed people struggling to buy basic goods.
IMF conditions include a demand that the government raise tax rates, among the lowest in the world. The fund wants a farm tax hike – a move MPs, many of whom are landowners, have opposed for decades.